11/01/2015 - Financial Repression – The Unintended Consequences
“Financial repression is not a conspiracy theory, it is rather a collective set of macroprudential policies focused on controlling and reducing excessive government debt through 4 pillars – negative interest rates, inflation, ring-fencing regulations and obfuscation – to effectively transfer purchasing power from private savings.” – The Financial Repression Authority
11/01/2015 - The Era of Financial Repression: Norway’s Sovereign Wealth Fund says Monetary Policy is a Risk to Watch
“Monetary policy does affect pricing in today’s market to such an extent that monetary policy itself has been a risk you have to watch .. Investors are focused more on monetary policy changes than has been generally the case, than at any time, as far as I can remember .. As anything that moves prices is a risk that has to be monitored, here the effects of monetary policy affect prices dramatically .. It’s of course always been the case with long rates, and now more significantly with the currency. That’s just a fact of the current market.”
– Yngve Slyngstad, chief executive officer of Norway’s $890 billion sovereign-wealth fund
“Financial repression is not a conspiracy theory, it is rather a collective set of macroprudential policies focused on controlling and reducing excessive government debt through 4 pillars – negative interest rates, inflation, ring-fencing regulations and obfuscation – to effectively transfer purchasing power from private savings.” – The Financial Repression Authority
11/01/2015 - Financial Repression Is Making It Difficult To Retire: How Do You Retire On Little Or No Savings?
Essay by our strategic partner Charles Hugh Smith who explains the challenges and issues for Americans (applies also to Canadians and Europeans) to retire, especially when interest rates are repressed to virtually 0% by central banks to the point where it is difficult to get any yield out of savings. Is there a way to retire on little or no savings and little or no income?
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11/01/2015 - Scotiabank’s Guy Haselmann on Financial Repression
Guy Haselmann of Scotiabank checks the definition of a free-market economy, confirms that is not what we have today .. given the financial repression of “regulatory macroprudential policies conspiring with zero (or negative) interest rates & asset purchases to exterminate the markets’ ability to freely calibrate clearing market prices based on supply and demand factors. It is impossible for central banks to sustain controlling influence on market sentiment, investor behavior, correlations, and valuations, simply because effectiveness wanes over time.”
Some pointers for investors in an environment of long-term 0% interest rates & worldwide QE programs .. “Stock and bond diversification alone will not be enough to adequately protect a portfolio” .. Scotiabank’s Guy Haselmann suggests:
1) It is time to find ways to preserve capital. Return of capital strategies now trump return on capital pursuits.
2) Where possible, transition from financial to real assets .. such as, real estate, farm land, collectables, art, other non-correlated & less-cyclical assets.
3) Cash has never had better optionality or a lower opportunity cost.
4) I remain a bond bull in long U.S. Treasuries for regulatory, technical, fundamental reasons.
5) Find companies & countries with low levels of debt & stable cash flows.
6) Despite recent bad press, alternative investments should be considered.
7) Place larger premium on market liquidity & counter-party risk.
10/31/2015 - Ty Andros – The Austrian School of Economics Uses the “Indirect Exchange” to Capture Real Wealth
Special Guest: Ty Andros – CIO Sanctuary Fund, Publisher of “Tedbits”
FRA Co-Founder Gordon T. Long deliberates the Austrian School of Economics with Ty Andros of Tedbits Newsletter. Ty Andros began his commodity career in the early 1980’s and became a managed futures specialist beginning in 1985.Mr. Andros attended the University of San Diego, and the University of Miami, majoring in Marketing, Economics and Business Administration. Mr. Andros is active in Economic analysis and brings this information and analysis to his clients on a regular basis.
WHAT IS AUSTRIAN ECONOMICS?
“Austrian economics is just human behaviour, and common sense, and history.”
“But what’s happening is human behaviour, nonsense, and history. We are at a period where people have forgotten history and are doomed to repeat it. “
“Austrian school and capitalism are one in the same.”
“Austrian Economics is production of wealth, producing more than you consume. Meeting people’s needs and doing it in a superior manner; in other words, capitalism.”
The historical school, had argued that economic science is incapable of generating universal principles and that scientific research should instead be focused on detailed historical examination. The school thought the English classical economists mistaken in believing in economic laws that transcended time and national boundaries.
APPLYING AUSTRIANISM TO INVESTING
“You have to prey on paper.”
“The only real way the middle class will get to success is going out serving others and getting rewarded for it.”
