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.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.
Inflation is not just rising prices, it distorts production as well.
b. Distortions are unsustainable
c. The “crack up bust” as one possible ending to the unsustainable boom
25. Deflation:
Deflation has been demonized by the Keynesians.
b. Natural slow deflation is the result of increasing production.
c. Deflation is the correction process from inflation.
d. Deflation is not a mouse trap that the economy gets stuck in and cannot escape.
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.
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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”.
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
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.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
10/04/2015 - Financial Repression: The Fallacies & Distortions Caused By Central Banks
Taking an Austrian School of Economics approach, Mark Spitznagel just made a billion dollars a few weeks ago & explains the fallacies & distortions being caused by central banks – the unintended consequences of financial repression .. “Great myths die hard. And I think what we’re witnessing today is the slow death of one of the great myths of human history: this idea that centrally planned command economies work, that they’re even feasible, and that they can be successful. It’s one of these enigmatic mythologies of the last hundred years in particular that we’ve been grappling with, and here we are today yet again thinking about this. Let’s remember that in the last hundred years a lot of blood has been shed over this mythology. And here we are today, how did we get here again? .. I think that another generation will look back and say ‘how could you have made that mistake all over again? How could you have failed to understand Hayek’s notion of the fatal conceit, that central planners can’t do better than the dispersed knowledge and signals of free market processes?’ .. When bureaucrats mandate low interest rates it doesn’t spawn long term productive investment. What it spawns is this short term gambling, punting on momentum-driven moves, on levered buybacks. This is the world we’re in today.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
10/04/2015 - Repressed Interest Rates Cannot Perpetuate A House Of Cards
Free market economist Richard Ebeling points out that when adjusted for inflation, the Federal Funds rate set by the Federal Reserve & also one-year U.S. Treasury not yields have been negative for the last several years already .. “It has cost little or almost nothing to borrow funds in the American financial markets, courtesy of the former chairman Ben Bernanke and current chairwoman Janet Yellen and the other members of the Board of Governors of the Federal Reserve, who possess the monopoly manipulation authority over the quantity of money in the banking system.” .. highlights how the U.S. government has added $8 Trillion to the federal government’s accumulated debt since the financial crisis – “The cost of U.S. government debt payments would be far greater if the Federal Reserve had not kept interest rates artificially low and created the illusion that the interest cost of government borrowing can be almost ignored.” .. these repressed interest rates (financial repression) have caused malinvestment, mispricing of assets & risk, & shafted savers & retirees from earning interest on their savings .. “A healthy restoration of actual market stability and coordination between savings and investment, between supplies and demands, requires an end to the monetary expansion and the reemergence of market-based interest rates that can tell the truth about the availability and cost of borrowing money and the real resources they are supposed to represent, so investments undertaken stay within the bounds or types and time-durations consistent with the saved means of production upon which they are dependent .. While the Federal Reserve has chosen to keep the Federal Funds rate near zero, it is merely delaying the inescapable and inevitable result of its own monetary policy – another needed economic correction that its actions will have generated but which it will, no doubt, blame on the supposed ‘failures’ of the market economy.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
10/04/2015 - Axel Merk: Financial Repression Could Lead to War
Axel Merk calls upon central banks to abolish their 0% interest rate policy (ZIRP) framework before more harm is done .. “ZIRP is bad for all stakeholders and may even lead to war” .. ZIRP is bad for business – “creative destruction may be undermined through ZIRP” .. ZIRP is bad for investors .. ZIRP is bad for Main Street .. ZIRP is bad for price stability .. ZIRP is bad for peace .. “We believe the key problem many countries have is debt .. The Great Depression ultimately ended in World War II. I’m not suggesting that the policies of any one politician currently in office or running for office will lead to World War III. However, I am rather concerned that the longer we continue on the current path, the more political instability will be fostered that could ultimately lead to a major international conflict .. The Fed needs to have the guts to tell Congress that it is not their role to fix their problems. It requires guts because they must be willing to accept a recession in making their point.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
10/02/2015 - Paul Craig Roberts PhD Talks About the Alarming Decline In Western Democracy
Special Guest: Paul Craig Roberts PhD – Chairman of the Institute for Political Economy
FRA’s Gordon T Long talks financial repression and the decline in democracy with Paul Craig Roberts. Paul is the chairman of the institute for political economy, he was also the former assistant secretary of the US treasury for economic policy in the Reagan administration.
“As far as I can tell not only has democracy departed the western world but also compassion empathy for others, morality integrity respect for truth justice fairness self-respect western civilization has become a hollow shell there is nothing left but greed and coercion and the threat of coercion”.
He believes this outcome is based on the behavior and statements of the government and the public’s acceptance of it. Part of the reason the public doesn’t care, is due to a lack of information as about 90% of the American media is owned by 6 large mega corporations that manipulate the news.
“The story that is told by the American media is Washington’s propaganda line and of course whatever the corporation’s propaganda line is and there is no challenge to either”.
