09/19/2017 - James Grant On 100 Year Bonds, Inflation & Federal Reserve Policy
Jim Grant podcast: 100 year bonds, bitcoin, Tesla, inflation & Fed policy
Grant’s Interest Rate Observer Podcast, Released on 9/18/17
Topics:
1:30 #Austria floats a 100-year bond
3:24 Limited supply of #bitcoin?
4:24 #Tesla promises one million cars per year
7:30 Five year/five year #Euro inflation swap rate
12:58 Hawkish hints
16:40 Half-empty #FOMC
09/19/2017 - Fiat Currency Has Encouraged Massive Debt, Excessive Credit, Loose Monetary Policy
DeutscheBank Jim Reid: “We think the final break with precious metal currency systems from the early 1970s (after centuries of adhering to such regimes) and to a fiat currency world has encouraged budget deficits, rising debts, huge credit creation, ultra loose monetary policy, global build-up of imbalances, financial deregulation and more unstable markets.”
09/18/2017 - The Roundtable Insight – Nomi Prins On The How G7 Central Banks Are Coordinating Monetary Policies Together
FRA: Hi, welcome to FRA’s Roundtable Insight. Today we have Nomi Prins. She is a renowned journalist, author and speaker. She is currently working on a new book, “Collusion”, formally called, “Artisans of Money” that will explore the recent rise of the role of central banks and the global financial and economic hierarchy. Her last book, “All the President’s Bankers”, is a ground-breaking narrative about the relationships of presidents to key bankers over the past century and how they impacted domestic and foreign policy. Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, ran the international analytics group as a Senior Managing Director at Bear Stearns in London, worked as a strategist at Lehman Brothers and an analyst at Chase Manhattan Bank. Welcome Nomi.
NOMI PRINS: Hi – Thank you very much Richard.
FRA: I thought today that we would focus on a recent writing you have that stems from your emerging book, “Collusion”, it’s titled, “A Decade of G7 Central Bank Collusion – And Counting”. It’s a great piece and it’s available on your website and has been reprinted elsewhere as well. I was just wondering if you would like to give us a brief synopsis of that.
NOMI PRINS: That piece comes from some of the conclusions that relate to ongoing monetary policy globally, particularly with the G7 central banks. When I talk about collusion, in terms of the importance of setting monetary policy to the G7 for the G7, there have been, since the financial crisis of the United States, so many multiple meetings, background meetings, calls, statements between the central bank leaders and so forth which collectively have created a monetary policy that is zero percent interest rate and has also connected to it a substantial amount of asset buying or what we now know under the term, quantitative easing, by the major central banks in particular. It’s not that other central banks haven’t been co-opted or have retaliated by trying to set their own monetary policies in their own countries, but it just so happens that this has been a G7 process that has been led by central bank of the United States, the Federal Reserve, and particularly the G3 central banks: the Federal Reserve, the European Central Bank and the Bank of Japan, that has together kept interest rates on average zero and are set on course, since the last year and a half, have raised interest rates up to one percent. But while that happened, 19 countries in Europe including the ECB have rates at negative as well as does Japan, and the Japanese central bank on average comes out to zero percent. And it’s not an individual policy – it’s a collusive collaborative policy.
FRA: So, it’s almost like the collective set of G7 central banks are acting as a unified central bank. Can that be stated?
NOMI PRINS: Yeah. They are absolutely acting as unified and occasionally they have independent commentary to their regions whether that be throughout Europe, in the United Kingdom, or Japan. But the idea is that, even if you take these individual statements and meetings and media coverage separately, the reality is, this is a coordinated effort. For example, last year when the Fed had raised rates and it caused a lot of chaos in the markets in the beginning of 2016. Immediately, some of the other major central banks in Europe and Japan had cut their rate down and it was like a balancing act. But the way the coverage works in general is that it tends to be independent and so what I looked at for the book is all of the communications, collaborations and the timing of all the various monetary moves, which again, have collectively averaged to zero. But there is a process along the way, after the financial crisis, where the Fed first embarked upon zero percent interest rates – They were the first to embark upon quantitative easing by simply buying US government bonds, treasuries and very soon after that, US mortgage bonds from the private banks that needed the liquidity and capital. But this sort of grew and you have the European central banks buying corporate bonds; you have the Japanese central banks buying collections of equity here and there. So the process segued into different details, but it was very much coordinated and over the years, for example, there was a particular problem with debt in 2012 in Europe with a potential credit crisis, after all of these years of cheap money and the potential for defaults, that’s when again central banks got involved and acted in a unified fashion. So throughout the period in the last 10 years since the US financial crisis began, there have always been these iterations of collaboration and them acting as a unit even though their individual leaders tend to behave within their own countries, to their own government, as if they are acting independently.
FRA: It almost seems sort of like a game of passing the baton like an Olympic team running event. I remember back in 2014 there was a time when the Japanese central bank, the Bank of Japan, seemed to have taken over the baton, if you will, from the Federal Reserve and it almost seems that when one of the countries get into trouble they let that country run with more quantitative easing. Do you feel a lot of examples of that?
NOMI PRINS: Yeah, it’s actually interesting. If you look at just the chart of the easening and then hone that into the G3 from the last 10 years, you will see exactly what you’re saying. And then what began in 2013 is that the central bank governor and the Bank of Japan’s [Haruhiko] Kuroda when on this crazy, very fast accelerated pace of quantitative easing. And so what wound up happening was, if you look at a chart of purchasing of Japanese government bonds by the central bank, all of sudden the line went up in almost a straight-line fashion – A very steep line upward because two things happened: the president of Japan and the central bank of Japan were incoordination as well within the country. So there was coordination between letting the Bank of Japan go nuts on quantitative easing and then it worked within the fiscal policy promises of Shinzō Abe, who had just come in as well as the leader of Japan. He wanted to improve the economy. His concept was that he had 3 pillars of an economic policy, one of which was having cheap money and that worked with what the central bank leader wanted to do because he is quite international as well and saw his opportunity to increase quantitative easing. And that also had the effect of accelerating the Japanese stock market, had the effect of accelerating the flattening of the yield curve, purchasing of government bonds and so forth. As recently as a few weeks ago, the central bank leader of Japan, Kuroda, was talking about this idea of unlimited capacity to continue to buy bonds or to continue the quantitative easing process which also is what Mario Draghi, in slightly different words, was doing in Europe. So, it is a passing of the baton and you would think that after 10 years of what began, according to the Fed anyway, as emergency measures in the wake of the financial crisis and the idea of if we go back then was that there was no liquidity in the banking system, and that there was a fear that was stoked by the Treasury Secretary Henry Paulson, the Federal Reserve head at the time Ben Bernanke and the New York Federal Reserve president Tim Geithner who all basically got together and colluded to indicate that: unless there was an immense amount of liquidity offered to the banking system, everything would seize up and people wouldn’t be able to get their money of out ATMs. And so they created this bailout from the standpoint of congress, but the bigger bailout was what the Federal Reserve and central banks did which was at the time, start to bring bank rates down to zero at the end of 2008 and then start to buy bonds. Then when the Feds stopped, the European central banks started and it accelerated and then the Bank of Japan continued to accelerate. And then you have smaller central banks involved such as the Bank of England who have half a trillion or so assets on their books. They have kind of dibbled in and out, but recently they have talked about expanding their quantitative easing program, Mark Carney did, the head of the central bank there. And they kind of use it as this tool – They promote it as this tool, to either stimulate growth in economies or to create stability in opposition to some type of a problem or a process. When we had the problems with Hikoshimi, we had the other G6 central bank governors get together and promise that they would help with whatever liquidity was needed for Japan to navigate that crisis. So, what began as an emergency measure has become normalized.
FRA: In the collusion article, you mentioned that the central banks have amassed assets on their books worth nearly 14 trillion. Is that for the big 3 central banks or the G7?
NOMI PRINS: Yeah – that is exactly right. The G3 are at about, give or take, 13½, then you add in the UK, Canada and other banks and it’s probably a little bit more than that, but on average it’s between 14-14.3 trillion – It’s a fairly large number. If you consider that that number was basically zero 10 years ago.
FRA: And you mentioned the result of all this is the fuelling of bubbles and money that isn’t serving any productive real economy purpose because it happens to be in lockdown. Can you elaborate on those?
NOMI PRINS: So if I’m a central bank and over some period of years I decide to create electronic money, we refer to it as printing money, but the idea is: creating some fabrication for money that is then used in an exchange process for either government bonds or, in the case for the US for example, mortgage debt from the banks. What that does is puts this fabricated money into the system which didn’t come from tax receipts or organic growth in companies, it was merely manufactured. And it was an offering return for the Fed amassing debt on their books – Debt in the form of treasury bonds and mortgage bonds. So, what that means is that it effectively created 14½ trillion dollars of money that did nothing but an exchange for debt. And if you’re just exchanging debt and you can’t determine how that debt would’ve been spent anyway, then it’s really just sitting there on the books for no apparent purpose. Now it’s not the Fed’s job, technically, to do this, but if you had examples conceived of a process by which instead of exchanging fabricated money for debt, you invested it in some sort of a national bank or you develop roads or railways with it or energy systems or whatever it might be – That is productive. Whatever the process is there could have been productive ways to utilize fabricated money to actually enhance the real economy, but if you’re just buying debt, then you can’t trace that debt to the real economy. In fact, for mortgage bonds, all you’re really doing is giving banks liquidity or giving them capital to do other things with because you’re not telling them what they can or cannot do, you’re not stipulating what kind of loans they can and cannot make, it’s just capital that is given to them – Then, that money is not being used for any productive purpose. It is on lockdown at the Fed because they basically offered it out. They have in exchange received these bonds or this debt and they are not going anywhere – They are just sitting on the books not being used for any financing or any productive purposes, real growth, wages, hiring people, research and development or really anything. And that’s been copied in Europe as well on the European central bank in terms of trillions of dollars, on the books in the Bank of Japan and so forth. So none of that money is really being used, but the way it gets discussed is that it somehow is connected to economic stimulus, but if it was actually stimulating the economy then you wouldn’t have a 10-year policy where it has to keep continuing. So, what you have now after 10 years is the central bank leaders, for example Mario Draghi at the European central bank recently, who is saying, “Hey, you know what? This is the only thing that needs to done. Creating a monetary policy alone or low interest rates and buying bonds alone isn’t enough to stimulate the economy”. So, after 10 years they are saying we have to keep going because what we did wasn’t enough and somehow if we keep doing it and other measures get put into that, such as a type of fiscal policy, then altogether after we have done this for 10 years somehow it will relate to the economy. So, these people themselves are basically saying that this process: their collusions, methods, strategy and policies really haven’t done anything for 10 years.
FRA: You even point out how Stan Fischer who was the Vice Chair of the Federal Reserve, who recently just stepped down from that role, essentially admitted that the Fed caused low interest rates globally while failing to achieve the economic growth as promised.
NOMI PRINS: Right. Stanley Fischer was the academic mentor for the doctorate for both Ben Bernanke and Mario Draghi who ran at different times with some overlap, between the Federal Reserve and the European central bank so it’s interesting that Stanley Fischer, who was also the Vice Chair of the Fed for a number of years before resigning, was one of the supporters of this policy throughout his years of a mentors as well of his years of being at the Fed itself. So he was one of the very people who would’ve voted at various meetings and so forth to continue to keep rates low and the effect of the Feds keeping rates low was that they were kept low globally. Now what he didn’t say was that they were actually kept low globally because they are having communications with each other and that this was not a choice, it was kind of a mutual decision and it unfolded that way in terms of events and in terms of when rates were reduced versus when assets were bought by the various central banks. And at the end admitted that it really didn’t stimulate growth and not only did it not stimulate growth, but even the Federal Reserve itself had a report out a few years ago where it indicated that after a number of years of these policies in the US it actually increased inequality. The way it does that is that this money that is being created is really only going to top bankers and through governments – It’s really not trickling down into the real economy which means that cheap money is also being used to fuel these bubbles. If rates are at zero on a 2-year or close to zero on a 10-year depending on the country, you’re not going to be investing in government bonds – You are going to be looking for something else to get returns out of. And you have this money coming to you cheaply, but not if you’re a regular person. If you’re a regular person, you are not getting money at zero percent or close to zero percent like a bank does, like a bank can give it’s major clients or like major corporations can raise debt for themselves. A regular person is stuck with much higher rates whether it’s personal loans, credit cards, student loans or even mortgages – They don’t have the benefit of the cheap money. They suffer the consequences of not having more secure investments like government bonds or even CB’s or even good rates on a savings account like they would’ve had historically. So, they’re sucked into this vortex of the stock market whether they are actively involved or not whether through their pensions, their life insurance contracts or whatever it might be because there is nowhere else for those pools of money to invest and get a return that even keeps up with a very low inflation that we’ve had globally in the last 10 years and we’ve had very low growth. The bubbles are a result of these policies and even some of the superbanks/development banks such as the IMF indicated that this is a problem, that bubbles are a problem. Everybody is aware that these policies don’t promote growth, create bubbles in the riskier markets and yet they can do nothing else but continue them.