“Austrian school is just history, common sense, and the production of wealth; everything else will flow from there. The reason middle classes cannot rise is somehow the public has gotten the idea that they are going to raise their lifestyle through the stroke of a pen at a central bank or other government bodies.”
THE INDIRECT EXCHANGE
“In today’s world economic growth is a function of a printing press; consumption presented as production.”
It is a situation in which goods, services, etc. are traded between two countries using the currency of a third country. Real wealth can only be created by growing it, mining it, building it, manufacturing it; being rewarded for providing more goods and services for less to consumers. What we have now is phony capitalism, which is more money for less goods and services, while consumer demand is being mandated by government planning and controlled by central banking.
EVENTS TO UNFOLD IN THE UPCOMING YEARS
“We are in a death event.”
“If you date interest rates going back 600-600 years, we have never once had a scenario where they were kept at zero for 6 years. What we have is a flat line; just like in any medical monitor a flat line is fatal.”
“The system is dead, we are just sitting there on the fumes and they can’t relight it because they have outlawed free enterprise capitalism, and wealth creation. Look at the health care system right now, it is just a leviathan. They went in there and wrote Obama Care for themselves and that’s how they became supporters. It was government sanctioned.”
“Just look at Japan, we are headed right there.”
“The long term the yield curve is going to invert, but it is going to invert near zero. There is no growth, the only growth there is, is just credit creation. To spurt credit creation they have to make it easier for people to borrow so people can miscalculate their returns.”
CURRENCY EXTINCTION
“Currencies expire when people wake up, the value that currencies hold are only values within people’s minds.”
There is absolutely no value in them. As long as they are perceived as having real worth, you can purchase real things; this is the indirect exchange. Money is a store of value because it is not pegged to anything, as long as this allusion is there; we are substituting it to grab a hold of real cash flowing assets.
THE LEVERAGE COLLAPSE
“The dollar is going down, and it is going to die; but it will be the last to die.”
“They really have people thinking that the dollar is a risk free asset, and it is not. It is a worthless junk bond. Currencies don’t float, they just sink at different rates, and the sinking is managed by the BIS and the ECB, Bank of England, Bank of Japan etc. and they all mange the theft of remaining value with their printing presses.”
“The financial systems were given the keys to the castle. These economies are not run for the benefit of the entrepreneur; they are run for the benefit of the financiers. It is a game that the central banks have been playing since the 1600’s when the Rothschild’s went after the Bank of England. We are in troubling times and we need to be well informed. If you are an investor and you do it right, it will be the greatest time in history.”
Abstract written by Karan Singh karan1.singh@ryerson.ca
10/30/2015 - Chris Casey: The Austrian Case for Inflation
Special Guest: Chris Casey – Managing Director, WindRock Wealth Management
FRA Co-Founder, Gordon T. Long interviewed Chris Casey of Windrock Wealth Management on the concept of inflation and other applications of Austrian economics to investment theory. Mr. Casey, an Austrian economist, is a frequent speaker and writer on macroeconomic topics and their related investment implications.
WHAT IS AUSTRIAN ECONOMICS AND WHY DOES IT MATTER?
The Austrian school offers the “most realistic interpretation” of society and economics according to Mr. Casey. Gordon agrees in noting that “mathematical models are only as good as their assumptions.” While equations and models may be useful as a construct to frame concepts, any social science cannot be scientifically tested due to the inability to control the countless variables at work. As such, Mr. Casey prefers the Austrian approach which “looks at basic self-evident axioms as it relates to mankind in nature and then uses deductive reasoning to describe how the real world works.” According to Mr. Casey, the unique Austrian explanations of inflation and the business cycle (recessions) have direct applications to practical investment ideas.
THE AUSTRIAN EXPLANATION OF RECESSIONS
Most mainstream economists believe recessions are inherent to capitalism since their repeated cycles largely began during the industrial revolution. The Austrian school recognizes a different causation occurring at the same time: fiat money with or without central banking. By artificially increasing the money supply through fiat money, interest rate levels are temporarily lowered. This incents businesses and individuals to make investment decisions they would not otherwise have made: in short, malinvestments. Recessions to liquidate the inevitably follow monetary mischief.
THE AUSTRIAN EXPLANATION OF INFLATION
The Keynesian school of economics has two theories of inflation which fail to comport with reality and are theoretically faulty. Their “demand-pull” explanation requires full employment and full capacity in an economy, but Mr. Casey demonstrates that fails to account for a doubling of prices during the 1970’s during economic weakness.