On the republican debates, Paul questions the aggressive stands that most of the candidates seemed to have towards foreign policy. He states that this stand will simply create distrust among nuclear wielding powers.
“Every American president since John F Kennedy worked with the soviet leadership to diffuse the nuclear issue”.
He says that this shift in culture across the candidates is a combination of both campaign finance and a shift in culture.
“There’s no such thing as a free market in the United States, it requires many producers none of which can affect price…….look at the banks, the banks are so concentrated that they are too big to fail. How do you have capitalism if a failed enterprise doesn’t close down instead it is bailed out by the people or by the Federal Reserve printing money to buy its worthless portfolio. This not capitalism, there’s no capitalism here, this is an oligarchy!”
“What has the government said that’s true? Think of anything, can you think of anything they’ve said that’s true? We know that the unemployment rate they’re reporting is false, inflation rate is false, and the gross domestic product is false. We know all of this, we know that Saddam Hussein did not have weapons of mass destruction, he did not have Al Qaeda connections, that Assad of Syria did not use chemical weapons. We know Russia did not invade Ukraine but they say this over and over and over. I can’t think of one thing that the government or corporate world has said in 20 years that’s true”.
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
10/02/2015 - Jeff Davis Talks Financial Repression & the Effects on the US Banking Sector
Special Guest: Jeff Davis – Managing Director, Financial Institutions Group, Mercer Capital
FRA Co-Founder Gordon T. Long interviews Jeff Davis of Mercer Capital, and discusses financial repression and its effects on the banking sector.
Davis is currently a Managing Director of Financial Institutions Group at Mercer Capital. Davis also provides financial advisory services primarily related to the valuation of privately-held equity and debt issued by financial services companies and advisory related to capital structures and M&A.
FINANCIAL REPRESSION’S EFFECT ON THE US BANKING SECTOR
“Financial repression is a price control that relates to all facets of the economy and has profound impact.”
The 3 major cycles: Business Cycle, Credit Cycle and Rate Cycle.
“The banks straddle all 3 to be a key contributor of capital in the US economy. Financial repression impacts at a very base level for all 3 cycles.”
“Financial repression has artificially pumped up asset value.
“Commercial real estate values really pivoted in 2010. There is additional risk in the system now that asset values are pumped up”(See Chart to Left)
Leverage Ratio
“If you look at the leverage ratio we can see that over the last 20 years the industry has been raising capital. I don’t think that’s a bad thing. We are significantly much better capitalized than Europe which is a good thing, but as it relates to an investor there is a lower return on equity.”(See Chart to Left)
“Regarding financial repression, if you think about interest rates today, it is very painful for an institution to hold cash. There is significant risk taking occurring amongst commercial banks in taking additional credit risk and duration risk. Structurally banks aren’t as spread in terms of their assets relative to their borrowings that fund these assets.”
“Companies don’t go broke because they don’t make money. Companies go broke when they have no liquidity, so what financial repression has done is push liquidity into the system. So now heavily indebted companies are able to borrow money and we will soon see the consequences of that.”
HOW BANKS FUNCTION
“The banks are special for being separated from commerce.”
“The objective for a bank is to earn a spread on assets. Loans being the highest yielding asset, followed by bonds, and finally cash. The banks role is to take the deposits and prudently while still taking risk, lend the money into the economy to help finance the economy.”
SHADOW BANKING
“Over the last several decades the shadow banking system has developed into an alternative lender as well as another place for people to put their money.”
The term “shadow bank” was coined by economist Paul McCulley in a 2007 speech at the annual financial symposium hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming. In McCulley’s talk, shadow banking referred mainly to nonbank financial institutions that engaged in what economists call maturity transformation.
Commercial banks engage in maturity transformation when they use deposits, which are normally short term, to fund loans that are longer term. Shadow banks do something similar.
“Shadow banking system is separate from commercial banking system, but is a very large piece of the credit allocator. A lot of risk has been pushed out of commercial banks and is now in the shadow banking system, where it is not as opaque as a commercial bank.”
CONCERNS WITH SUSTAINED LOW INTEREST RATES
One day there will be a reckoning. It’s simply a buildup of risk; an attempt by central authorities to guide the economy.
Malinvestment: A mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses.
“A delay of lost recognition and mass malinvestment which is all a credit risk within the banking systems. However, my biggest concern is a dramatic slowdown in the economy, short rates at zero.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
09/25/2015 - Don Rissmiller – The Biggest Fed Meeting Since 2008 In Terms of Expectations
Special Guest: Don Rissmiller – Partner & Chief Economist, Strategas Research Partners
FRA Co-Founder Gordon T. Long talks Financial Repression and current economic developments with Don Rissmiller, a founding partner and chief economist of Strategas Research Partners. Mr. Rissmiller has overseen Strategas macroeconomic research since 2006, as well as thematic research, and high frequency econometric forecasting.
“When we think about financial repression, we think about interest rates being below normal levels or below inflation. You would do that if you’re in an environment with a lot of debt. The solution if you have too much debt is to try to make the burden of that debt to decrease.”