FRA: So with all of these failed policy experiments behind us after what has happened, this brings us to the big question that you ask: Why should we have faith that the Fed or any other central bank has any clue about what to do next?
NOMI PRINS: Right – Because all they’ve done for 10 years is effectively the same policy which they then admit has not gotten them any closer to what they had indicated the policy was initially supposed to do, which was to stimulate growth. In emerging countries it is more volatile, but slightly higher, but in terms of real growth it’s not there. In terms of being able to invest in more secure bonds for the population or for again, pensions and insurance, you can’t do that. And so what are they going to do if there’s an actual crisis. A crisis can come in any form. It could’ve come from, unfortunately, the hurricane that just happened in Florida. I’m not saying that will create a crisis, but you have a situation where a lot of development, real estate, leverage and cheap financing going into these larger development companies and through the main banks and so forth, is hit was a stoppage in occupancy rates. Or having to rebuild and having to wait for money to come in and that trickles in to potentially defaulting on certain payments or loans. It could be anything that starts to crack these asset bubbles whether that’s a natural disaster, a geopolitical thing, a new war or whether it’s simply that rates do get raised enough in one area, and I don’t believe the Feds are going to raise rates again this year for all of these reasons, but all of these things start to become cracks to let the air out of these bubbles at which point what do central banks do? They will double-down or triple-down on what they have done. That could work for a year or two years, but it’s still an artificial stimulant to the global economy. It’s still not healthy. It’s still an external source of capital that is unlimited and unregulated from the standpoint of a policy, and that’s very artificial and creates a lot of ongoing inequality and inability, ultimately, for people to have money invested in the future and be secure about it.
FRA: Given this lessening faith or growing sense of lack of faith in central banks – Could we get a Wile E. Coyote moment in the financial markets where there is all of a sudden a large drop in the equity markets?
NOMI PRINS: You could in the extent that something happens from an external perspective whether that’s a sector that continues to default or something happens to the real estate sector or the energy sector, right now energy is going to be a little better because of what just happened, retail which was just shifted in terms of the way in which people shop such as consumers losing confidence – A lot of external things can happen that deflate confidence in what is actually a stock bubble that could drive things down. Now this policy, these 10 years, has been really unprecedented in terms of this collusion between central banks. If it were not a global policy, it would be more likely to crack in one area which would reverberate throughout the world, but because it’s collaborative, artificial and collusive, there has been this way of keeping the house of cards up. Any major thing that happens can also take that down very quickly. The one thing we learned just studying crises historically is that there has never been a global reaction of this magnitude to a crisis. What tends to happens when something hits the markets is that they do tend to go down faster than they went up. That hasn’t happened yet, but if there’s a confluence of the wrong events, it definitely could.
FRA: If that were to happen, do you foresee the central banks again coming in in a consorted way to save the day? Especially, considering that there’s a concern on pension funds and insurance companies with large holdings of equities and the central banks are not looking forward to bailing them out if there was another financial crisis affecting them.
NOMI PRINS: I don’t think they care so much about pension funds and insurance companies. They care about the financial system as a whole and I do think that the first thing that would happen in the event, this happened in 2016 which showed a precursor to this, is in the event that something catalyzes a very fast day or two fall in the stock market, that central banks do come in and coordinate some sort of policy that boosts them up, but the fact is there is no ideas for them to do that this time simply because they are almost collectively at negative, aside from the Fed. The fed could go down by the point it’s gone up since December 2015 and it could go negative, but there is not much more room to go. It would boost the markets again though if things really fell and the Feds say that they’re going to reinstate quantitative easing in order to stabilize the economy or stabilize the financial system or promote growth or whatever it is they’ll say they’re doing it for. So, then you’ll just have volatility in the markets in that way. You could have a very steep drop followed by the sort of “save the day” efforts on the part of the major central banks and you’ll have an uptick. Then let’s say confidence goes down because there isn’t a lot of room to continue to do that in the same magnitude, then the markets go down again. You can kind of see how that might precipitate a jagged type of bear market with major ups in between when central banks do announce movements, which they would announce to try and save the market. All of this just means that their main function has become to continue to keep these asset bubbles inflated. A couple months ago when the private banks in the US had to give the results of their stress tests, basically stressing their books to the extent of what could happen in certain crises situations, and the Feds said that they all passed with flying colours while having mostly not passed the year before. So, somehow in a year they managed to magically change. They turned around and said that rather than saving extra capital or whatever, we are going to just buy our own stock. That just creates more inflation of these bubbles and that why the financial sector increased by so much more than some of the other sectors because all of a sudden they were given a green light by their own regulatory body, the Federal Reserve, to just use this, effectively 1% or less, money to buy their own stock and to pay themselves dividends that amount to two more than that – Effectively using the Fed’s policy to freely inflate their own stock by paying themselves dividends on their own stock that they bought. It’s kind of market manipulation if you think about it, but it’s legal because the regulatory body that is supposed to control this sort of thing green-lighted it.
FRA: So when does this all end? You mentioned ongoing emergency procedure spells an eventual recipe for disaster if you think about growing levels of central bank assets, you mentioned 14 trillion, and given the coming even much higher numbers on unfunded liabilities that may need to have central banks monetize further debt by governments, but is the end point limited by perhaps the interest rate? Or if you sort of look at it as a lever between debt and interest rates for servicing debt, is the end point involving interest rates?
NOMI PRINS: At some point, what’s going to happen is the interest rates will continue to remain low and again, I don’t think any of these banks are going to move rates up this year, but when a disaster happens, so not necessarily when rates get raised a smidge although that certainly does push that lever when the fact the Feds have moved rates by even just 1%, has created some more instability in terms of defaults and international corporate defaults and so forth because you have companies that have been mostly funded through US banks and other major private banks in dollars. They have multinational operations and have to repay them in dollars, but their currency isn’t worth as much, and the interest rates go up again for them so they lose twice, and they’re not growing as fast so don’t have as much profit to cover it. So that stuff is happening throughout the world organically. The lever is really when those numbers start to tip, but I don’t know when that is. I used to try and find the end point, such as when the European central bank actually stops using their quantitative easing program and then they get to the date where it’s going to stop and then they extend it. They have this ongoing elasticity in terms of their policy, but what will happen besides monetary policy in central banks is that the sheer development and growth of companies that are highly, highly leveraged relative to even how they were before the financial crisis, just simply aren’t making enough money to cover even the minutest of interest rate payments on their debts. That’s when stuff starts to collapse, not necessarily if they’re raised, although that would certainly hasten it and that’s why it’s kind of stopping right now, but when they’re actually simply not growing enough organically to make their own payments. And there’s a lot of that happening. For example the son-in-law of the president of the United States, Jared Kushner, he’s a real estate person; his major building 666 Fifth Avenue in New York City is completely overleveraged and it’s occupancy rates continue to become lower, which means he can’t pay for even the debt he has with the people who are supposed to be renting out space in his building – That’s an organic problem. On one hand it’s because you’ve taken out too much debt, on the other hand it’s because people won’t pay you for the provision, space, service or whatever because they don’t have the money or want to spend that. That’s when things start to collapse from an organic perspective, unless again we have a major war or a major sect or something like that happens more acutely and will more quickly create some sort of collapse.
FRA: But not really in terms of the time frame?
NOMI PRINS: Well if we go back into discussing negativities with North Korea, if the defaults have been increasing in the various sectors throughout the world continue to increase at a more rapid rate – You could see a crisis happening within the next year even though you’ll have the cavalry of central banks attempting to double-down or triple-down on what they’ve done simply because there will at that point be nothing on the gross side at all to enable companies, particularly small-medium sized companies that hire a lot of people, to pay off their debts. And if they don’t hire people they have to fire people. If they fire people and they aren’t paying people, people can’t buy stuff. If people can’t buy stuff, it all goes down very quickly and becomes a very quick spiral. You’re starting to see that. You’re starting to see defaults in various sectors and if that continues it could spiral down within the next year and that would happen naturally.
FRA: That’s great insight Nomi. How can our listeners learn more about your work and also when is your new book, “Collusion”, coming out?
NOMI PRINS: Collusion is slated to come out on May 1st of 2018 and in terms of anyone who wants to read more of my books or any of my writings I do have online or just in general, you can come to my website which is just my name, NomiPrins.com, and just check it out.
FRA: Great – Thank you very much Nomi.
NOMI PRINS: Thank you so much Richard.
Transcript by: Daniel Valentin <daniel.valentin@ryerson.ca>
09/18/2017 - Dr. Lacy Hunt: The Secular Downtrend in U.S. Treasury Yields – Fueled By Excessive Monetary Easing
“If we are talking the long term bond yields, central banks have very little influence. Long yields over time are determined by inflationary expectations. Something that’s know as the Fisher equation and the reason that long yields are low not only in the United States, but around the world, is because the inflation rate is very depressed… The action of the world’s central banks, in my opinion, are actually serving to lower, not raise, inflationary expectations. The Federal Reserve has tightened four times. The rate of growth in the money supply is decelerating very substantially. Bank loans have moderated even more substantially than the rate of growth in the money supply. The velocity of money is falling. So to summarize, what I would say is when you have an extremely over-leveraged economy such as we do today, a little bit of monetary tightening goes a long way.
…The ability of central banks to influence the long term rates by acting on the short term rates in very very limited, and in fact it’s often contradictory. For example, when the Fed was expanding their balance sheet under QE1 and QE2, a lot of folks called that money printing and said it would be inflationary and the bond yields actually rose because the bond market is so sensitive to the rate of inflation. When the Federal Reserve allowed the balance sheet to contract very slightly between QE1 and QE2 and then again between QE2 and QE3, money supply growth came off, the economy decelerated, and bond yields declined…”
LINK HERE to the article – video
09/18/2017 - Chris Martenson: Central Banks Are Petrified With Record High Markets
“We are talking about a steady erosion of the dollar as a reserve currency. I think that is most likely. The only thing that could make that really go fast is some kind of war. The United States and China, we got to keep our eye on this because Trump has been threatening a trade war with China. China responded and said if you do that, we may dump the dollar. . . . So, there is all this trade and financial back and forth and maybe even actual war at some point… China has the ability to really impact the dollar in a big way on the world stage. We better hope it does not come to that because a slow erosion we can adjust to; a quick erosion is going to really roil the markets and maybe blow a few of them up.”
artenson contends the U.S. could see hyperinflation in a short time if China “dumps the dollar.”
09/18/2017 - Governments Begin Cracking Down On Cryptocurrencies And Begin Creating Their Own Cryptocurrencies
“Last week bitcoin plunged over 40% from all time highs hit as recently as three weeks ago on news that China had ordered local exchanges to halt trading in the cryptocurrency. Since then, defying naysayers yet again, bitcoin staged a remarkable comeback, rising from under $3000 to $4000 in the last few days of trading, but China appears to be nowhere near done, and as the WSJ reports this morning, Beijing is moving toward a ‘broad clampdown on bitcoin trading, testing the resilience of the virtual currency as well as the idea its decentralized nature protects it from government interference’ in what the paper dubs the ‘most draconian measures any government has taken to control bitcoin.'”
“So with China having already banned exchange-based trading of bitcoin, if not bitcoin itself just yet, and with India seemingly on pace to do the same as it pushes for its own, regulated and central bank-mandated cryptocurrency, the question on everyone mind is will this global crackdown against bitcoin and its peers boost their already near-record high popularity and price, or will it force holders to flee, wary of getting burned further by a wave of governments who have turned increasingly hostile to the ad-hoc cryptocurrencies which are not controlled by the central banks themselves, something Eric Peters hinted at earlier today. If the answer is the latter, will that prompt monetary purists and seekers of central bank inert currencies to finally start buying gold once again?”
09/12/2017 - Former Executive VP Federal Reserve Bank Of NY: “Strong Chance The Fed Will Turn To Asset Purchases Again When The Next Substantial Economic Downturn Occurs”
Brian Sack is Director of Global Economics at the D. E. Shaw group. Prior to joining the D. E. Shaw group in 2013, he was an Executive Vice President at the Federal Reserve Bank of New York (FRBNY), where he served as head of the FRBNY’s Markets Group and managed the Federal Reserve’s System Open Market Account portfolio from 2009 to 2012. Below, he reflects on the experience with the Fed’s asset purchase programs and argues that the Fed should maintain a relatively large balance sheet and be willing to deploy it as a policy tool during future downturns.
“In my view, there is a strong chance that the Fed will have to turn to asset purchases again when the next substantial economic downturn occurs, considering that the neutral level of the federal funds rate has fallen notably .. Purchases of Treasuries and agency-backed securities—the primary assets that Congress has so far authorized the Fed to buy—have the advantage of allowing the Fed to affect the market price of interest rate risk without taking on any credit risk. Purchasing a wider set of assets—as do some other central banks—might enable the Fed to have a larger effect on financial conditions and promote faster recoveries. But it would also involve putting more taxpayer money at risk and having an imprint on a wider set of risk premiums in the market. So there is a tradeoff involved that Congress would ultimately have to consider.”