The “cost-push” theory is equally wrong. By blaming a particular price increase in a commodity such as oil for all price increases, it would have predicted pronounced inflation and deflation over the last 15 years as the oil price gyrated wildly. In addition, it is theoretically faulty as more money spent on oil means less money is spent on other goods and services – which lowers their prices and renders the overall price level largely unaffected.
“Prices are merely a function of the supply and demand for money” states Mr. Casey. More supply means dollars are worth less while higher demand lowers prices as people seek to increase cash balances by selling goods and services through lower prices.
WHEN WILL WE EXPERIENCE INFLATION?
Mr. Casey believes that “once we have another downturn, the Fed . . . will step right in. Once we have that . . . we’ll really start to see the inflation take off.”
What will the Federal Reserve’s next move be? They have other options besides another round of quantitative easing. Mr. Casey notes they may stop paying interest on excess reserves held by commercial banks at the Federal Reserve, and they may also lower the reserve requirement which could have a pronounced and immediate impact on increasing the supply of money.
WHAT SHOULD INVESTORS DO?
“Timing is everything, so utilize investments which pay well now, but in an inflation will be a home run.”
10/30/2015 - Doug Casey: Retirement & Living Overseas for Americans – The Growing Trend (& Need!)
Special Guest: Doug Casey – Casey Research Personal Freedom Through Financial Freedom
FRA Co-Founder Gordon T. Long interviews Doug Casey on the different and emerging trends that are taking place in the U.S. Doug is an author, investor and founder of Casey Research.
On trends and changes in the U.S, Doug relates it to a “lush, comfortable and well maintained prison”. In his opinion th
e country is gradually degrading. He points out that the standard of living in other countries is steadily going up unlike before when the standard of living in the U.S was clearly ahead of others.
He agrees with Gordon on the fact that very soon people will be forced to retire outside of the U.S due to the rising health and medical costs. Doug points out this trend will only just increase because for years the current good standard of living being enjoyed by the U.S is a result of the heavy borrowing that has been taking place for years.
“When you take on debt, you are either mortgaging your future or you are consuming capital that somebody has saved in the past and lent to you to increase your standard of living now, but when you pay the debt you reduce your standard of living by more than that amount because you have to pay interest on it in addition”.
He predicts that when interest rates start going back up, things are going to get bad quickly, and he advises people to take precaution now by diversifying both politically and geographically while they can. He also recommends that people should acquire as many gold and silver coins as possible as it would be a great way to conserve capital.
“I don’t think in today’s high tech world, the government serves a useful purpose. There’s nothing that the state does that could not and would not be done better and cheaper and without coercion by the free market”.
“If you are the citizen of a country, the government considers you as its property this is why you are better of living in a country where you are not a citizen, and so they treat you as a guest to be cultivated as opposed to a milk cow that has to be milked”.
On the issue of people renouncing the U.S citizenship, Doug believes that this trend will simply keep on increasing. He likens this increasing exodus to what happened in the past, when the American predecessors left England in search of greener opportunities. He advises that Americans’ who value their freedom should look into getting dual citizenships.
“The quality of medical care is at least as good outside the U.S as it is in the U.S and it is much much less expensive”.
Doug believes that the popular belief held by most people, that the medical coverage you get when traveling the world is of a lesser quality as that in the United States is wrong. In his opinion you receive a cheaper and much better service.
Abstract written by Chukwuma Uwaga – chuwaga@gmail.com
10/30/2015 - Financial Repression By Central Banks
Tim Price compares the approach being taken by the central bankers of the massively indebted western world to North Korea .. highlights how the rest of Asia has a bright future for economic growth, given its positive demographics & high savings rate .. “A combination of a Zero Interest Rate Policy, generalized financial repression and trillions of dollars, pounds, euros and yen all conjured out of thin air has failed to trigger inflation in the narrower CPI sense of the word. Central banks, in other words, have failed. Analyst and market historian Russell Napier of Cerno Capital suggests that ‘Central banks’ failure to reflate will be very damaging for the price of financial assets and will also ultimately trigger reflation from another source: the government.'” .. likes gold for protection against likely massive central bank monetary easing & government stimulus by the indebted western world in an attempt to generate inflation .. considers an outcome of ‘deflation followed by inflation’ to imply holding these investments: cash held at reputable and solvent banks, objectively creditworthy sovereign debt, inexpensive but high quality listed stocks, gold… concludes: “You would have thought that North Korea had done a reasonable job of invalidating the legitimacy of state socialism and central planning. Perhaps Janet Yellen, Mark Carney and Mario Draghi could go visit sometime. One way fares would suffice.”