Rissmiller highlights the 3 avenues in which the government receives funds through taxes. Taxing income, taxing transactions, and taxing wealth; however financial repression relates by,
“Keeping interest rates below inflation is a fancy way of taxing liquid wealth, taxing cash.”
THE RESULT OF LOW INTERST RATES
“You’re trying to stimulate the economy by implementing lower interest rates.”
The financial repression process begins at the monetary policy level as a response to some shock In the economy. The goal is to get risk taking up in the economy, and that’s complicated with monetary policy because it is not the best policy when it comes to risk taking,
“It may be the best you can do, it may be an appropriate policy response in a time of stress, but it still has consequences that may not all be desirable.”
When you think about where we are going, what you can do is use whatever works. “You have to force other investors to take more risk. You might bid up asset prices, and of course assets are not equally distributed so that has consequences for income inequality.”
THE SEPTEMBER 17th FOMC MEETING
“It was the biggest fed meeting since 2008 in terms of expectations”
The Fed took the approach that they would like to wait a little more and see some more data. This is not uncommon, if we look back to 2013 to see an example of this, the Fed started talking about the quantitative easing taper in the middle of 2013, and by Sept 2013 the expectation was they were ready to go, but they held back for 3 more months because of the tightening of financial conditions.
“This is a reasonable way to look at what will happen in September of 2015, a tightening of financial conditions plus data that wasn’t equate to have confidence in your forecasts leading the Fed to delay.”
FORECASTING THE US ECONOMY
Considering the global slowdown in world trade and commodity prices, Rissmiller shares some foresight into the potential future of the American economy.
“We are seeing weakness in manufacturing that means another sector will have to pick up the slack. The sectors I will focus on are housing, consumer, and the government.”
“In housing we are seeing some improved signs on household formation. As unemployment is looking more normal we have had more household buying.”
“Consumer spending has been growing, we think this can continue because the decrease in energy prices tends to effect consumer spending with a lag and so we are going to continue to see positives to lower energy prices.”
” The government sector has been a drag, there is still one more budget fight coming in the next few weeks and that’s going to be a challenge, but if we get through that we are into the part of the election cycle where government drag turns into a small boost, we are already seeing some rehiring at the state and local level and that is significant as well.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
09/25/2015 - Stewart Taylor Discussing Financial Repression with Eaton Vance VP
Special Guest: Stewart Taylor – Vice President, Eaton Vance & Senior Fixed Income Trader
FRA Co-Founder Gordon T. Long breaks down financial repression and the future of emerging markets with Stewart Taylor. Stewart is currently Vice President and Portfolio Manager at Eaton Vance Management based in Boston, managing the Short Duration Real Return Fund since 2005.
THE SEPTEMBER 17th FOMC MEETING
“I am sure the Fed is going to move, the Fed knows they have to get away from zero bound.”
To Taylor, financial repression is keeping interest rates below a considered normal level. When asked about the recent FOMC meeting, he had this to say…
“They missed a chance in 2013 to raise rates, they had a free shot at it and they didn’t do it. I think they had a free shot at it again this past month, they didn’t take it, and now it becomes harder as we go along. Particularly, given what we are seeing happening in emerging markets.”
A progressive opening up of more countries to foreign investors has been accompanied by major structural transformations in many parts of the world. Strong economic growth combined with the development of financial markets has led to the expansion of investment opportunities in emerging markets and has reshaped the equity sector.
The graph to the left shows a dramatic drop for emerging markets performances of this September. The decline is Indicative to what Taylor had to say regarding the meeting…
“After hearing what the fed said, I don’t think the market feels the Fed has much confidence in the economy right now.”
THE COMMODITY SECTOR
“I am looking for ways to own commodities now.”
When asked about the commodity sector in emerging markets, Taylor states
“Commodities have been going down for the past 3 years while equities have been increasing or staying in the long trading range. I think it is evidence that perhaps equities have become somewhat divorced from the real economy. I certainly think that commodities are more indicative of the economy than equities are. “
THE FUTURE OF BOND MARKETS
Is a shift in the bond market inevitable?
“I do think a shift is coming, but I think the one thing that happens with rates that not many people appreciate is that first of all there is a difference between how rates behave in an inflationary environment, and how they behave in a deflationary environment.”
“I think at some point an abrupt shift will happen, but if you look historically you see that these changes take sometimes decades to complete.”
THE BRICS
“I am a firm believer that too much debt pushes down economic growth, and we are in a world that is constrained by debt and that isn’t going to change anytime soon.”
Taylor compares China’s equity market to America’s; both are very similar, China’s is just multiplied by a greater degree.
“Their equity market isn’t well connected to the underlying economy, so that’s why I dismiss equities as a signal. “
“You look at countries like Brazil that are being hurt by corruption, that’s hugely concerning considering how large of a role Brazil plays in the emerging markets. The BRICS, with the exception of India have all had a really rough time as of late and I don’t see that changing anytime soon.”
Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.
10/30/2015 - Financial Repression By Central Banks
