Special Guest: Mike Pento – Pento Portfolio Strategies LLC
FREE MARKET SYSTEM HAS BEEN COMPLETELY VANQUISHED
WHERE WE ARE HEADED
Special Guest: Mike Pento – Pento Portfolio Strategies LLC
FREE MARKET SYSTEM HAS BEEN COMPLETELY VANQUISHED
WHERE WE ARE HEADED
International Man essay explores the growing trend of governments & banks to setup “bailin” mechanisms which effectively confiscate a certain percentage of bank depositor deposits at banks in the event of a banking crisis .. the European Union (EU) has now setup this type of bailin mechanism to start soon in Europe – All the banks in the EU will be given the freedom to perform their own bail-in: they may absorb any deposits that exceed €100,000 .. “Following the Cyprus bail-in, we believe that Cyprus was intended as a trial-balloon, that a similar bail-in would later be created for the EU, the US, and a host of other jurisdictions. That prediction seems to be panning out.” .. this essay suggests a similar movement may happen to the paper-gold market – potentially: “Banks could be given the go-ahead to simply cancel the paper-gold certificates that they have sold. This will enrich the banks by billions of dollars, and the only losers will be the greedy rich who have so much money to burn that they have purchased gold certificates.” .. banks doing this would be “praised” by governments for taking the action for the “Greater Good.”
Just as the Federal Reserve has stopped its quantitative easing program, the Bank of Japan stepped up to the plate to take over the bond buying .. now the New York Times reports that the Financial Stability Board, a panel made up of central bankers, finance officials & top regulators from the world’s largest economies, announce proposals this week that would double the amount of money that large banks would be required to have on hand to absorb losses .. the idea minimizes the possibility of governments to have to bail out their banks, plus makes banks buy government bonds at the same time – a double whammy to help governments with their debt & deficit burdens [Cliff Note: They call it ‘financial repression’. We think it would be more honest to call it ‘exploitation’ … Words can affect perception & make reality seem more innocent than it is. As an expression, ‘financial repression is similar to the expression ‘Quantitative Easing’ .. which sounds innocent until you call it for what it really is: creating new money from thin air for the benefit of those who are in control of the money system.] .. “The new rules would require global systemically important banks to hold twice as much capital, 6%, as required by the Basel III rules. In addition, banks would be required to have capital equal to at least 16 percent and as much as 20% of their outstanding loans, derivatives portfolios and other assets, after adjusting for risk. Part of this capital could be borrowed from investors who would earn interest, but would lose their money if the bank got into trouble. Combined with the impact of other new regulations, the rules would require banks to increase their capital to 25% of assets adjusted for risk.” .. the article emphasizes bank lobbyists will push back vigorously on these proposals.
Special Guest: Tim Price – PFP Group
Tim recalls the words we last heard in the dark days of 2008:
“When you’re a distressed seller of an illiquid asset in a market panic, it’s not even like being in a crowded theater that’s on fire. It’s like being in a crowded theater that’s on fire and the only way you can get out is by persuading somebody outside to swap places with you .”
This is precisely what occurs when the regulatory pressures and un-natural forces of FINANCIAL REPRESSION finally ends
“Financial Repression is government stealing from savers and the future!”
“The single biggest problem of our times economically, is that for the last 40 years there has been an unsustainable buildup of credit expansion throughout the developed world … and we have reached the end of the road new. Every policy by governments and their agents (the central banks) is too a) Kick the Can Down the Road and B) to steal from savers to keep this bandwagon rolling!”
THREE ALTERNATIVE APPROACHES TO ATTEMPT A RESOLUTION:
Approach #1 and #2 or no longer realistically viable, leaving governments with only option #3. The last options has historically always been the option governments of fiat based systems have resorted to throughout the ages because of a lack of “political will and discipline”.
Tim believes Japan is presently the ‘dress rehearsal’ and the rest of the world will be the main event.