10/30/2015 - Robert Blumen: The Core Tenets of the Austrian School of Economics
Special Guest: Robert Blumen – Follower of the Austrian School of Economics
FRA Co-Founder, Gordon T. Long interviewed Robert Blumen, noted follower of the Austrian School of Economics, on the Core Tenets of the Austrian School and the Key Elements for investing in an Era of Financial Repression.
CORE TENETS
1. All economic understanding must be based on individual action
2. Subjective valuation drives prices
3. Marginal utility
4. Entrepreneurship
5. Time preference as the basis of interest and profit
6. The role of capital in production
7. Savings is required to create capital
8. Price Theory: – prices determine costs, not the other way around
9. Money as an evolutionary solution the problem of barter
10. Precious metals as an evolutionary solution to the choice of the best money
11. The purchasing power of money as a price that balances money supply and money demand
12. Non-neutrality of money (Cantillon effects)
13. The importance of money prices
14. Money is a good, and like any good, money does not have constant purchasing power. Stable money does not mean stable prices.
15. Mises’ “critique of intervention”: one thing leads to another
16. The “impossibility” of socialism (central planning)
17. Macro-Economics must be founded on micro economics
18. Macro-economics is based on Say’s law.
19. The rejection of the Keynesian revolution in macro.
20. Money and money substitutes (bank deposits, bank notes).
21. Banking with 100% gold reserves
22. Fractional reserve banking. The Austrian critique of fractional reserve banking
23. Central banking. The Austrian critique of central banking.
24. Austrian business cycle theory – the theory of unsustainable booms drive by fractional reserve banking and central banking.
25. Deflation:
26. An Austrian understanding of recessions and depressions through Say’s Law, entrepreneurship, and market price theory
KEY ELEMENTS IN AN ERA OF FINANCIAL REPRESSION
1. Entrepreneurs create wealth by employing scarce resources in production within the context of the price system.
This requires real markets with real prices.
2. Central planning can not replace market prices.
3. Central bankers have it backwards. Counter-cyclical policies create the business cycle.
4. Interest is not a number you can set to anything you like for “policy” reasons. It is a price and it cannot be zero.
5. Attempting to keep interest rates at zero creates unsustainable distortions in the productive part of the economy.
6. Something that is unsustainable must stop – at some point.
7. In the end there are two choices – market prices or destruction of the monetary system
8. Investors think in terms of money, but money itself is unstable.
9. The path from fake prices to real prices will be difficult.
10/29/2015 - Michael Snyder Says: “We Are Approaching A Global Economic Collapse!”
Special Guest: Michael Snyder – Lawyer, Author, Publisher – TheEconomicCollapseBlog.com
FRA Co-Founder Gordon T. Long interviews Michael Snyder on financial repression He is an author and publisher of the economic collapse, blog and other blogs.
FINANCIAL REPRESSION
On financial repression Michael prefers to look at it from the angle of who is doing the repression, which in his opinion is being carried out by the governments and central banks. He believes that markets work best when free market forces are allowed to play out without interference, and that the governments and central banks are anathemas to the market.
He says the area that has witnessed the greatest distortions as a result of outside interference are the emerging markets. He goes on to explain that the period of easy money and quantitative easing flowing into the markets caused a boom in the lending of money to emerging markets all over the world. As a result of these markets gorging on all this cheap money with low interest rates, a lot of debt has been accumulated, and most of that debt is denominated in U.S dollars.
As a result of a crash in commodity prices, the emerging markets are getting less for their exports and due to the reduction in quantitative easing, the dollar is increasing in value and its taking a lot more of their currency to service and pay these debts.
Michael noted that there is no easy way out from this, He believes that the current crisis will keep on getting worse especially as global economy is slowing down.
“I think that what we are seeing already is just going to accelerate we are going to have emerging markets really struggle and this is carrying on into global trade”. This is a global problem created by a global bubble that was created by the Federal Reserve and others and so I don’t know that there is any easy solutions and in fact, what we are seeing now is just the initial stage of a crisis that is going to get much much worse”.