09/12/2017 - Nick Giambruno: “Ultimately The Federal Reserve Will Paper Over The Pension Crisis By Printing More Money”
“Ultimately, the Federal Reserve will paper over the pension crisis by printing more currency.
Politically, it seems impossible that the government would default outright on its promises to millions of its own employees when the Fed can simply print more currency.
Ultimately, this will turn a local debt crisis into a national currency crisis. And many states will effectively default on their pension obligations anyway, since those payouts will be made with depreciated currency.”
09/12/2017 - The Roundtable Insight: Adam Andrzejewski On Unsustainable And Reckless Government Spending, Deficits And Debt
FRA: Hello, Welcome to FRA’s Roundtable Insight. Today we have Adam Andrzejewski. He is the CEO and founder of Open the Books (OpenTheBooks.com), a government watchdog organization not funded by government, and he’s a national leader in bringing transparency to government spending. Welcome, Adam.
Adam Andrzejewski: Great to be on the program, Richard. Thank you very much for your interest in our work.
FRA: I notice on your website you initially set up homepages as the nation’s largest publisher of community telephone directories?
Adam Andrzejewski: That’s right, I’m probably the only guy you’ll ever meet anymore that actually monetized a yellow page publishing company in the internet age. So I had the good fortune to sell my shares to my brother and an investor from the east coast back in 2007, that was 1 year before the iPhone was invented.
FRA: Wow. And then you ran for governor of Illinois with a pledge to create this organization, correct? The OpenTheBooks.com?
Adam Andrzejewski: So I ran for governor based on my private sector success. And I knew in Illinois, where we ranked high we should have ranked low and where we ranked low we should have ranked high and I felt we needed new blood, a new day. I ran on two things, both of these things we’ll talk about today. A hard forensic audit of all state and local spending, you know evidentiary, follows the money, holds up in court. If you think about it it’s how we caught Al Capone back in the day and Illinois is horribly corrupted on every level and we needed that audit. And that resonated, that idea resonated on the campaign trail. The second idea I ran on was the tagline slogan “Every dime online in real time” aggressive financial transparency. You know I lost the race. I lost about 5.5% of the vote, I’m comfortable with that. But what we knew was the ideas resonated and I’ve carried those forward at our non-profit charitable organization at OpenTheBooks.com.
FRA: Great, and I just want to point out before we get in some of the details on what you’re saying as well as what your organization is doing about what you’re saying. Just want to point out that every fact, statistic, and development that you’re going to mention, we see as the root cause of increasing central bank and government interventions in the economy and in the financial markets. So all of these spending issues, deficit problems, challenges and overall debt levels the challenge by government to control the burden of that debt, we see as a root cause of increasing central bank and government interventions.
Adam Andrzejewski: Well I think the founders of the country thought the same way. They recognized that knowledge is power, they actually wrote transparency into the United States Constitution. It’s article one section nine, and this gives us at OpenTheBooks.com the authority as citizens from the private sector to open the books on government. So it simply says that a regular statement and account of receipts and expenditures of all public money shall be published from time to time. So Richard this is our information, the people own this government spending information and at OpenTheBooks.com our mission is to post online every dime taxed and spent at every level of government across the entire country. We’ve captured 4 billion federal state and local expenditures and it’s 80 cents on every dollar of spending at every level right now. And we have visibility over the course of the next 18 months to get that first very unique data set so you’ll be able to track every single tax dollar from every level of government.
FRA: And today you’ve compiled some very interesting facts and statistics. First on the state of finances in Chicago and Illinois, how that is evolving. And then also for municipalities, other U.S. states. Do you want to bring some of those up?
Adam Andrzejewski: So I think in the city of Chicago and across the state of Illinois, the number one public policy problem that affects the delivery of all government services whether it’s education, housing, the war on poverty, the soft social safety net, medicine, the delivery of healthcare, it’s quite simply the number one issue, is the extreme level of pay perquisites and pensions for public employees. In Illinois this summer we identified 63,000 highly compensated public employees that make more than $100,000 per year. For instance, in the city of Chicago, Rahm Emanuel paid out nearly $300 million worth of overtime last year. And 1,000 city workers got at least $40,000 in overtime alone. You’ve got people for instance, phone operators in the police department that last year made nearly $200,000 because they got $126,000 worth of overtime.
FRA: Wow.
Adam Andrzejewski: You’ve got 4,800 police officers assigned as detectives that made between $10,000 and $126,000 in overtime last year trying to solve the homicides and thousands of shootings in the city. It’s a mismanagement of public resources, it’s a mismanagement of taxpayer dollars and we’re holding Rahm Emanuel accountable.
FRA: And for overall in Illinois as well?
Adam Andrzejewski: Well it’s just out of control across the whole state. So for instance, there are 30,000 Illinois educators that last year got a check for over $100,000, you know paychecks. Now 20,000 of them are actually currently employed in their school district. But the 10,000 of them, they’re out the door, they’re retired on six figure pensions. So look, you can educate kids, or you can pay a massive education bureaucracy. The delivery of government services is conditional on reasonable levels of compensation. What we’re showing in Chicago and across Illinois, they’re just completely out of control.
FRA: Probably the easiest way to do it is, I remember an example given by Martin Armstrong, he basically said if you have 10 government employees and 4 of those retire, that those 4 need approximately say 3 units of retirement pay pensions and all that benefits, you have to hire for the other 4. So you need a budget then of 13 units. You’re going to raise property taxes 30%, you know it’s unsustainable essentially.
Adam Andrzejewski: In the state of California, when we looked at their highly compensated public employees, and by the way, in California we found 220,000 of them. We took a look at one position, and it was a water management position I believe it was in Los Angeles County. And the position was a million dollar a year position because there were two $350,000 pensions that taxpayers were paying out of the pension plan. And then the current one was hired for about another $350,000 on salary. So you had two out the door, one currently working, and $1,000,000 at stake.
FRA: Wow, that’s in California. So you’ve got some examples you’ve sent also on New York?
Adam Andrzejewski: So in the state of New York it’s not much better than Illinois or California. New York has 170,000 public employees that make over $100,000 a year. And look it’s out of control like every other state. For instance, in the New York City public school system you’ve got 700 janitors, they’re called “custodial engineers” they’re janitors in the public schools. And they can make up to $206,000 a year. Now, we took a look at the average principal salary in those New York City public schools, the average principal makes $125,000 and there’s 700 custodial engineers that out earn the average principals salary.
FRA: Have you also taken a look at projections based on the statistics that you have, projections on unfunded liabilities and sort of unsustainability limits?
Adam Andrzejewski: We leave that for the actuaries. Obviously, those are complicated calculations, but we actually read all the reports. So a number of years ago I remember, this is an interesting story about 2012, I wrote a piece based on what I had read in one of the pension system reports. And it was the Illinois teachers retirement system, that at the time had about a $100 billion unfunded liability and today it’s probably about $130-$140 billion unfunded liability. And we wrote that that system very rapidly was going to run out of money. And I remember getting an email from the spokesperson of the system and he said look, this is scaring people, you are wrong, this is factually incorrect retract it. And we wrote him back we said no, here’s the evidence. About a year and a half later an email was leaked from the executive director of the teacher’s retirement system. And he confirmed and every single year to date he confirms that unless something is done with the system, if the employees need to work a little longer, pay them a little bit more, receive a little less lucrative cost of living adjustment, if these things are not done, the system very very rapidly in the early 2020s will run out of money.
FRA: And so if we look at how governments are coping with this, you know how are they reacting, what draconian measures they are currently resorting to, can you identify some of those measures currently and in the near future?
Adam Andrzejewski: Well I think Illinois is a great example of this. And you know its taxes for as far as the eye can see. So for instance right now there’s huge uproar is in Cook County, Illinois. And that’s the country where- Chicago is encompassed by Cook County. They’re taxing everything, they’re even taxing soda pop. They didn’t tax the Starbucks drinks and things like that, they tax the soda pop. And so regular rank and file people are just in revolt. The soda pop tax in Cook County has a lower poll approval rating then president Donald Trump has in Cook County. It’s very very interesting. So whether it’s ever escalating property taxes, whether its taxes on businesses for a headcount of employees, if they can think of a tax they’re putting in a tax. And of course, that’s what driving everybody out of here, Illinois loses businesses. We’re a very narrow state, there are actually five geographic state borders, we border five states. And it’s very very easy just to move a few miles and jump over a state border to a different state for a future of prosperity.
FRA: And also on sort of a government taking over everything, the militarization of federal agencies, can you go into that?
Adam Andrzejewski: Well I think that once you can’t pay your bills when you have ever escalating taxes, when you have a regulatory regime that continues to regulate everything, tax everything, at a certain point- you know the federal government has 36,000 lawyers enforcing those regulations? Now only 12,000 work for the Department of Justice pursuing crime and criminals. So you got 24,000 federal lawyers enforcing the regulatory states of America, and that’s why people feel over-regulated. So after you grab legal power, and somebody has to enforce the regulations and the taxation. What we have shown, and we broke this on the editorial page on the Wall Street Journal, our honorary chairman is Dr. Tom Coburn, the former U.S. senator from Oklahoma, and we wrote a piece that broke our oversight report. The piece was entitled, and many people still remember this piece, it was called Why does the IRS Need Guns? And there were two major findings in our oversight report, now these were the federal agencies outside of the department of defense. So we found 67 federal agencies bought $1.5 billion in a 7 year period of guns, ammunition, and military style equipment. And 53 of those agencies were not a part of homeland security or the department of justice. These 53 agencies were rank and file, traditional, regulatory, paper pushing agencies like the IRS, like Health and Human Services, like the Animal Health Inspection Services, like the Veratrin’s Affairs. So we found that an IRS special agent can carry an AR15, the Health and Service agents are trained on the same special weapons platforms that our Special Forces military warriors use. They’re trained by the same vendors to use those weapons, and it goes on and on. I just want to point out, Richard, that the second finding in that report was equality as interesting. We quantified for the first time 200,000 plus federal officers with arrest and firearm authority. And that exceeds the number of United States marines at 182,000.
FRA: Wow, amazing. And in terms of what’s happening, you referenced earlier some of the time frame considerations, any idea on how this unfolds timewise? I know Chicago Illinois is sort of fairly the first to have these challenges, but how do you see it playing out between other municipalities, other cities, and states across the country?
Adam Andrzejewski: So, if they follow the lead of Illinois, they’re going to be in trouble. Obviously, the Illinois legislature just hiked taxes with no underline spending reform, the budget they passed with the tax hike is still $1 Billion underfunded. And taxes went up from roughly about 3% to, it was about a 67% tax increase. So the fundamental reforms weren’t there. We had racked up $15 billion worth of unpaid bills, and now Wall Street is going to bear the financing of those bills. To date, Main Street has financed it just waiting to get paid. But now, as of last week, Governor Bruce Rauner has said that he’s going to bond out $6 billion of the $15 billion of unpaid bills. So look, every single day in the state of Illinois we look more and more like Puerto Rico and as a matter of fact, we might be worse than Puerto Rico.
FRA: Wow. And all of this is also causing brain-drain and wealth-drain. Just before we started you gave the example from your hometown.
Adam Andrzejewski: So back in the late 1970s, I grew up in Kankakee County which is about 100 miles south of the city Chicago. And I grew up in a fairly rural area, our County had 100,000 people, and we lost our two main manufacturers. And nearly overnight the population dipped from 100,000 to about 75,000 people. And it took over 20 years before the population recovered. And it was even more than the loss of jobs, it was moral decay. Before I ran for governor in 2010 I took a look at the number of sex offenders in the city of Kankakee and it was 126. And I looked at a similar size town just north of Chicago, and they had 1. So not only do the jobs leave, but capitalism is the best system for honing an individual, keeping them engaged within communities and preventing decay of all types.
FRA: I guess all of this is quite negative, but what your organization has been doing is quite positive, serving as a beacon of light. Can you go into some of the activities that your organization is doing about these developments?
Adam Andrzejewski: Yes. So one of the major issues and lack of transparency at the federal level is the federal pensions and retirement annuities. And with the federal pension systems, taxpayers are on the hook for a $3.5 trillion unfunded liability. But right now Richard, you and I, we have no right to know, we have no ability to see who the retiree is, how long they worked, what they put into this system, what taxpayers put into this system, and what that retiree receives in retirement. We have no ability to look at the federal agencies to see who is confirming the most for instance 6 figure retirement pensions. And we have no right because all of this pension data is not subject to the Freedom of Information Act. And so we have legislation that we’ve put together with Florida Congressman Ron DeSantis and it’s a great bill. The bill is called Federal Pension Disclosure Act and it already has 10 sponsors in the house, in congress. And we’re optimistic that this will pass the house and we’re looking for Senate sponsors. So this would open up all of that. I mean wouldn’t you like to see Lois Lerner, she was the IRS boss who is rumored to have retired on full pension benefits? She allegedly led, she plead the fifth in front of congress and she allegedly led the targeting scandal of the conservative and tea party groups ahead of the 2012 election for Barrack Obama. I just think all of this needs sunlight and that’s just one of the areas that we are aggressively moving forward to open up.