Bill Gross, the 69-year-old billionaire co-founder of Pacific Investment Management Co., told Bloomberg Radio – AUDIO
Feeble returns on the safest investments such as bank deposits and fixed-income securities represent a “financial repression” transferring money from savers to borrowers, says Bill Gross.
Workers 65 and older, struggling with years of depressed yields, are the only group of Americans who are increasingly employed or looking for jobs, according to Labor Department participation-rate data.
Federal Reserve interest-rate policy that aims to cut borrowing costs. “I hate to be gloomy, but, yes, for the next 10 years, the oldsters, and I’m in that camp, are going to be disappointed in terms of the policy rate.” About 75 million baby boomers, born from 1946 to 1964, are starting to retire and face meager returns as a byproduct of the Fed’s decision to hold its benchmark rate near zero since December 2008. Policy makers also have quadrupled the central bank’s balance sheet to a record $4.22 trillion to drive down borrowing costs.
“I side with Hussman and have been in his camp for a number of years. Make calls like this and you look foolish until the bust happens. To paraphrase John (I cannot find the exact historical quote) ‘The choice is whether one looks foolish during the runup, or during the inevitable decline.’ .. Fed policy certainly represents financial repression at its finest. It’s very much behind the income inequality that Fed Chair Janet Yellen moans about all the time .. Forcing stock, bond and other asset prices higher only helps those who hold stocks, bonds and assets (the wealthy, not the poor) .. When stocks rise, it also drives CEO pay higher and higher via performance incentives and stock options. That money is not taken back when stocks crash. The irony is stunning. If Yellen wants to understand the central cause of income inequality, all she has to do is look in a mirror.”
– Mish Shedlock
CATO’s Dan Mitchel essay identifies the developments & evolution in thinking by politicians & the general public toward confiscating or taxing wealth .. emphasizes politicians want more money & deal with wealth inequality concerns .. on the consequences of wealth taxation/confiscation .. concludes: “A wealth tax is a very misguided idea. And that’s true whether it’s a permanent levy or a one-time cash grab by politicians .. The wealth tax will probably be a real threat in the not-too-distant future. America’s long-run fiscal outlook is very grim because of a rising burden of government spending, and other nations are in even worse shape .. When fiscal policy begins to deteriorate, even semi-rational politicians will join their leftist colleagues in a desperate search for more revenue. In a political world where inequality is a driving force and in an economic world where other tax sources have been exhausted, people with assets will have real reasons to worry.”
Peak Prosperity’s Chris Martenson* essay on the fear, panic & desperation of the central bankers of the world’s indebted countries, with a particular focus on the Federal Reserve & the Bank of Japan .. emphasizes how they are watching with trepidation as their policies & metrics fail to respond .. “They are so far over the tips of their skis right now that there’s nothing they won’t do. They’ve summarily thrown granny under the bus because they have this idea that negative real interest rates are the cure. The cure for what? The massive amounts of debts and imbalances their prior policies caused. So savers are punished in the pursuit of policy. You know, ‘for the greater good’ and all that .. They’ve spurred the greatest wealth gap ever in U.S. history, greater even than at the extremes of the Great Depression, apparently without the slightest concerns for Plutarch’s ancient admonition that ‘An imbalance between rich and poor is the oldest and most fatal ailment of all republics.'” .. in Europe, central bankers have forced negative nominal interest rates on savers .. “The Federal Reserve, theBank of Japan (BOJ), and the ECB have decided that they want you to take your money out of your bank account and place it into the stock market” or they encourage policies to encourage you to spend your money .. every hard asset has been price suppressed except for houses – which asset requires you to borrow from banks & that is considered good for the economy .. Martenson explains how financial repression is being used by central banks & governments to help governments manage & pay down their debt – “Negative real rates serve to confiscate purchasing power from the general population and transfer it to other parties. Those parties include the big banks.” .. the essay focuses on the insanity of the Bank of Japan’s recent actions – throwing the equivalent of $3 Trillion of thin-air money .. “Whether we call this the largest bond bubble in history, ‘reckless’, ‘mad’ or ‘insane’, Japan has truly jumped the monetary shark. There’s no way back and no way forward that will be pain-free and this terrifies the BOJ. The best advice I have is that when you see your central bank panic, you should panic too and avoid the rush.”