He expects that initially major financial institutions all over the world will get into trouble with some of them even failing resulting in the banks refusing to lend to themselves and us thereby causing a credit crunch or freeze, which in turn will bring economic activity to a standstill and as a result cause a short severe period of deflation.
“I believe we are going to see financial crisis financial crash more intervention which is going to cause other problems, ultimately I believe we are going to see major financial intuitions all over the world fail, I believe we are going to see a loss of faith completely and entirely this time around in the central bank of the world and governments and I believe this is going to causes economic chaos around the globe in a scale we have never seen before in our times, and I believe this is going to be a tragedy that is going to play out over years and it’s going to fundamentally transform our standard of living and the world around us as we move forward”.
PREPARATION
On what can be done to prepare for this eventuality Michael advises that as for the short term people should evaluate financial assets that could crash in value. He also advises a 6month emergency fund at the very least. On long term protection, he recommends gold, silver and precious metals as ways people can protect their wealth. As for a longer term of protection he suggests people should have supplies of food and supplies in the event of a long term emergency, as well as having some cash at home in the event of bank holidays or shutdowns. Finally he strongly recommends a greater level of self-sufficiency from the system as he believes that it is going to fail soon.
Abstract written by Chukwuma Uwaga – chuwaga@gmail.com
10/24/2015 - John Mauldin Letter: How Savers, Retirees & Investors Are Adversely Affected By The Federal Reserve’s Financial Repression
In his latest letter, John Mauldin laments the failure of the Federal Reserve in its monetary policies: “The Fed is implicitly acknowledging again that their policy action over the past 5 years of putting the US economy on a sustainable growth path has been a failure and now if their international concerns become more pronounced, they will also admit to the world that they have no tools to deal with it. I think today’s decision was a bad one. The dollar rally should be over and I’m bullish on precious metals (again) as I don’t understand at all what the bear case is in it anymore. Other commodities should benefit too from the weak dollar.… Therefore be cautious, the Fed did more damage to its credibility today. We have a Federal Reserve that doesn’t trust its models and is running U.S. monetary policy on its understanding of a flawed academic theory.” .. goes on a tirade for what has been happening to savers, retirees & investors on the Federal Reserve’sfinancial repression:
I’m sorry to the retirees that have saved their whole lives. I’m sorry to the generation of young people that don’t know what the benefits of saving [are]. I’m sorry to the free markets that best allocate capital. I’m sorry to pension funds that can’t grow assets to match their liabilities. I’m sorry to the successful companies that are competing against those that are only still alive because of cheap credit. I’m sorry to the U.S. banking system, [which] has been hoping for higher interest rates for years. I’m sorry to those industries that have seen a pile of capital (aka, energy sector) enter their industry and have been or will see the consequences of too much capacity. I’m sorry to investors who continue to be bullied into making decisions they wouldn’t have made otherwise. I’m sorry for the bubbles that continue to be blown. Again, I’m sorry to those who don’t want to hear this.
10/24/2015 - The Age of Financial Repression
Sylvester Eijffinger presentation on The Age of Financial Repression at the Global Economic Symposium in Kiel Germany this week .. sees financial repression when governments implement policies to channel funds to the government (to address the challenges of government debt) where those funds would flow to other assets if government policies were absent .. references the Basel III regulation for banking capital adequacy .. “Basel III regulation stipulates that banks do not have to set cash aside against their investments in government bonds with ratings of AA- or higher. If they invest in government bond of their domicile countries, there is no need for buffers, even if the rating is lower” – this is financial repression .. another form of financial repression is making sure the real interest rates are negative .. “For a long time, direct or indirect monetary financing of budget deficits ranked among the most serious and damaging offences a central bank can do. Quantitative easing and ECB’s expanded asset purchase program are just fancy new names for direct and indirect monetary financing. The fact that central banks in the West engage in monetary financing, says a lot about the real degree of their independence from their governments. Those policies in combination with Basel III regulations and the fact that all of them are of long term nature, mean that financial repression is only set to get even worse and in any case will define the economic landscape for at least a decade.”
10/23/2015 - John Butler – Investing Based on the Austrian School of Economics
Special Guest: John Butler, Amphora Commodities Alpha
FRA Co-Founder Gordon T. Long discusses the Austrian School of Economics with John Butler and how its methodologies can be applied to the current global economy. John Butler has 18 years’ experience in the global financial industry, having worked for European and US investment banks in London, New York and Germany.