FRA: Now a lot of people have pointed out the potential for a movement to the far left. I mean you mentioned capitalism just a few minutes ago and there may be some misunderstanding by the millennial generation of the current economic system, especially in the light of what happened during the financial crisis and the causes of that. Do you have any initiatives that can reach out to the millennial generation?
Adam Andrzejewski: Yes we actually use the latest in technology to display all this data. And millennials love having the tools and the ability to hold the political class accountable. So I think it’s a generation that naturally fits our mission and vision of empowering citizens with robust facts and hard data. In the year of, fake news is talked about all the time, well this information actually comes from the government, so it’s true. And I think people like having that ability to just circumvent and ask hard questions demand answers and hold people accountable for tax and spending decisions.
FRA: Great, and how can our listeners learn more about your work? And do you have a service or a newsletter they can subscribe to?
Adam Andrzejewski: Yes, so if you come to OpenTheBooks.com all you have to do is, if you want to give me feedback on this interview just do the contact us, and then you’ll have subscribed to all of our services. So that’s just the easy way to do it, is just come to OpenTheBooks.com and send me an email through the “contact us” function.
FRA: Great thank you very much, Adam, for being on the show.
Adam Andrzejewski: Richard, thank you for your interest in our work, I look forward to keeping you updated.
FRA: Great, and we’ll end it there. And yeah Adam, we’ll do this again. It will be interesting to see how this continues to evolve. And especially on the reaction by governments, what they’ll do, and also perhaps maybe if the federal government steps in to do like a bailout of the states, if that’s going to happen in some way. So it would be interesting to see how this evolves.
Adam Andrzejewski: It really is, and we’re going to be there for it. I mean you and I, we’re young we got a lot of years to go and this probably in states like Illinois won’t take too long. I mean you know the levels of debt, the levels of spending, the lack of- the political structures that have been cemented in place just ensures that all of this continues to a race to the bottom. So it’s not a question of if, it’s just a question of when. And you know the trend can continue for a good bit. But at the end of the day it does stop, and when it stops it’s going to be a painful experience. And I don’t think it’s going to take that long.
FRA: Right, actually I was just talking this morning with an economist who’s originally from Argentina and now is working in Canada. And all the economic devastation down there, he mentioned how prevalent and how the Austrian School of Economics is in trying to sort of bring back the economy positively from down there. So they’re sort of much ahead of the evolutionary process if you will then where we’re at now in the US. I know your partner Matt, he takes a very close view of the Austrian School as well.
Adam Andrzejewski: Right, right. No, I kind of looked at things through more of a political frame. So what I hear or what I see is just further genius of the system instituted by the founders. So it’s conditioned on federalism. So the laboratories of the states, they try out all these different ideas. The successful states over time where a lot of people want to live have the better ideas. That’s what you’re seeing, you’re seeing people moving from California and Illinois and New York and they’re going to states like Texas and Florida. And those states eventually grow in political power, in federal power and the states with bad ideas, they die. And they become less powerful over the course of time. Now, things are so bad in some of these states, you know California is the most populous state and Illinois is the fifth most populous state and New York is the third most populous state. I mean, can these states bring down the good old United States of America before federalism rights the ship? And I think that’s an open question. Federalism may be moving too slow to help us this time.
FRA: Yeah, that’s a very interesting observation.
Transcript written by Jake Dougherty <Jdougherty@ryerson.ca>
09/11/2017 - The Roundtable Insight: Alasdair Macleod And Jayant Bhandari On The Rising Synergistic Asian And European Economies FRA: Hi, welcome to FRA’s Roundtable Insight. Today we have Alasdair Macleod and Jayant Bhandari. Alasdair is head of research for GoldMoney and an Austrian economist. He has a background as a stockbroker, banker and fund manager. Jayant is constantly traveling the world looking for investment opportunities, particularly in the natural resources sector. He advises institutional investors about his findings. He worked prior 6 years with U.S. Global Investors in Texas, a boutique natural resource investment firm, and also for one year with Casey Research. He also is a follower of the Austrian School of Economics. Welcome, gentlemen.
Alasdair Macleod: Thank you for having us.
Jayant Bhandari: Thank you very much, Richard.
FRA: Great, today I thought we’d do a discussion on currencies, commodities, cryptocurrencies, what’s happening there. An update from India, and also just what monetary policies are doing by the major central banks, some recent writings by Alasdair in that regard. So to kick things off, just wondering Jayant if you want to give an update, we were just talking about the recent announcement by the Reserve Bank of India?
Jayant Bhandari: Richard, a very funny thing came out a few days back by the Reserve Bank of India. Firstly, the reality is that in this electronic age, when you have deposited all the money into the banking system the government should have released the effect of the demonetization very soon after the end of December 2016. And I’m talking about the demonetization process that has started in November 2016. Now a few days back they came out with a new saying that 99% of the demonetized currency had been deposited with the bank by the end of March 2017 which basically means that more than 100% of the money in circulation was actually deposited. Which basically if you try to understand what this means is, not only legal tender was deposited, the counterfeit currency in circulation also ended up getting deposited with the banking system. So not only did the banking system of India completely failed to stop corruption or black money, they actually converted counterfeit currency into legal currency. Now also if you read the recent news releases, they have also come out with the latest survey reports, which now tell you that the economic growth has fallen to 5.7% which is now much lower than that of China. And it clearly shows that the Indian economy is now starting to stagnate. In my view, it was stagnating 6 months back and it’s actually regressing in my view. Two more things before I go complete my response here Richard. Most of the growth can be attributed to destruction of the informal economy and transfer of that economy to the formal economy. Which in real terms means that they are destroying the economy, not improving the economy. Also, a huge amount of GDP increase is a result of massive increase in government spending. Which is of course as you and I know is not sustainable and it’s actually not helpful to the economy or to the society. So there are constantly negative news coming out of India right now.
FRA: Your thoughts Alasdair?
Alasdair Macleod: Well I find that fascinating. It doesn’t surprise me, before we came on we were just sort of remembering last time we spoke about this, and I think you Richard agreed this is going to be economically destructive. Yet the Reserve Bank of India count money has been sorted, which means that there’s got to be some money that which money in there. And the economic growth figures has been fiddled with. There is no way that you can destroy the money and then expect a growth of any sort to occur because economic growth or contraction is purely a reflection of the money SKIP Economic growth simply collapses. It seems to me that what’s happened is that the figures have been filled one way or another, as Jayant suggests, to come up with something that looks reasonable in the circumstances. I wouldn’t believe for a moment that there’s been economic growth of 5.7%. I don’t actually hold any SKIP. Is completely meaningless, because you can’t get at what is going on in the economy, whether it’s progressing or not. I would say that that figure is completely false and anyway pretty meaningless.
FRA: Jayant, what has been the effect on the currency? The exchange rate and purchasing power and inflation/deflation?
Jayant Bhandari: So food prices in the country have now started to rise. So if you remember, Richard, when we talked initially soon after demonetization, I was telling you that food prices had fallen drastically. Food prices were down about 50% or so. That seems like good information to most people, but the reality is that food prices fell so much because poor people were unable to feed themselves. Hundreds of millions of people had lost their jobs, and they had no option but to reduce the food consumption. Now that also meant that farmers could not really make money, and they did not sow properly for the next season which now means that food prices are now increasing across the country. So that is the harm that has been done to the inflation/deflation situation. Deflation happened for the wrong reason and now inflation is happening for the wrong reason in the country.
FRA: And what has been the effect on gold prices in rupee terms locally?
Jayant Bhandari: So Indian currency has surprisingly done very well in the last 7 months. Now, these are all in the short term. I don’t think should pay attention to the currency prices because these changes tend to be noise. And there is another thing that is happening that Western institutional investors continue to be very euphoric about India; the reason why they keep pumping money into the Indian stock market. And as a result of that more Western money keeps flowing into India which has helped the Indian currency. Now another thing that is happening is the situation with gold and Bitcoin. Bitcoin is being bought by Indian states, a lot of people now come to me asking about Bitcoin and a lot of people have increased their consumption of gold. They have also increased the storage of gold in Hong Kong, Dubai, and Singapore. This is what rich Indians are doing, so in my view from what I see, gold consumption has gone up and Bitcoin consumption has gone up in that country as well.
FRA: And you were mentioning earlier about the rise of other metal prices like the base metals over the last year period, can you provide some commentary on that, Jayant?
Jayant Bhandari: Well I mean this is, of course, a good sign in my view that China continues to consume a huge amount of commodities. Which in my view underpins the future of China which is that China continues to grow. And I continue to be very optimistic about China and therefore commodities and I continue to be optimistic about gold, but for the wrong reasons which is that many of the third world countries continue to stagnate and suffer as a consequence of bad policies.
FRA: Alasdair, your thoughts on the rise of base metals and how that relates to the precious metals?
Alasdair Macleod: I think Jayant is absolutely right about China. China if you like, is a mercantilist economy. It’s driven, if you’d like, by policy from the center. And the policy from the center on various 5-year plans, and they’re on the thirteenth 5-year plan now, is basically to create an industrial revolution throughout Asia. At the same time, the spice route spice road projects the OBOR project is beginning to cut down substantially the transcontinental shipment times. There’s an enormous number of trains now going between China and Europe. And we’re now in a position where SKIP can put a brand new car on a train, ship it over to China on that train and have it in a showroom in Beijing in 15 days. That time is going to come down too, around about 10 or 12 days eventually and probably in the not too distant future. And this compares with sea transport times of at least 30 days for the same thing. At the same time, you have companies in Europe like Zanussi Italian white goods manufacturer. They’ve got factories in China and they’re shipping their white goods by rail now in contain raised shipments. And again they’re getting the benefits of their goods coming into Europe within literally almost a fortnight out of the factory. Now, this is very very beneficial and China is in effect driving the economy of the whole of the Europe and Asian continent. It’s becoming particularly visible in the Asian part, it is becoming more visible in the European part. The German economy is going like a train, it really is. Other Eurozone economies are if you’d like, they don’t have the manufacturing porous but nonetheless, they are beginning to recover. And this is really the story I think for the next 2 or 3 years at least as far as Europe is concerned. So when it comes back to base metals, the demand for base metals I don’t think we’ve seen anything yet. There is another aspect of this and that is the currency aspect. What China basically wants to do is to do away with using the dollar as a settlement currency for her trade. And she’s made enormous strides to achieve this end. And there will come a point where she will take a view on her reserves, which total roundabout $3 trillion equivalent, most of it is in dollars and about a trillion of it is invested in T-bills and bonds, treasury bonds and so on. There come to view about that relative to other currencies. And I think we’re on the edge of China reducing her reserves in favour of buying base metals because she needs copper in particular. She’s redoing the whole of her electric metalwork, her grid. Air conditioning is a huge market in China. And the building of these cities, I mean we think these are just castles in the sky, but they’re not. Actually what China is doing by building these cities is she is seeking to rehouse huge numbers of people, up to 200 million people is the plan, where the get redeployed from low-value agriculture and that sort of subsistence existence into these satellite cities where they will be redeployed in manufacturing. You know in all the sort of activities if you’d like that go with the modern economy. The Chinese economy, it is becoming rather like the European economy if you take a 5-year view on it. It’s going to become service driven, you’ve got middle classes and all the rest of it. And middle classes want things like air conditioning, they want electricity that works. And so this is the demand for copper that we’re seeing. And when it comes to all the construction, the railroads the improvements that are going on, the industrialization of the whole of Asia, that’s where things like iron and steel come in. And of course, you have all the other metals. Golds relation to this, well there are two ways of looking at it I think. The first is that the price of base metals, the price of anything energy as well, is a lot more stable over the centuries measured as gold as it is in paper currency. And I think that’s a very important point to bear in mind. So if you see the base metal complex rising in price, then it is likely that that will put an upward stimulus on the price of gold as well measured in paper currencies. And the reason for that is that its paper currencies that are losing their purchasing power, not gold. So that’s the first point. The second point that I would make about gold is that if China is serious about doing away with the dollar, the Yuan as currently constituted is not a satisfactory substitute for the dollar. So what she must do is offer trade partners if you’d like, the ability to settle in something else. And this is where gold comes in. We’re seeing this on the futures exchanges in Shanghai. There’s a Yuan contract already on the futures market for gold, the next contract that’s coming in, and it’ll come in by the end of this year, is a Yuan contract in oil. So what this means is that a country like Iran who exports a lot of oil to China, because Iran doesn’t want to use the dollar and she is restricted very heavily on what she can do with dollars, she doesn’t want anything to do with the dollar, she doesn’t necessarily want to take Yuan. So what she’ll do is through the futures exchanges she’ll cover her shipments, the payments that she expects her shipments to China through the futures market. First of all converting oil into Yuan, and then another futures contract converting Yuan into gold. And this is going to produce I think a demand for gold which will not be satisfied by China indecently, it will be satisfied through the markets, deliveries through the market which will put quite a drain on global gold resources. So this is another way in which China is going to move away from settlements in the dollar and that is to provide the facilities if you’d like as an entrance stage for her trade partners to accept payment in effect in gold by bridging through the futures. Eventually what she has got to do is she’s got to formalize the relationship between the Yuan and gold. And that I think will happen in time, how long is difficult to say. All I can say is that the moment that is done, almost actually the moment that Iran can go and just literally sell oil to China in return for gold by using the mechanism of the futures markets, then this is almost like a financial nuclear attack on the dollar. And I do see the dollar is very very vulnerable to this. The timing on this I think in a sense has been speeded up by the election of Donald Trump, because that’s produced a huge air of uncertainty in international trade relations. America is isolating herself in this. But I think that the Chinese, they will move cautiously but watch North Korea, watch Afghanistan, that’s another thing. Also watch the relationship between China and Russia which is very very close. And I think Russians might have some input as to the timing on when they if you’d like pull the rug out underneath the dollar. So I think we’re living on sort of a cliff edge if you’d like as far as the dollar is concerned and this is a fascinating time. And I think anyone who basically doesn’t hold any gold or silver for that matter which is a geared play on gold in financial terms, I think could find themselves with egg on their faces. So it’s a very interesting time and I would be very positive I think on what’s going on, on base metals and also on gold and all to do with China. China is developing the most amazing economy for the whole of Asia. I think Europe is a major beneficiary, Europe will overheat very quickly on this by the way so there’s got to be a very sharp reversal in monetary policy by the ECB. But guess who’s not in the game at all? And that’s America. America has just isolated herself from the gold game and she’s sitting there thinking what to do about it.