Yra Harris provides several considerations on why Japan is now becoming even more aggressive on QE .. notes that Japan seems to exert pressure after international meetings: “The IMF and G7 and G20 ended in mid-October so either the Japanese wanted to avoid criticism about depreciating its currency or it received the GREEN LIGHT from the G7 members to get more aggressive on its QE efforts. Readers of NOTES FROM UNDERGROUND can revisit a blog post from October 15, 2012 when I noted that the G7 communique seemed to give the Japanese authorities a ‘wink’ in its efforts to weaken an overvalued YEN.” .. Yra Harris lists other factors as well on why the big push on QE now: a belief that it will work synergistically with implementing higher consumption taxes to drastically reduce the massive public debt .. also another hope is taking actions similar to what Bernanke did to encourage risk asset buying from financial repression: “The Government Pension Investment Fund (GPIF), Japanese insurance firms, banks and annuity investors will have offloaded JGBs to the ultimate buyer of last resort, THE BOJ. It seems Governor Kuroda has initiated Bernanke’s PORTFOLIO BALANCE CHANNEL and it’s pension funds are disposing of riskless assets and undertaking the purchase of domestic and foreign equities, as well as foreign bonds, an ‘all in’ play by the BOJ. Bernanke used financial repression to motivate private investors to take on more risk while its public sector entities buying equities in Japan.”
Podcast discussion on how the Federal Reserve is destroying consumer savings, how central banks will be to blame for the coming bond collapse, how trying to keep gold & silver prices ‘corralled’ is part of the official plan.
Special Guest: John Butler – Amphora
“The whole point of financial repression is to make it difficult or impossible for an investor to protect themselves”
John feels Financial Repression “is now extremely broad based (globally) and in fact you have to look very closely to find countries not actively pursuing some mix of Financial Repression policies.”
A NEGATIVE SUM GAME
Butler has argued in his Amphora Report that competitive currency debasement is “is not a zero sum game but rather a negative sum game because policy makers don’t realize that by trying to devalue against each other, unseen they are undermining the very credibility of unbacked fiat currencies generally.”
Increasing the BRICS are “becoming increasingly wary of where all this is going and as a consequence are diversifying not only their fiat currency reserves but are diversifying into gold, oil fields and real assets generally.”
HOW INVESTORS PROTECT THEMSELVES
“The only free lunch in economics is DIVERSIFICATION. The problem is that in a world of Financial Repression, the way you diversify yourself is very different than a world where financial represion is not an issue.”
“There is no way out but Currency Debasement”
Special Guest: Chris Martenson PhD – PeakProsperity
“When governments get into too much debt there are only so many ways to get themelves out from under the debt.” There is:
In reality, the third is the only politically viable solution. Financial Repression ” the cornerstone involves taking a little from everybody and giving it to a couple of favored parties”. To do this involves three basic elements:
THE COMING CRISIS
True wealth NEVER gets destoyed, it only gets transferred!”
Chris points out that wealth is never destroyed. but rather it is the claims on wealth which are destroyed during a crisis. “A profound currency accident is coming” according to Chris where he “would not be surprised to see the Yen be completel obliterated just like the the Zimbabwe dollar.” His strong recommendations are:
Wealth can no longer be stored in paper currency or “paper” claims in a Fiat Currency System.
“Whether or not BoJ governor Haruhiko Kuroda’s ‘shock and awe’ will provide the necessary uplift to the economy remains to be seen but he has certainly committed himself to ‘financial repression’ more than any other nation. Furthermore, with the Fed ending its QE program, Japan is at the forefront of leading the currency wars.”