Prior to launching the Amphora Commodities Alpha Fund he was Managing Director and Head of the Index Strategies Group at Deutsche Bank in London, where he was responsible for the development and marketing of proprietary, systematic quantitative strategies for global interest rate markets. Prior to joining DB in 2007, John was Managing Director and Head of European Interest Rate Strategy at Lehman Brothers in London, where he and his team were voted #1 in the Institutional Investor research survey. In addition to other research, he publishes the Amphora Report newsletter which appears on several major financial websites
THE AUSTRIAN SCHOOL OF ECONOMICS
“It is the no free lunch school of economics.”
The Austrian school believes that economics systems are ultimately information systems. Some of those systems use information more efficiently and effectively than others, and in particular systems of which authorities of various kinds meddle with the market. Authorities may do this by extracting capital from the market via tax rates or even by manipulating the money of that market through some sort of artificial interest rate policy.
“From the Austrian schools point of view, anything that impedes the free price information flow of an economic system will result in a sub optimal economic outcome.”
Without the rule of law, without the ability to strongly enforce property rights, without the ability to prosecute fraud, and various other legal frameworks; the Austrian economic model cannot work.
“Our goal is to make sure economic information flows as efficiently as possible within a solid legal structure.”
HOW THE AUSTRIAN SCHOOL CAN BE APPLIED IN INVESTING
Austrianism teaches us that the future is unpredictable. The economy is made up of the billions of people in the world, with each person making transactions almost every day. Each decision is an individual’s choice, and each decision, even the decision not to spend your money has some effect on the economy.
“Austrian school provides you a way to identify distortions, a powerful way that is caused by a fiscal and monetary policy set such as interest rate or fiscal policy manipulation. Austrians are able to look at these policies and be able to see how they are impacting the investment environment. This gives you a sense of where the distortions are. In theory you get an idea of where you should be overweight and underweight from an investor’s point of view.”
CURRENT EVENTS AMPHORA IS FOCUSED ON
“Currently we are seeing a general overvaluation of risky assets that has been caused by truly an unprecedented set of highly expansionary monetary and fiscal policies throughout most of the world.”
Income growth has not kept up; assets are expensive relative to incomes. So the correct strategy is not simply to short assets, which is dangerous; but if indeed they do look for ways to stimulate aggregate demand more directly rather than through the banking system.
The correct strategies to have today are those that will perform if incomes begin to catch up to asset prices, it could be asset prices declining towards incomes or vice versa. It is impossible to know which one is going to happen, but it is highly likely looking forward that a conversion of the two will happen.
POSSIBILITY OF NEGATIVE NOMINAL INTEREST RATES
“Policy makers have become almost pathological; they have a relentless attitude to make their policies work.”
“Problem with this is, once you get to this point, you can no longer question your original set of assumption. Austrian school of economics knows that the original sets of Keynesian assumptions that have gone into forming this unconventional and aggressive policy mix are themselves flawed. We are on this course where if it were left to run itself, policy makers will operation in these counter-productive directions because they will not question whether their assumptions are wrong.”
“Banning cash will prevent people from making even the simplest transaction in their own neighborhoods; it will lead to complete riot and chaos.”
“Putting a ban on cash is a terrible idea. It is terrible for them and for the economy as a whole. Sadly, with the way things are going, policy makers are going to teach everyone a very hard lesson about blindly accept anything the bureaucracy tells you to do.”
CENTRAL BANKS ROLE IF ASSET CORRECTION OCCURRED
“If you do get a major correction in asset markets that causes collateral problems in financial markets, the policy makers are out of options. The only thing they could do is begin capital controls”
Prevent investors being able to freely liquidate or withdraw funds from their existing investments. This of course is very anti-capitalist, very inti-market. It goes directly against everything that a free enterprise economy should stand for; but when you follow these policies you will eventually get to a dead end.
Abstract written by Karan Singh karan1.singh@ryerson.ca
10/17/2015 - The Role Of Financial Repression In China’s Growing Inequality
Essay emphasizes the role of monetary policy & the banking system in fueling China’s growing inequality .. “China has a hybrid banking system that serves both political and commercial goals. It relies on collateral instead of on profitability, distorting capital allocation in favor of large assets holders instead of efficient holders. This often produces the problem of overcapacity and ‘survival of the fattest’. It is not surprising that this creates inequality through rent-seeking. Certain agents receive special treatment and have preferential access to newly created credit. Those agents are mostly well connected insiders in the state sector .. China’s monetary policy — characterized by financial repression — is based on the government setting interest rates below the inflation rate most of the time. Financial repression acts as a redistributive machine, transferring purchasing power from savers to debtors. But China’s financial repression also covers its exchange rate policy by forcibly sterilizing foreign exchange. This means that only sellers of foreign exchange receive liquidity, but the externalities from excessive leverage are shouldered by the whole economy. Unfortunately, this gives rise to a coalition of interest groups whose incentives are aligned to the increased role of credit in China’s economy.”