FRA: Jayant, you spend a lot of time in Asia, do you see the same type of dynamics from your perspective as Alasdair has elaborated on?
Jayant Bhandari: I’m certainly extremely bullish on China, I go to China quite often and I have talked with you about this several times Richard. I continue to see good growth taking place in China. And I see whenever I go to villages, towns, and cities in China I see improvements. Sidewalks get constructed, coffee shops come up, the coffee shops get cleaner and more hygienic as time passes by. So China is actually improving consistently as time has gone by. One thing very interesting to add to what Alasdair was talking about is to look at the currency chart, the comparison of the Yuan with the U.S. dollar. Now, two years back people were starting to feel very pessimistic about the Chinese currency, they were thinking China was going to start regressing or stop growing. And Chinese currency actually did continue to fall for about 1.5 years. But then people don’t really talk much about the Chinese currency because since the beginning of this year, Chinese currency has improved massively and has gained back at least half of the losses it has made in the earlier 1.5 years. So this is also a reflection of the fact that Chinese economies actually doing quite well.
FRA: Alasdair, you’ve recently written about the Jackson Hole speeches of Yellen and Draghi, omitting commentary about the burning issues of the day. And you list a few of those, one is the question: why is the ECB injecting 60 billion per month if the great financial crisis is over? In the same writing you also indicate in reference to the Fed normalizing interest rates: will take nominal rates only 1-2% to set off another financial crisis. So how do you see things playing out? Do you see what you just mentioned earlier as putting more pressure on the ECB and the fed?
Alasdair Macleod: Yes, I do. I think the importance of the China story is that everybody has got commodities to export, everybody who has territory if you’d like on the Euronation continent is going to benefit from what China is doing. America is not, America doesn’t have any friends really in the trade sense. She’s even turning around under NAFTA and telling Canada and Mexico: “we don’t like this arrangement, we’re going to rejig it”. They’ve already given up on any sort of trans-Atlantic and trans-pacific idea. I mean this is absolutely crazy, America has isolated herself. Where this translates into economic performance is that I view the U.S. economy as still being in a recovery stage from the great financial crisis, and by that I mean the credit cycle. The next phase of the credit cycle is the one of expansion. The expansion of credit, when banks actually start competing to lend to the 80% of the economy, which is the medium size and smaller business. We’re not there yet I think in America, and we probably will never get there because of the trade policies and the isolationism of President Trump. But Europe is a very different thing, Europe is turning around very very quickly. And I noticed in the Jackson Hole speech that Mario Draghi made, he made reference to the time difference in terms of recovery between the Eurozone and America. And he got it completely wrong, he said you’re ahead of us in the recovery. No, Europe is actually ahead of America. Europe is now expanding very rapidly, we’ve yet to see it really I suppose, in normal statistics, but the anecdotal evidence-and if you just watch what’s going on and you just look at the situations. I mean I described the situation for a company like SKIP. There is a major Italian company, whose doing incredibly. Got the most manufacturers, particularly the German manufacturers, I mean this is amazing. And the interest in Europe is actually going to go one further, very soon I think you will find that Germany SKIP for the Eurozone. And what that means is there will be a break with the American lead NATO arrangement. Whereby America says “This is who we’re going to have sanctioned, and everybody is going to fall in with us,” I think this is going to stop. And this is terribly important because SKIP. Mario Draghi and the ECB doesn’t seem to recognize SKIP. Here we are, we got banks who despite money at the ECB, have a negative interest rate of -.4% the interest rate from the ECB is 0% so you’ve got somewhere between negative interest rates and zero rates. They are doing quantitative easing of 60 Billion Euros a month. And they’re still doing this. And in my judgment, in a credit cycle, they have moved from recovery and they’re moving into expansion. Monetary policy in the ECB is completely inappropriate for what’s going on. So I see the big shock, if you’d like, by the end of this year has got to be a complete SKIP fast, by the ECB when it comes to monetary policy. We’re already getting wind of this, the Euro has risen from I don’t know, 1.05 against the dollar it’s now currently knocking at 1.20 to the dollar. And of course you’ve got all the manufacturers in Europe turning around and saying “oh the currency is too expensive, how dare you raise interest rates and make the situation worse” so the ECB’s got itself into this hole, which so often central banks who are behind the curve find themselves. And this is going to be very very difficult for them. First of all, stop QE SKIP. Also, and that is with the dollar declining, eventually she’s going to have to think quite seriously about raising interest rates to avoid a huge great debt problem in the economy. Which really means that over in debated business are going to find that the cost of money starts going against them and they are going to start failing. So it’s an interesting one you go back to the Eurozone, you also got the problem SKIP and the banks are all up to their necks at the moment in government debt. And that government debt is wildly overvalued. It’s overvalued on the basis that the ECB is in there buying relatively scarce bonds pushing down yields. The moment that stops, there are going to be huge great losses on the Italian banks, all the losses that they haven’t dealt with from the financial crisis. So I can see the worst nightmare I think for a central banker is that we move from this sort of this recovery phase, which just rumbles on and rumbles on and rumbles on. They don’t have to raise interest rates, they ignore things like unemployment and inflation sort of stays somewhere around about 2% and you know everybody is happy with that. If you actually get an expansion of credit because things are going like a train or beginning to go like a train, SKIP because I think must hope that we are in a permanent stage of repressed recovery. But I don’t think that’s going to be the case unfortunately with the Eurozone because of the Chinese stimulus across the whole of the Asian continent.
FRA: And so from this, what is your outlook on the Euro, the U.S. dollar, and gold prices?
Alasdair Macleod: Dollar down, gold prices up, Euro up. I think there’s going to come a point where the Euro- I don’t know whether the Euro outpaces gold or not. At the moment gold is outpacing the Euro I mean if you look at gold measured in Euros, it’s only up by about something like 3% something of that this year, it was actually down 2% until fairly recently. So basically to answer your question, I think that gold is going to go up. One thing that really really light a fire under gold I think is when the Chinese come in with the oil to Yuan contract on the futures market. And then you’re going to get Russia, you’re going to get Iran, you’re going to get various of the oil producing Asian countries using that facility to not buy dollars, but to just sell their oil for gold. And I think that’s going to make a huge difference.
FRA: Jayant, your views on ECB policy and Fed policy and your outlook for the currencies and gold?
Jayant Bhandari: Well I’m very optimistic about the gold price and virtually every sign tells me that gold is going to go up. Not only the monetary policies but also what I see as stagnation I see happening, economic stagnation in the third world countries, except for China of course. Also, the North Korea situation is very likely to continue to push the gold price up. I might add some comment on Canada, Canada has recently increased the interest rate. And as we know the housing prices have been going up continuously in Vancouver and Toronto. And the Canadian society is hugely in debate, the private debts are huge. So it will be amusing to see what happens if Canada continues to keep the interest rate at what they have now declared or actually increase it going forward.
FRA: Interesting, great insights gentlemen. Just wondering how our listeners can learn more about your work, Alasdair?
Alasdair Macleod: Well, I publish an article every Thursday, around about midday I guess in Eastern Standard Time. You can access it by the website, or the other way to access it is open an account and we’ll send you an email. But basically yeah, I publish an article once a week on the Thursdays. I also do a market report on the Fridays. And what I try and do is look as dispassionately as possible at both what’s going on if you’d like in the futures market, the physical markets, if I have good information. And I don’t rely on charts at all on that. I mean what I will do is I’ll quote charts because other people use charts. But I try to get to the nitty grittiest of what the balances are and you know, where the interest is in market. And that’s quite fun, that’s on Friday, I write that on a Friday before we get the commitment of traders figures so it’s a slight leap in the dark, but anyway those are my two things, regular contributions if you’d like.
FRA: Great, and Jayant?
Jayant Bhandari: Everything I do, Richard, is on my website http://jayantbhandari.com/
FRA: Great, thank you very much. We’ll do another session again, thank you, guys.
Alasdair Macleod: Thank you.
Jayant Bhandari: Thank you very much for the opportunity, Richard.
Transcript written by Jake Dougherty <Jdougherty@ryerson.ca>
09/08/2017 - The Roundtable Insight – Yra Harris: Central Banks Fear Deflation More Than Inflation FRA: Hi, welcome to FRA’s Roundtable Insight. Today we have Yra Harris. Yra is an independent floor trader, successful hedge fund manager, a global macro consultant trading foreign currencies, bonds, commodities and equities for over 40 years. Also he was the CME Director from 1997-2003. Welcome Yra.
YRA HARRIS: Richard, thanks for having me back again.
FRA: I thought we’d begin today with a discussion of your interview with Rick Santelli back in February of 2016. At that time you mentioned gold and bonds are better plays than the Chinese Yuan. Since then, I think you referenced gold at being 18% higher and also referenced a shift in asset classes taking place – that would be great to get your insight on that.
YRA HARRIS: This is always a cautious zone for me to do this. Sometimes you just have to go back and look at things you said to weed out all the noise that crowds the world of finance and the discussion that takes place. So yes, on February 1st 2016 I had done a hit which you can find HERE. And it was the Monday after a weekend – I mean it was a scheduled interview, and what took place over that weekend is what I call the four horsemen of the global macro world. People I hold very high regard for their analytical ability: David Tepper, Ian Horton, Kyle Bass and George Soros – These guys came out and made comments over that weekend, it got a lot of media play, that they expected a 30% depreciation in the Chinese Yuan because of all the debt issues in China and other things that were taking place. On that Monday morning with Santelli I discussed that that’s a difficult trade for a lot of people to make .. I said I would rather be long bonds, all kinds of bonds all over the world, sovereign debt not corporate, and gold. It raised Rick’s eyebrows and he said, “Why?” I said, well, because if the Chinese Yuan, and at that time it was trading at about 6.58, which was an okay level, it has certainly weakened over a period of time where it was down to 6.10, so I said if you’re looking for a 30% depreciation from these levels, the impact on the globe will be massive deflation because if the Chinese were depreciating that much that means they would be shoving exports out as fast as they could and it would really put downward pressure on prices all over the world and we already know we had too much slack in the global economy, and that would be the impact. And I would own the gold because it’s deflation that will force the hand of central banks to panic. We are now at zero to negative interest rates. People say they fear inflation; no they don’t, not at this point in time. We go back to Ben Bernanke talking about the lessons of 1937 and that’s the fear of deflation. Central banks fear what happened in Japan for the last 20 years. The fear of deflation weighs upon them, so then, from a hard money perspective, it’s more the issue of what you do in response to that deflation. And that’s why I said gold would be a better play, a safer play and an easier play for most investors and traders to make. So I went back the other day to review it and the Yuan had actually dropped. Right now, it is through the level it was on that weekend and right now it’s trading at 6.48. So that’s moved where the Yuan is actually higher from that date, but gold is up now 18-19% from then and the bonds are basically steady, maybe they are now 10 basis points higher than they were. But that was the purpose of that trade because again it’s to put the light that central banks fear deflation far more than they fear inflation at this point in time. Now will that change? Well, the Fed hopes it changes, but it’s not changing. And we heard Mario Draghi this morning; he’s much more worried about hitting his inflation targets on the upside than anything else. So that was my point of that. I just wanted to go and revisit that for people who follow my blog and just to put perspective to things.
FRA: Great. And what about your current thoughts on the 2/10 U.S. yield curve? I think you had some concerns that it might be breaching the 73 basis points level.