– Sean Darby, strategist at investment bank Jefferies
In his latest letter, Tim Price stresses the price distortions in the financial markets .. emphasizes that although Federal Reserve asset purchases have abated (for now), central bank financial repression “will go on” .. on investments, Price sees bond prices as being “grotesquely expensive”, continues to like only quality listed businesses trading at or well below a fair assessment of their intrinsic worth .. “Pretty much everything else amounts to nothing more than paper, prone to arbitrary gusts from some very powerful, and very windy, bureaucrats. We note also that former Fed chairman Alan Greenspan, no doubt looking to polish his legacy, managed to front-run the Fed’s QE announcement by pointing to the merits of gold within a government-controlled, fiat currency system. Strange days indeed.”
“Financial repression always consists of a combination of different measures, which lead to a significant narrowing of the universe of investable assets for investors. Money, which in a more liberal investment environment would have flowed into other asset classes, is channeled in a different direction. The goal of financial repression is an indirect reduction of government debt by means of the targeted manipulation of the cost of government debt, most of the time accompanied by steady inflation. Financial repression is ultimately a government-imposed transfer of wealth .. A preferably “quiet debt reduction” is supposed to be achieved by the following measures:
One of the most important goals of financial repression is to hold nominal interest rates below the rate of price inflation. This lowers the government’s interest expenses and contributes to a reduction in the real value of the debt burden.
– Ronald-Peter Stoferle, Incrementum AG Liechtenstein
“There is a very simple lesson that when the markets finally break through the manipulation they move to price in deflation and not inflation. This is key because it means financial repression has failed.”Analyst Russell Napier
The Economist’s Buttonwood column described it as:
“Letting go of Daddy’s hand,” and cautioned, “[W]e may indeed get to see QE4 rolled out. Daddy might have let go of the market’s hand for the moment but he’s still close by.”
“That coinage nicely speaks to the juvenilisation to which markets have been reduced during six long years of:
Interest Rate Manipulation, and
The Unprecedented Expansion of central bank balance sheets.
Only the asset purchases have abated (for now): the Financial Repression, one way or another, will go on. Whether the asset purchases have really disappeared or merely been suspended will be a function of how risk markets behave over the coming months and years.
“Although our crystal ball is no more polished than anyone else’s, we would not be surprised to see petulant markets rewarded with yet more infusions of sweets. Our fundamental views are clear:
On November 1st, the first European bank has passed along these negative interest rates to its retail customers.
So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.
We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.
And large investors are paying European governments negative interest on certain bonds.
Now we’re seeing this effect bleed over into retail banking.
It’s starting with higher net worth individuals (the average guy doesn’t have half a million euros laying around in the bank). But the trend here is pretty clear – FINANCIAL REPRESSION is coming soon to a bank near you.
It almost seems like an episode from the Twilight Zone… or some bizarre parallel universe. That’s the investment environment we’re in now.
Bottom line: if you’re responsible with your money and set some aside for the future, you will be penalized. If you blow your savings and go into debt, you will be rewarded.
If we ask the question “cui bono”, the answer is pretty obvious: heavily indebted governments benefit substantially from zero (or negative) rates.
Case in Point:
the British government just announced that they would pay down some of their debt that they racked up nine decades ago.
In 1927, then Chancellor of the Exchequer Winston Churchill issued a series of bonds to consolidate and refinance much of the debt that Britain had racked up from World War I and before.
This debt is still outstanding to this day. And the British government is just starting to pay it down– about $350 million worth.
Think about it– $350 million was a lot of money in 1927. Thanks to decades of inflation, it’s practically a rounding error on government balance sheets today.
This is why they’re all so desperate to create inflation… and why they’ll stop at nothing to make it happen. (It remains to be seen whether they’ll be successful, but they are willing to go down swinging…)
What’s even more extraordinary is how they’re trying to convince everyone why inflation is necessary… and why negative rates are a good thing.
On the ECB’s own website, they say that negative interest rates will “benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.”
I’m not sure a more intellectually dishonest statement could be made; they’re essentially telling people that the path to prosperity is paved in debt and consumption, as opposed to savings and production.