10/17/2015 - Mish Shedlock On Financial Represssion And The Potential For Negative Interest Rates
“Purportedly the Fed is ready willing and able to go to next step of financial repression insanity .. Negative interest rate proposals go one step further than inflationist policies of central banks down the rabbit hole .. There is absolutely no benefit with financial repression measures that further punish those on fixed income. The positive effects these clowns see are nothing but a mirage that will vanish as soon as asset bubbles collapse .. The problem is debt coupled with asset bubbles created by debt, yet the proposed solution is to make people spend more while taking away scarce resources of those who save .. It is stupid to attempt to force people to spend money on things they don’t want or need on the inane belief demand is too low and wasting money is the cure .. These economic idiots will never stop, which is one reason why I am firmly committed to gold over the long haul.” – Mish Shedlock
10/10/2015 - Financial Repression: The Hidden Cost of 0% Interest Rate Policies
Essay makes the case that 0% interest rates – which translate to negative real interest rates after inflation – are a massive transfer of wealth from investors to governments & other borrowers around the world .. “We’ll show that the scale of the transfer is nearly $1 trillion per year in the U.S. alone and will argue that the zero-interest-rate policy lowers expected returns on stocks and real estate as well. Low interest rates hurt more than just investors. Everyone suffers because low rates distort consumption and investment decisions, potentially causing economic growth to be slower than it otherwise would be .. Negative real interest rates are a nefarious tax, punishing savers and depriving the economy of one of its primary sources of income .. Financial repression in this century is thus represented by the space between the zero axis and the red real-rate line. That is the ‘tax’ paid by savers due to the zero interest-rate policy. Actually, that is a low estimate of the tax because real interest rates are usually positive, representing a reward to the investor for deferring consumption .. What a mess. It will take teams of PhDs years to unravel all the distorted incentives, capital misallocations and foregone savings opportunities that emerge from the financial repression of the early 21st century.”
Laurence B. Siegel is the Gary P. Brinson director of research at the CFA Institute Research Foundation, and an independent consultant. Thomas S. Coleman is executive director of the Center for Economic Policy at the Harris School of Public Policy, University of Chicago.
10/10/2015 - Carl Icahn: Financial Repression Of Interest Rates Have Led Corporate Managers To Employ Financial Engineering & Accounting to Boost Earnings Per Share
Icahn warns that the financial markets are being supported by unsustainable earnings outlooks .. what’s coming next will be “very dangerous and could be disastrous” .. emphasizes the need for corporate tax reform in the U.S. .. For the financial markets & the economy, Icahn says the core problem is the Federal Reserve & its ultra-easy, zero-interest-rate policy .. he argues that it was the Federal Reserve that got us into the financial crisis to begin with .. low rates (financial repression) have led corporate managers to employ financial engineering & accounting shenanigans to boost earnings per share.
LINK HERE to the Article & Video
10/10/2015 - Financial Repression In China: Capital Controls
Article highlights new financial repression measures by China – annual limitations on cash withdrawals outside China on China UnionPay bank cards .. Cardholders, under the new rules, may withdraw a maximum 50,000 yuan ($7,854) in the last three months of this year & a maximum 100,000 yuan next year .. “The new rules could be the first in a series of measures leading to draconian prohibitions of transfers of money from China. Draconian prohibitions, in turn, could spark a global panic.” .. the article says the global financial community has been focusing on the wrong crisis in China – “Beijing’s efforts to prevent the collapse of equity values by massive purchases of stocks have received wide publicity since early July, but these purchases do not pose an immediate challenge to China’s technocrats.” .. the big crisis is about the currency – with outflows/inflows relating to the depreciation or appreciation of the currency .. “Beijing now finds itself in what looks like a no-win situation. If it does nothing, cash will continue to gush out of China. If, on the other hand, China acts to stem the outflow, it could make an already bad situation worse. Actions that are too radical can create a panic. Moves not radical enough will probably hasten outflows because holders of cash will think they have only a limited opportunity to transfer their wealth to safer jurisdictions. At this late date, confidence is eroding quickly, and China’s technocrats are finding their options narrowing and prospects dimming.”