YRA HARRIS: Yeah, we’re down here again. This 73 basis point level has been an important level for me. I’ve written about it for 4 years and we’ve bounced out of this area several times, but here we are back visiting it so we are getting some flattening in the curve. Now as I warned last night in my blog, this is a critical level for me and it sends a very important message to the banks because this curve ought not to be flattening. If the Fed embarks upon, as our beloved Peter Boockvar calls: Quantitative Tightening (QT), which is a wonderful phrase, but if they begin shrinking their balance sheet that should unleash more supply in the long-run in the market & the curve ought to steepen. But, if the curve chooses not to, I think the Fed will have received a message. We saw the Bank of Canada tighten after we saw the response of the currency which rallied quite a bit because it caught the market off guard because the consensus was that they weren’t expecting a tightening. So we saw that action and this plays right into Lael Brainard’s speech back in June. What Lael Brainard said recently is that she doesn’t want the Fed’s Funds Rate to go up, that the Fed Funds rate is high enough to embark upon quantitative tightening. And with more supply it’s going to be a trickle effect to begin with, just as Janet Yellen has famously said that the quantitative tightening will be like watching paint dry. Peter Boockvar doesn’t believe that, nor do I, once this starts going, but this curve is very interesting. Now, as I warned, and I’m not being a two-fisted economist here, but with the impact from the Bank of Japan and from the ECB still actively involved in quantitative easing programs and because we believe in the global macro world that money is fungible, it might push the long-run US curve lower and lower. And this is really going to cause a problem for the Fed. They’re going to have to sit up here and take note of it because they cannot afford in all their designs for whatever they want to do, for this curve to start flattening more dramatically.
FRA: And that’s what you think would likely happen if the 2/10 reaches 73 basis points then…
YRA HARRIS: Yes, especially if it closes on a weekly basis. In today’s world we can get all kinds of erratic movement, but it closed on a more long-term technical level like a weekly close, that would give me a warning sign. My history of studying this has been that when you get flattening curves, especially in the US dollar, which is of course the most significant part because they are the world’s reserve currency – That your currency ought, and I emphasize ought, first of all to rally .. now that may seem counter-intuitive but that’s what does happen. I don’t know what the time lag is but the currency does rally. And it’s not good for metals because what does it reflect? It reflects a coming slow-down in the global economies. That’s what flattening yield curves project, that’s historical .. And that’s why historically they have been great predictors of economic and financial outcomes. But, in this world of massive QE, we don’t know that. Again, as we’ve stressed, and I’ve been on with you I think for 3 years on and off – the signalling mechanism has been so badly broken. And this may be one of those times, but it certainly sends a warning sign. And the warning sign this time will be interesting because if I’m right, this time the dollar will not rally and the gold will not break. It may have an initial effect, but there won’t be any significant damage done to these prices levels because the Fed will be in a very difficult situation as to how to respond to this because with interest rates at 1.25% it’s not like they have much latitude on that end. So this gets very interesting. We are at very interesting pivotal points and we’re going to wait to see how this unfolds. But, the market dynamics are telling us that we’re at very precarious points.
FRA: Yeah, and we also talked yesterday on the program show in terms of what’s happening in China on the Silk Road and the rally of base metals over the last 1 year period or so. So in the old world, base metals and precious metals could fall, but now because of all the distortions and new factors such as China’s development, we could still see that trend of rising base metals and precious metals?
YRA HARRIS: Well, yeah. I mean we are still trying to figure this out as we’ve watched copper rally. And I’ve been suspect about the copper rally, but now between the Hurricane Harvey and Irma there is going to be a lot of rebuilding and the copper prices were already moving higher, so we might see some of that fall off from that. With China’s Silk Road initiative it certainly has had some impact, but the way the Chinese securitize some of their debt is with commodities which I’m a big fan of. I think that there should be gold-backed bonds. How this hasn’t taken place is beyond me and I know my friend Bosko up in Canada has been working on this because he trades – he makes markets for people’s gold coins and he has been very interested in this. But this is significant. These are significant events that are taking place here and part of the reality may be that the Chinese are securitizing a lot of commodities and that puts a floor on the pricing and keeps them in demand. The problem is that when you use commodities as securitization, if you haven’t priced them, meaning: if you pledge me 100 ounces of gold and you’ve given too big of a haircut on it, then I’m not really protected if gold prices collapse. But if you figure out the right ratios it does work. Are we embarking upon this? I don’t know as of yet, but we are certainly seeing some interesting responses to all of this.
FRA: As you mentioned earlier about the central bank policies of Europe and Japan factoring into this thinking, do you still see their monetary policies as staying the same like the current program of 60 billion Euros per month by Europe? Do you see that changing?
YRA HARRIS: Well, I think about that. Peter and I have actually disagreed because he thought we were going to see an earlier statement from quantitative tightening, but he was dead right on target in saying that it will probably come in October after it shifted a little bit after Jackson Hole. And from what Draghi talked about today in his press conference, recalibrating the October meeting which fits Peter Boockvar’s timetable now. I don’t know; I think it depends on many things. Number one, I think that Mario Draghi is hoping, he’s fervently hoping, that Merkel does very well in this election because it will give him more latitude because Merkel has been running protection for Mario Draghi in his whole quantitative easing plan since day one. So the stronger she is, the more comfortable he is. So we will see the way this election comes out and we’ll play upon that. I still say that Mario Draghi nets me my premise and I’m sticking to it. He has a far different agenda than the Fed or the Bank of Japan does because he has a political agenda and his political agenda is how to craft a Eurozone bond because it will take a Eurozone bond to create a truly unified European financial system and therefore the bigger he builds that ECB balance sheet, the higher the chance that he is going to be able to synthetically create a Eurozone bond.
FRA: And to continue building that balance sheet if the ECB is running out of bonds to purchase, could it expand or broaden to include German equities?
YRA HARRIS: Well, that’s a very good question. Mario Draghi was actually asked that question today and he danced like he was afraid to answer, he really didn’t give an answer. Could he? – He said they haven’t discussed it – Baloney they haven’t discussed it. They are very aware because this is going to become a legal issue regardless. And if the AFD, the Alternative for Deutschland Party, actually does better in the election than some think, it will for certain become a major legal contention because they are already violating the whole basis of the Maastricht deal to begin with, but everybody has looked beyond that because Mario Draghi’s real mandate is preservation of the Euro. He said that in July of 2012. He keeps talking about inflation, but he has taken that upon himself to be the preserver of the entire EU project regardless of costs. So, we can’t answer that question, we really can’t, until we see certain things start to play out. Everybody is going to develop their own hypothesis and some are going to prove right and some are going to belong in the trash heap of ideas, or as Max Planck would say, science advances one funeral at a time; same with trading.
FRA: The last question is on the Euro. Where do you see that going? We’ve seen a lot of volatility, today for example after Mario Draghi’s speech and also the ECB releasing forecasts on foreign exchange.
YRA HARRIS: In fact, Rick Santelli had John Coulter on and Santelli asked him a great question at the end. Rick asked him about the Euro and he asked would he be buying Euros and Coulter of course dodged the question just as Mario Draghi dodged the question, he dances one with great ability. It’s interesting that he cited the 1.18 Euro level as the number that they use in their projections. So he was being nailed down to that, but he didn’t give it that much credibility. My view on this is that he likes Euro here because it helps Merkel because it quiets the Germans. He wouldn’t come out and say this, but if I was there I would have certainly asked the question: Does the strong Euro represent the successful policies of the ECB? Which of course is what Draghi would say if asked .. I’m not sure where it goes here, but I’ll tell you this, and I’m going to blog about it tonight: so far today in the cash Euro market the high has been 1.2059. This is a real critical area because if you go back to July 2012, and especially July 23rd when Draghi delivered his famous comments of whatever it takes – Meaning to preserve the Euro. The low that week, when he made that comment, was 1.2042. Then over the next year and a half the Euro proceeds to rally all the way back to 1.40. Now during that time is when the United States when in full quantitative easing mode. And then 2014 when the United States began tapering, the dollar starts to rally and the Euro drops over the next few years from 1.40 to 1.05. So these areas that we’re in are very important and we’ll see what happens.
FRA: Great insight, lots of volatility and moving parts today. How can our listeners learn more about your work Yra?
YRA HARRIS: You can follow me on my blog, “Notes From Underground” at YraGHarris.com. You can register for it; it’s free. You will get a real-time into what I am thinking about
FRA: Great excellent. Thank you very much Yra.
YRA HARRIS: Thanks Richard – I appreciate it.
Transcript by: Daniel Valentin <daniel.valentin@ryerson.ca>
LINK HERE to get the MP3 Podcast
09/07/2017 - Jeff Deist And Dr. Mark Thornton: Central Bankers Are Responsible For Boom And Bust Cycles
Jay Taylor Interview ..
09/07/2017 - Paul Brodsky: Nominal Asset Prices Could Rise – But In Purchasing Power Terms?
“Central bank purchases and government investment have been fabricating output growth and asset gains. Central banks now hold about $19 trillion in assets on their balance sheets, up from almost zero in 2008, and are now 20 percent owners of global assets. There is also about $20 trillion in US federal debt, up from $9 trillion in 2008 .. The current imbalance separating credit (claims on money) from money itself suggests a doubling, tripling or even quadrupling of the money supply in float (yes, 100, 200 or 300 percent monetary inflation directed towards financial markets). This implies nominal asset prices could rise, but not nearly as much as the purchasing power value of the currency they are denominated in would fall.”
09/07/2017 - Daniel Lacalle: Are Central Banks Nationalizing The Economy?
“The FT recently ran an article that states that ‘leading central banks now own a fifth of their governments’ total debt.’
The figures are staggering.
•Without any recession or crisis, major central banks are purchasing more than $200 billion a month in government and private debt, led by the ECB and the Bank of Japan.
•The Federal Reserve owns more than 14% of the US total public debt.
•The ECB and BOJ balance sheets exceed 35% and 70% of their GDP.
•The Bank of Japan is now a top 10 shareholder in 90% of the Nikkei.
•The ECB owns 9.2% of the European corporate bond market and more than 10% of the main European countries’ total sovereign debt.
•The Bank of England owns between 25% and 30% of the UK’s sovereign debt.
The Bank of Japan, with its ultra-expansionary policy, which only expands its balance sheet, is on course to become the largest shareholder of the Nikkei 225’s largest companies. In fact, the Japanese central bank already accounts for 60% of the ETFs market (Exchange traded funds) in Japan.
…
The central bank can ‘print’ all the money it wants and the government benefits from it, but the ones that suffer financial repression are the rest. By generating subsequent financial crises through loose monetary policies and always being the main beneficiary of the boom, and the bust, the public sector comes out from these crises more powerful and more indebted, while the private sector suffers the crowding-out effect in crisis times, and the taxation and wealth confiscation effect in expansion times.
…
It is a clever Machiavellian system to end free markets and disproportionately benefit governments through the most unfair of competitions: having unlimited access to money and credit and none of the risks. And passing the bill to everyone else. If you think it does not work because the government does not do a lot more, you are simply dreaming.”
09/05/2017 - Alasdair Macleod: Normalizing Interest Rates Would Threaten The Whole Western Financial System
“Where do the Fed and the ECB respectively think America and the Eurozone are in the central bank induced credit cycle, and therefore, what are the Fed and the ECB going to do with interest rates? And why is it still appropriate for the ECB to be injecting raw money into the Eurozone banks to the tune of $60bn per month, if the great financial crisis is over? .. Normalizing interest rates would spring the debt trap firmly shut. The whole Western financial system would be threatened by a combination of defaults and collapsing asset values, starting from the weakest point in the global financial system. With debt of today’s magnitude, it will take nominal interest rate rises of only one or two per cent to set off the crisis Ms Yellen believes will never happen again. It is a repeating credit cycle endemic to the fractional reserve monetary system and central banking’s monetary intervention. And when the crisis hits, yet again for the umpteenth time, central banks will flood the system with ever larger quantities of cash.”
08/31/2017 - Dr. Thorsten Polleit: Central Bankers Are Debasing Currency
“Sound economics tells us that central bankers do not pursue the greater good. They debase the currency; slyly redistribute income and wealth; benefit some groups at the expense of others; help the state to expand, to become a deep state at the expense of individual freedom; make people run into ever greater indebtedness.”
08/31/2017 - Nomi Prins: Ongoing G7 Central Bank Monetary Policy Collusion, 0% Interest Rates Globally, Unlimited QE Potential, Major Asset Bubbles
“As we approach the ninth anniversary of the collapse of one of my former employers, Lehman Brothers, and the 10th anniversary of the beginning of central bank collusion into the financial crisis, there has been – no change – in global G7 central bank monetary policy .. Take the composite of all that and what are you left with? Ongoing G7 central bank monetary policy collusion, zero percent interest rates globally, unlimited QE potential, and major asset bubbles.”