“THE LIQUIDATION OF GOVERNMENT DEBT”
“The saving (or “revenue”) to the government or the “liquidation effect” or the “financial repression tax” is the real (negative) interest rate times the “tax base,” which is the stock of domestic government debt outstanding.”
Working Paper 16893, National Science Foundation Grant No. 0849224
ESTIMATE 3-4% of US GDP Y-o-Y
“Such annual deficit reduction quickly accumulates (even without any compounding) to a 30-40 percent of GDP debt reduction in the course of a decade”
“Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes:
“In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year.“
“The markets want deflation, and they want the world’s unsustainable debt pile to be reduced. There are three ways to reduce the debt pile. One is to engineer sufficient economic growth (no longer feasible, in our view) to service the debt. The second is to default (which, in a debt-based monetary system, amounts to Armageddon). The third: explicit, state-sanctioned inflationism, and financial repression. The reason why markets have become so volatile is that from day to day, deflationary and inflationary forces are duking it out, and neither side has yet been convincingly victorious. Who ultimately wins? We think we know the answer, but the outcome will likely be a function of politics as much as investment forces.”
– Tim Price
“The RIKSBANK strikes again! This is the most important story of the day. The Swedish Central Bank lowered its lending rate to ZERO in an effort to halt a slide into deflation .. Deflation is a very dangerous economic outcome for a country with a large public and private debt load. It is why I keep discussing the impact of 1937 on the work of Ben Bernanke and why he obsessed about removing FED stimulus until he was sure of price stability, meaning inflation of 2 percent .. Riksbank Governor admitted that depreciating the Swedish kroner was one of the tools in the central bank’s arsenal .. the Riksbank has made efforts to weaken the currency. This is a problem for ECB President Draghi as he comes under increasing pressure from France and Italy to enact policies to depreciate the EURO. Mario Draghi’s job is now more difficult as he sees his neighbors weaken their currency to prevent deflation, just as the tide of deflationary fears washes up on the ECB‘s shore .. But the job of the Yellen Fed became easier as global deflationary fears will keep the Fed steady as it goes. More importantly, for the world financial system the G20 agreement of not entertaining policies aimed at weakening a nation’s currency is now officially dead. The global financial system is now in a full-blown war against deflation. Damn the printing presses, debt restructurings, currency devaluations and full speed ahead. I wonder if Sweden will get a Nobel Peace Prize for its efforts. The global equity markets comprehend that deflation is the common enemy. What new policies await the markets? Is this what Joseph Schumpeter meant by CREATIVE DESTRUCTION?”
– Yra Harris
“The Swedish Riksbank (central bank) has cut its key interest rate to zero percent. With this quantitative easing monetary policy the central bank is desperately trying to stimulate borrowing to fight deflation .. How can dropping the interest rate from 0.25% to 0% make ANY difference? They will wipe out any savings for the elderly causing them to spend nothing if not seek employment driving unemployment higher. This is how brain-dead government operates when you NEVER consider yourself in the equation and the problem is always the people who have to be manipulated .. When the economy turns down in the USA, look out below. We are facing one of the most dramatic deflationary waves perhaps in history. This is the price of a collapse in socialism. We are going through the same collapse process that destroyed communism. It ain’t the private sector – its government!
– Martin Armstrong
Also a great piece by Ambrose Evans-Pritchard also on the same subject ..Riksbank cuts rates to zero & mulls currency war to fight deflation .. “Sweden’s central bank is having to pick its poison, choosing between deflation or an asset bubble .. The Riksbank is now fully aligned with the Yellen Fed in Washington, which argues that raising rates to stop asset bubbles merely destroys jobs for little useful purpose. Both are pitted against the Bank for International Settlements. The BIS says radical monetary stimulus may help invidual countries but only by displacing the problem onto others, leading to a ‘Pareto sub-optimal’ for the world as a whole. It warns that speculative excess is reaching pre-Lehman levels, and calls on global central banks to take pre-emptive action before the bubbles becomes unmanageable.”