10/09/2015 - Leland Millar Talks Quality of China’s Economic Reporting
Special Guest: Leland Millar – President, China Beige Book International
FRA Co-Founder Gordon T. Long interviews Leland miller, the president of the china beige book international and discusses financial repression in the context of the Chinese economy. He describes himself as a Lifelong china watcher who decided to do something about the complete lack of data in china.
“One of the things that the china beige book plans to do is to give people a real picture of not just the growth dynamics, but also the labor market, the credit dynamics, the macro implications of Chinese growth, indications of future Chinese demand, implications of commodity markets around the world, we try to give the people a much better picture on what’s actually happening instead of just relying on official data and press release”.
FINANCIAL REPRESSION
Leland describes the Chinese reform as a reversal of financial repression and this repression in the context of the Chinese economy is the oppression of consumers and households by state organizations through its economic systems.
“It means reversing this long time economic model, where the state will profit through the economic system at the expense of the consumers and household, and one of the things that the new leadership is intent on doing in order to create consumption is to empower consumers, so they spend more and stop empowering state organizations which are fuelling the overcapacity and the massive debt bubble”.
What should investor know about china?
He explains the biggest misconception concerning the Chinese economy is believing the GDP tells you much about how china is doing.
“It is a broad, blunt indicator that doesn’t measure productive growth or credit dynamics”.
On some of the challenges of getting reliable data in china, Leland explains that he and his team had to ask Chinese firms and consumers on ground what is happening in the country, and set up a number of polling units across sectors in order to get reliable and accurate information.
Economic trends in china
“For years we have been talking about the Chinese slowdown; it’s inevitable, despite the fact that the economy has been slowing”.
He goes on to explain that although the market sentiment has gone from optimism to “Armageddon” in recent months, the actual data is at odds with these sentiments. As a result of china’s economic slowdown, there is great vulnerability among emerging markets. Now, the reason for this is that for years these markets have relied on china’s demand without factoring the likelihood of a decline or certainty of a decline in china’s demand.
On China’s view of America, Leland has this to say
“The Chinese look at America as a model that they are interested in taking pieces from; they like the dynamism of the economy and the global status. On one hand, they see us as a model to learn a lot of things from but also as a serious threat that is looking to constrain their inevitable and ultimate rise”.
Abstract written by chukwuma uwaga uwaga3@outlook.com
10/04/2015 - The Financial Repression By The IMF: Risks To Your Investments And Retirement
International asset protection specialist Mark Nestmann does not see free markets – rather he identifies the unintended consequences of financial repression in progress by government authorities & the IMF in particular .. gives the example of what China is doing to prop up the markets now – “Their playbook comes from the International Monetary Fund (IMF), which advises governments to engage in ‘financial repression’ to buoy up global markets. The IMF’s recipe to avoid what former Fed Chairman Ben Bernanke calls ‘chaotic unwinding’ includes bail-ins, higher inflation, negative interest rates, and capital controls. The IMF even proposes a ‘one-off capital levy’ – outright confiscation of private savings – at a rate of 10% or higher. But as world markets have demonstrated over the last few weeks, it doesn’t always work. The cause of this chaotic unwinding is excessive debt combined with leveraged bets financed by more debt.” .. the international economy is beset with massive levels of debt – “collateralized, re-collateralized, hypothecated, and semi-hypothecated. Total world indebtedness now stands close to $200 trillion. That amounts to 286% of the global GDP of $70 trillion.” .. Nestmann says financial repression only works as long as the targets – individuals, families, & businesses – don’t catch on .. Nestmann points out many of the world’s wealthy are investing in real physical assets, no financial assets, stored outside of the banking system & internationally, .. these are assets that cannot be “bailin in, hypothecated, or hyper-hypothecated.”
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LINK HERE to The Nestmann Group to get help on addressing these risks
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The Financial Repression Authority (FRA) educates investors, funds and retirees on the adverse risks resulting from good-intentioned macroprudential central bank policies, government fiscal policies and financial regulations focused on controlling excessive government debt, attempting to stimulate economic growth, and minimizing the potential for financial and economic crises. FRA provides consulting services, lead generation services and retirement solutions.
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