08/29/2017 - This Is Not Capitalism – Overregulation, Corporate Bailouts, Manic Money Printing, Artificially Low Interest Rates
“Today, we’re continually reminded that we live under a capitalist system and that it hasn’t worked. The middle class is disappearing, and the cost of goods has become too high to be affordable. There are far more losers than winners, and the greed of big business is destroying the economy. This is what we repeatedly hear from left-leaning people and, in fact, they are correct. They then go on to label these troubles as byproducts of capitalism and use this assumption to argue that capitalism should give way to socialism. In this, however, they are decidedly wrong. These are the byproducts of an increasing level of collectivism and fascism in the economy. In actual fact, few, if any, of these people have ever lived in a capitalist (free-market) society, as it has been legislated out of existence in the former ‘free’ world over the last century .. Years of overregulation, corporate bail outs, manic money printing, and artificially low interest rates, have bloated and warped the economy.” – Jeff Thomas
08/29/2017 - Yra Harris: The Exit From QE Programs Will Be Far More Difficult Than Central Bank Models Have Predicted
“The SWISS FRANC has certainly been involved in currency intervention as it has increased its foreign reserves over the last seven years from roughly 100 billion Swiss to a now 715 billion, which most of the accumulation having occurred over the last three years.
My argument has been and continues–as the SNB PRINTS BILLIONS of SWISS FRANC to sell in order to prevent the dramatically rising I WONDER WHAT ENTITIES HAVE BEEN ACCUMULATING SO MANY FRANCS DEFYING THE WILL OF THE SNB. Yes, the SNB have performed the greatest alchemy in financial history as it exchanges newly printed fiat currency for real corporate assets (i.e. APPLE STOCK.)
At a time when the SNB has actually managed to weaken the Swiss franc versus the EURO SNB President Thomas Jordan OUGHT to be buying back some of the francs and selling its EUROS. Unwinding its massive foreign reserve portfolio. But as Peter Boockvar discussed in an FRA PODCAST, the SNB is trapped because any hint of SNB buying of Swiss francs would lead to a sizable rally. The EXIT from QE programs will be far more difficult than their beloved models have predicted.”
Notes From Underground: Arthur’s Song, Lost Between the Moon and New York City
08/28/2017 - The Roundtable Insight – Morten Arisson On A Unique Investing Method Based On The Austrian School Of Economics FRA: Hi, welcome to FRA’s Roundtable Insight .. Today we have a very special guest. He’s Morten Arisson. He’s a Canadian economist, whose work in interest focuses on portfolio management, investing history, probability and mathematics. He has worked in strategy consulting, private equity and credit portfolio management. He’s written a book called Investing in the Age of Democracy. In that book he explains how democracy, beginning with the American and French revolutions, shaped the way we currently invest in the 21st century. He proposes an alternative approach to investing based on 4 key features that are unique to the Austrian School of economics: class probability, the role of entrepreneurship and institutions, and the notion of inter-temporal exchange. Followed by ultimate consequences, these define a unique investing method. So what he has done is structured the book in 10 lessons where history, math, law and economics mix to provide the reader with a rich perspective that stretches from ancient Rome’s first investment vehicles to high frequency trading in the 21st century. So we’re going to explore that today with Morten. Welcome Morten.
MORTEN ARISSON: Hi, thanks for having me Richard – a pleasure.
FRA: Great – so I just want to mention that you were kind enough to put some notes together that we will put into an overall transcript once this podcast is published so we’ll have a transcript plus a podcast that people can either read or listen to the podcast or both. Just wondering a little bit about your background on economics – how you came to look at the world through an Austrian School of economics perspective.
MORTEN ARISSON: Okay – I was educated in Economics. I have a bachelor’s degree in Economics, but it was only recently, a few years ago, that I became very interested in Austrian economics and I went to the conference at the Mises Institute, in Auburn in 2011 – And I did further research and I really liked the work of a gentleman from Spain, Huerta de Soto. He has written extensively about the issues of dynamics, coordination in markets, probability and so forth. And you know, being familiar with the Austrian school, I often heard that it is not clear whether one can say that there is a unique investing method that would define Austrian Economics, in an applied way. This book was a challenge for me. I was going through some pillars, some defining characteristics of the school of thought, and I think that if you follow them to the last consequence you can actually organize a very rigorous structure, a consistent investment method that will be unique. The book obviously asks why, if that is the case, market forces would have not led us there. I argue that we would have been there had it not been for interventions which are of political nature and have a lot to do with the political developments that we have seen since the French and American revolutions. So, broadly speaking, there were two trends: one was centralization – also sometimes understood as big governments – it has been increasingly growing since then, and at the same time Scientism, which is a term that was brought forward by Hayek, if I’m not mistaken, Friedrich Hayek. It mainly describes the abuse of the scientific method; in this case, to humanities. These two have created a lot of situations, gave place to a lot of interventions by governments that in a way ended up taking us apart from this approach to investing.
FRA: And so what you’ve done is you’ve identified 4 elements from the Austrian School of economics that yield a unique investment method if you want to go into some detail on that.
MORTEN ARISSON: Right. Probably, I should expand a little bit more first on what each, centralization and Scientism, do to the way we look at investing today and how the pillars define that method. So, in terms of centralization, we have seen with increasing tax rates that we have experienced a loss in the saving’s capacity, particularly with the establishment a hundred years ago, approximately, even more, of income taxes. And that’s something that began in a few countries and now it’s widespread all over the world. Then, in parallel to that, we have suffered the loss of private money – also called gold – which was also a very slow process which began in 1913 with the creation of a Federal Reserve and then in 1933 with the expropriation of gold in the United States, we’ve had a system – the gold exchange standard that lasted until 1971. From then on, we have been basically on fiat currency. That also led to a misunderstanding of the concept of liquidity. I think this is important. I’m going to put a few minutes here.
FRA: Sure.
MORTEN ARISSON: The way people look at liquidity today is as if it was an intrinsic characteristic of an asset. So, people can say: “Well this bond is liquid or this stock is liquid.” If you look at the way we used to see it – even until 1936 John Maynard Keynes, who was obviously not an Austrian… – He referred to the concept of liquidity preference. So, we all do have a liquidity preference, which is the preference to be liquid and to own money, which is an asset that sort of protects us from uncertainty. At the same time, the concept that liquidity is characteristic to an asset unfortunately was suggested by Carl Menger, who was an Austrian. He called that, in his words, “Marktgängigkeit” which was sort of “marketability”. And from then on, it was corrupted, and today we understand liquidity as the capacity of an asset to be traded with credit. If we say that a market is liquid, what we are saying today is that there is enough credit in that market to trade an asset, even though as a counterpart we don’t have true savings supporting that. And that is very important, because then, that creates a distortion that shouldn’t be. I mean, if you want to be liquid, Austrians would say, just own money that is the instrument that you need to be liquid. Then, from then on, if you want to invest, invest in capital assets. But the corruption of the concept of liquidity led us to mix everything – money and capital, and create degrees of liquidity in them, and forces to think in terms of paying for risk premiums when in fact there’s an asset available to us at every time, which is money. That too, because money began to be created by the expansion of fiscal deficits which led us to the misunderstanding of sovereign risk as well, – and it is something I discuss in the book. But all of that together created a distortion in favour of public securities versus private securities, the creation of Ponzis, and with central banks, systemic risk. At the private level the rationalization of all that under modern portfolio management – the theory of modern portfolio management. And all of this is a product of that movement in centralization that we have experienced, our big government that we have experienced since 1780s. In terms of Scientism, which can be described as the abuse of the scientific method applied to humanities, you can see that particularly after the 1870s with Walras, you have seen infinitesimal analysis, general equilibrium and the use of probability and the mechanistic view of interest rates that Austrians considered as inter-temporal exchange rates rather than as productivity rates, applied to the valuation of securities which are actually property titles on entrepreneurial processes. So all of that together takes us to where we are today.
However, I think we can make a pause here and think in terms of the 4 pillars of the Austrian School of economics. One of them I think is the most important is entrepreneurship – the role of entrepreneurship. It is completely ignored in mainstream economics; there’s no place for that because, mainly, it cannot be formalized, and that is seen as a disadvantage rather than being considered on a factual basis. There is no reason to believe it is better or not to mathematize entrepreneurship. And somebody, a few years ago, published an article on a Spanish magazine – Procesos de Mercado, edited by Jesús Huerta de Soto, proposing a way to establish whether or not entrepreneurship could be formalized. He concluded that it cannot, – because it’s non-recursive, it cannot. And so why did I bring this up? Because if you establish that human action cannot be mathematized, entrepreneurship cannot be mathematized, then there is no point in saying that you can value equity, which is a property title on said entrepreneurship. And that has profound consequences, because if you cannot value that, if it’s up to the risk management of the entrepreneur, the immediate direct consequence of that is to say that if you’re going to invest in equity you should invest in private equity because it’s something that you can manage. It’s a risk that you can manage. It’s an uncertainty in which you have certain control. And that is not the case solely with public equity. And one of the things I bring up in the book is that at the time of Adam Smith, with the beginning of the concept of limited liability, there was an enormous debate on whether it was advantageous or not for investing. One of the distortions that took us out from the field of private equity that was predominant, I would say, since the fall of the Roman Empire to the times of the trading companies in Holland, was private equity. And it was in the beginning of the trading expansion of Holland that lawyers like [Hugo] Grotius bought up the issue of changing the status quo and establishing the concept of limited liability. There was a lot of reaction against that at the time, and it had to be imposed. And because it was imposed and was properly seen as a privilege, the monarch that did that charged a fee on that privilege. And I would say it stayed that way until the mid-19th, century when increasingly in the United States it was seen as necessary to fund more ventures. But, like I say – it’s something very, very recent and it has created a distortion in terms of favouring public equity versus private. And at the same time, if you add the other intervention, which is the banning of insider trading, which takes the signal out of the market, it creates the illusion that there is no such thing as insider information –,… It also unlevels the field of private equity versus public equities.
So this would be one of the first pillars – the idea of entrepreneurship, that if you think the Austrian way, literally you think that the best case for you as an investor is always to go for private equity. The other one is the concept of probability. I think it’s a key characteristic of the Austrian School of economics to distinguish between case and class probability. The concept of class probability was actually the mainstream concept of probability up until the 1920’s. And I’m going to try and be brief here, but it basically was the probability that – you can think of in terms of when you roll the dice [here are limited spaces and you know the outcomes. Richard Von Mises, who was the brother of Ludwig Von Mises, wrote a book called “Probability, Statistics and Truth” that I think was published in 1928, and he made the case that that is the only time when one can speak of probability correctly – properly. And that means that, in order to do so, you have to identify a collective, a group of elements or, in this case companies, if you want. And they have to behave in a homogeneous way and converge to a number that you may be looking at, let’s say a return or a ratio. And most importantly, whenever you take different time frames to see that convergence take place, regardless of which time frame you take, you still see that trend taking place. And if you apply that to investing, you will realize that since entrepreneurship is unique – there are unique markets, there are unique companies with unique management, unique capital structures, it’s impossible to apply probabilities here, because, – I mean you can speak of a asset class called equity versus an asset class called debt and I guess you could say that the convergence of the net returns is positive otherwise there would be no entrepreneurs – otherwise they would be always bankrupt. But besides that, I can’t think of any other case. And the proof of that is that rating agencies show every month updated tables on, for instance, migration in risk ratings. I mean, if you could apply probabilities here regardless of which timeframe you see, probabilities of default for, let’s say companies with similar debt-to-equity or similar net debt-to-ebitda ratios, it should not change, – but the fact is that they do change… I’m not surprised. And it’s just, you know, with that scientist approach, with that search for perfect information, you run into the illusion that we can use it.
But it was a movement that began with Keynes in the 1920’s in a book called “The Theory of Probability” and it has really shaped the way we look at portfolio management today. If you use a Bloomberg terminal and you try to value any security that would be a derivative or any structured product, you would immediately see that probability is used without thinking, without a pause. It’s just something very direct. If you use the other concept, the Austrian concept of class probability you realize that unless you actually have control over that security that you want to own for your investment purposes, there is no point in trying to forecast the probability of something happening, because effectively you have no control. I mean you’re running into a tautology where you tell yourself: if such and such a thing happens, I would get this outcome. But I mean, that adds no insights – no further information. So, I don’t know if you have any questions or, if you want, I can go to the 2 other pillars of…
FRA: Yeah, sure. So we’ve covered so far entrepreneurship and sort of the correct theory of probability and we have two more institutions, money, capital and interest rate. Go ahead on those two.
MORTEN ARISSON: In terms of the institutions, I think that the Austrians have an advantage because they can understand the institutional context in which investing takes place. I mean, there are very important institutions like a deposit and a loan that the Austrians can distinguish. They understand that a deposit is not a loan, and that fractional reserve banking corrupts that concept today. They understand what is money and what it’s not, and the qualities that money has to have and that gold is money, so to speak, because it has all those qualities. If you look at, for instance, virtual currencies, I believe that virtual currencies lack two qualities that are quite necessary – I mean fundamental to money. One of them is fungibility. Since Bitcoin by definition is a ledger, a distributed ledger, it will never be fungible.
FRA: Sorry, just to clarify, the virtual currencies you’re meaning the cryptocurrencies right? Such as Bitcoin and –
MORTEN ARISSON: Right, right.
FRA: Okay. Just to be clear.
MORTEN ARISSON: Yeah. So those cryptocurrencies are distributed ledgers. There’s a reason why that happens, because they are not redeemable. So, the two characteristics that define money – I mean that are more but these are fundamental to money: these are fungibility and redeemability. And by definition virtual currencies or cryptocurrencies are not redeemable. You cannot redeem them into any… – you can change them, you can use them as an indirect medium of exchange, but you can never redeem them themselves. Fiat currencies you can do, you get the physical paper bill. Gold you can do, you get the metal. But that’s not the case [with cryptocurrencies] and because possession is not there to show ownership –, Ownership has to be established via the distributed ledger. And that institution [distributed ledgers], if you want, because it has been a spontaneous creation of the market, cannot benefit from fungibility, by definition, because at any point you know what belongs to whom.
FRA: Yeah.
MORTEN ARISSON: So, there can never an established capital market in that sense. And as far as I know, at least to date, the only inter-temporal exchange is peer-to-peer, right? Which some savings are – you know exchanged from one participant to the other, but not to a central institution that collects and then distributes. And I mean that is intrinsic to virtual currencies precisely because .. my understanding that those who created them, actually wanted to avoid that centralization, – But banking has a role, right? I mean, there’s a lot of information to be discovered about those saving and those demanding those savings, and it has value. And banking itself is an institution that has been documented at least since the time of ancient Greece. So, without fungibility you can never have capital markets in cryptocurrencies. And at the same time without the redeemability if there ever is any sort of expansion via credit multiplier, it will have to be unchecked by definition too, because there will be never any run on any Bitcoin banks, for example. And eventually Bitcoin or any cryptocurrency that advances to that stage would devalue. You know, defeating its own purpose, right? Because the credit multiplier would affect an expansion that was not thought of by the traders of the cryptocurrency. So, if you want, you know, in a way you can say that Austrian investing is institutional arbitrage, because you’re always understanding loopholes, interventions on market-driven creations, institutions and arbitrage and sell the bad ones to buy the good ones. You could say the same about structured investments, you could say the same within the space of currencies” you’re arbitraging certain features. Usually scarcity being one of them, we arbitrage scarcity when you see that a currency expands more than another, you’re arbitraging scarcity. If you need to take capital out of a jurisdiction that is pretty restricted, you are arbitraging redeemability. And that’s where Bitcoin gets its value [from], because it’s less redeemable and at the same time less sizable by the authorities.
There is also the issue of public institutions where you recognize, if you are into the Austrian School of economics, you recognize failures in public institutions. One of them is the Eurozone, where mainstream economists took last year’s crisis as a liquidity crisis, while lots of other economists understood that it was an institutional problem and that it was the fact that there’s not a unified bond market in the Eurozone. And the last but not least important of all the pillars is the understanding of what is money and what is capital that is lacking in mainstream Economics. And that interest rate is actually an institution too, whose function is to allow the inter-temporal exchange of resources between people. And the direct consequence of understanding that is that it allows you to differentiate when you invest and when you trade. When you invest is when you exchange your money for capital assets. And so with derivatives that are not used for hedging, for instance, or commodities or fiat currencies, you’re not investing, they don’t yield any produce and that’s the same case for gold. So an Austrian would say that you do not invest in gold, you exchange a fiat currency: one currency for another one. There is also another direct consequence of understanding what an interest rate is, which is that asset allocation is nothing else but inter-temporal preference. So, there’s a direct connection between your inter-temporal preference and the way you allocate your assets, whether you want growth or not. If you want growth you need, like I said, to invest in equity, in entrepreneurial projects. If not, if you want yield, obviously you will go for another part of the capital structure – for debt. And any subjective exchange – I mean any, inter-temporal exchange is completely subjective. There’s no point in trying to benchmark yourself against indices in terms of returns. You have to target your absolute returns, the ones you are comfortable with and the ones that are consistent with your liquidity preference and I’m going back to the concept of liquidity. So that when you put all these four pillars together: the correct understanding of the theory of probability, the correct understanding of the role of entrepreneurs, the correct understanding of the role of institutions, and the correct distinction between money and capital, and understanding of interest rates, then you come up with a particular method that would say to you: Well, you need to think of investing not in the terms you have seen until now, where you have one big diversified portfolio that tries to be optimized in terms of risk and returns, minimizing risk and maximizing return.
You shouldn’t be paying a premium for liquidity. You shouldn’t mix private and public securities. You shouldn’t even try to do any value investing because it’s a tautology. You will never be able to really know the value of any entrepreneurial project unless you have a control of it. And then, the first thing you should do is define your liquidity needs, so your liquidity preferences and separate that into a liquidity portfolio. Then, the second one is, once you establish your inter-temporal preference, you look for a certain component of growth and a certain component of yield and that growth will be represented by equity. But you have to prioritize private equity and in terms of that the same happens once you prioritize bilateral loans. But again the book goes to explain all the distortions that we have suffered that have made the use of bilateral loans, such as lending to someone directly via mortgage, – that took us away from that. We are left with public securities, public equity and public bonds, and we are constantly benchmarking the indices. There is another interesting thing; if you recognize the fact that final value increases with time and the direct consequence of that is that – most of the time with mainstream investing theory – the recommendation comes that when you’re young you should try to go for as much equity as you can for as much growth as you can with your investments, because only after when you’re established you need a stable cash flow. But when you think of that, you are putting yourself through an enormous amount of risk, uncertainty in securities over which you have no control and you lose an enormous amount of compounding value. So, I think that when you go through all this thinking in terms of how to approach investing, one conclusion is that the longer your term horizon, that means, the younger you are, the less you have to invest in equity and the more you have to invest in computable risk that can compound – that you can manage. There were a lot of institutions that we had created before this big increase in government. One of them was the annuity business by the insurance companies. It was a legitimate market-driven, spontaneous invention, but today we don’t have that and with distortion in interest rates it’s pretty expensive if you try to go that way. So, again, the younger you are the more you have to allow for that compounding to work for you. Only when you’re getting older and you see that you don’t get to your target in terms of savings, then you can start risking something, which is completely counterintuitive versus what common knowledge says. So, and after all, yes I devote one third of the book, the last third of the book, to discuss the proper macro themes in Austrian economics. But, as you can see, we just discussed very specific things and I haven’t gone properly into discussing any macro themes. And one of them, I think is most important, is systemic risk, in the chapter where I go to show that there is no such thing as systemic risk. It [systemic risk] is just the natural outcome of the interventions in the market by central banks. The fact that we don’t know when it’s going to happen doesn’t mean it is risk. It is there, and we know it causes, and we know how the process works, the coupling between central banks works, which I describe in a chapter, via cross currency swaps. And I recommend that after you have established your three portfolios, liquidity, equity and debt portfolios, one can think in terms of an aggregate hedge against that systemic risk at the portfolio level. That could sort of address the mainstream view that you have to pay a premium for liquidity. An alternative could be that you do not, again, you separate whatever liquidity you need under your liquidity portfolio. Then once you have established your investing portfolios you put a hedge against systemic risk for them, to protect them.
FRA: And how do you do that exactly in terms of applying a hedge?
MORTEN ARISSON: This is just my own opinion, in the case of Canada that the hedge was the exchange rate between the U.S. dollar and the Canadian dollar. As you see, increasing systemic risk in these particular times, in this particular moment, through the increase in risk from the real estate market, I think that will be translated into sovereign risk and it would push the monetary authorities to devalue the Canadian dollar. So, if you can be long an instrument that would capture that and would have some convexity properties in that sense, then you’re doing exactly that [hedging systemic risk].
FRA: And just a couple questions. You mentioned on the equity portfolio that you should prioritize private equity. How do you go about doing that in terms of the prioritization process?
MORTEN ARISSON: I think the simplest way to do that, which is accessible to everybody, is to buy a property today. But that has been completely intervened today by the government. There is this push from the government to take you away from any safe haven assets. When you buy a property for investment purposes, obviously you are first avoiding fractional reserve or re-hypothecation of the assets, because there cannot be two similar assets on the same location, because you’re buying location. Then you are free to manage – you have a lot of latitude in terms of managing, and in terms of having control over that. But for real capital assets, I have a chapter devoted to them, but I think the conclusion in the book is that there is never a definitive answer to that. And that is very intrinsic to Austrian Economics: the notion that there is never equilibrium; that you’re always in danger, that you always have to look out for opportunities and for future problems. Like I said, there might be multiple real capital assets. You can have property, cattle, wine, forestry, and farmland. And all of them they serve a purpose at a specific time within a crisis. For instance, in terms of farmland, it’s not a hedge against crisis forever. It will be your equity investment, but to a certain extent if things go really bad, you will be stuck with an immovable asset, a very easily taxable asset. So again, even as I provide examples of ways in which you can invest into private equity, there is never a safe haven asset.
FRA: And in terms of public equity, is your suggestion to diversify due to the non-computable risk?
MORTEN ARISSON: Yes and no. If you say that then anybody could argue well you’re just saying the same as mainstream economics. And here’s the thing: in Mainstream Economics, the exercise of diversification is against the…they have what they call systemic risk component that they claim to be able to measure from observations on what they call risk-free assets, such as sovereign bonds. That diversification comes from the measurement of the sigma, the volatility of all their assets and their correlation and so on. Which again, they go into a circularity because they assume that past performance will be something that you can project into the future and you have to make a lot of assumptions that just revolve around themselves. What I am saying is, yes you have to diversify, but only because you know nothing. You absolutely know nothing and the shot can come from anywhere. If you tell yourself that you need 20 securities to be diversified, well you’re kidding yourself, that is not the case. If these are subject to a currency zone and they are denominated in a currency that because of institutional problems, because the central bank is too weak or prone to suffer from devaluation – there is no remedy to that. So, the diversification comes only as a consequence of the recognition of our ignorance, but only that. I cannot provide you with a specific number [of securities to diversify]. Obviously, the general idea is that all things equal, the more assets you have, the better. But that is not necessarily true and that [diversification] is a very subjective exercise.
FRA: The last question is on – you mentioned these three macro themes and how Austrian Economics has a unique approach to these three macro themes. Can you briefly touch on the inflation/hyperinflation macro theme?
MORTEN ARISSON: Yeah, sure. Obviously the general notion of inflation within mainstream economists is that you have something that is observable, that is a vector which they call an index of prices and that inflation is neutral, that never goes up or down in terms of monetary expansions or reductions. But as an Austrian you recognize two things. First, that it is not neutral, absolutely not. The reason that money expansion is not neutral is precisely what motivates monetary authorities to create, inflation. The second thing is that there is this notion that hyperinflation is simply an arbitrary high number in terms of inflation, and that is not the case. Hyperinflation is not quantitative – that is my point. Hyperinflation is a qualitative phenomenon and it is one in which the central bank finds itself defenseless, in a circularity where they are obligated, they are forced to issue an interest-paying liability. The interest that they pay on the liability is higher than any interest they receive on their assets so that [resulting] deficit, which is called quasi-fiscal deficit, can only be covered by monetizing and by printing money to pay that net interest. Then again, in order to take that money that the central bank just put into circulation, what they have to do is increase the rate, they have to sterilize that money that they have just printed, at a higher rate, which simply enhances that circularity. Today, right now as we speak, there is one country that is suffering from that – Argentina. With an instrument called Lebacs, the central bank began paying something like 38% a year ago and it’s around the high 20’s now. And, unless they have the fiscal deficit in control in Argentina, that will spiral out of control. So, even though you don’t see inflation in the 100’s like you used to in the 80’s maybe, the fact is right now that that central bank is out of control, and they’re in the early stages of a hyperinflationary process. What about us in the first world? Well, what matters here is the relation between the interest income received by the central bank in excess and what they have to pay. It doesn’t have to be too high. What if there was a sovereign problem in the Eurozone and all of a sudden the central bank had to replace sovereign bonds with their own liabilities? Right now what they do is they collateralize, but, what if they actually had to replace it with their own liability, but with an interest-paying liability? On the one hand they have, like any central bank, money supply which bears no interest and then they have to pay 25 bps. Those 25 bps will have to be monetized. So, right there, you have hyperinflation, and I think one has to pay close attention to that, and only if you understand that you will see how, in my opinion, we are at the early stages of a hyperinflationary period. But again, you have to understand that it is a loss of control by the central bank [what causes hyperinflation] and not the inflation rate on its own.
FRA: Wow Morten, great insight on Economics and investing. How can our listeners learn more about getting access to your book “Investing in the Age of Democracy”?
MORTEN ARISSON: The book is already on available now on Amazon. It is under the title “Investing in the Age of Democracy”. And soon, I intend to put it on a digital format for Kindle.
FRA: Great, we look forward to that. Thank you very much Morten for being on our show.
MORTEN ARISSON: You’re very welcome.
Transcript by: Daniel Valentin <daniel.valentin@ryerson.ca>
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