INET video interview with Boston University’s Professor Kevin Gallagher on his new book .. discussion of international capital flows, how it is causing destabilizing effects in developing countries .. Gallagher points out that today a number of emerging economies, including Brazil, Taiwan, & South Korea, have been successfully experimenting with new capital account regulations (CARs) to manage volatile capital flows .. Gallagher develops a theory of countervailing monetary power that shows how emerging markets can & should counter domestic & international opposition to the regulation of cross-border flows, even as he acknowledges powerful attacks from a multiplicity of interests, seeking to undermine those very regulations .. 20 minutes

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.

Special Guest: Professor Laurence Kotlikoff – William Warren FairField Professor of Economics at Boston University

Professor Laurence Kotlikoff believes the current banking system needs to be restructured into “Limited Purpose Banking to remove excess leverage and opacity; that the bureaucrats are having a field day with new ineffective regulations and the US government is financially bankrupt when accounted for correctly.

FINANCIAL REPRESSION

To Professor Kotlikoff the Financial System needs to be understood as a Public Good. It is a market place which needs coordination and banks & financial intermediaries are there to facilitate the operation and management of that public good. Regulators are there to keep the public good working. The question is what kind of regulation do we need that will ensure the financial system keeps working.

“Today the system is in bigger danger than 2008 because fundamentally the banks are being allowed to operate with dramatically larger leverage than would keep things safe!”

Additionally, the banks are being allowed to operate with full opacity. They don’t have to tell what they own in terms of assets or liabilities. Therefore depositors don’t know the risk they are taking which can lead to bank runs which we saw in 2008 where banks didn’t trust other banks.

“We are all set up to see this happen again because of all this leverage and opacity. The system is more fragile!”

THE FIX

In his book Jimmy Stewart is Dead, Professor Kotlikoff talked about shifting from a “Faith Based” banking system to a “Show Me!” banking system where financial intermediaries disclose all the assets they are holding. Instead of borrowing money to invest in assets we can’t see, they would sell shares through equity finance. They in effect would be equity financed Mutual Funds.

The purpose of “Limited Purpose Banking” which Professor Kotlikoff is proposing in his book is that all the financial middle men who are running the “public good” not be allowed to gamble with it. To most people their banking would be through:

• Cash Mutual Funds – For the Payment System
• Mortgage Mutual Funds – Instead of Fannie Freddie

The leveraged derivative element of the current speculative banking system would be run in a similar manner to modern parimutuel betting system polls. Dodd-Frank legislation has not made the system safer and instead sees only one regulator agency (the “Federal Financial Authority”) which oversees disclosures versus 130 entities in Dodd-Frank!

THE $210 TRILLION FISCAL GAP

Economists like Professor Kotlikoff feel the ‘Fiscal Gap’ is what we should be measuring, not one part of it which is the National Debt. The Fiscal Gap according to the CBO is presently $210T while the National Debt approximates $13T. We are focused on the $13T but really we need to be focused on is the $210T.

Over 1200 economists and 17 Nobel Laureates have endorsed a bill that mandates that the CBO & GAO do ‘Fiscal Gap’ reporting to look at the big picture.. Information on this bill can be found atwww.theinformact.org.

The current shortfall is 10.5% of GDP, each and every year. To offset this would require a 60% increase in taxes or for a 35% cut of all expenditures and benefits.

“The US is actually fiscally broke!”

The banks are holding a lot of the governments debt which is unpayable. Governments that cannot pay their bills print money. Eventually this inevitably leads to inflation. This will make the bonds worth less money which would highly likely put the banking system underwater.

SUPPORT

theinformact.org

thepurpleplans.org

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Zero Hedge reports from news sources that the Swiss central bank may be considering & is now hinting at implementing capital controls – one of the pillars of financial repression .. this would be an attempt by the government to restrict capital flows causing unwanted effects in the Swiss financial system, such as a strengthening currency .. “The question becomes who imposes capital controls first: Greece, where the specter of whoelsale bank insolvency is now raging across the nation, and where a capital lockout may well be imminent, or Switzerland, which knows that the moment Greece is pushed too far and a Grexit is perceived inevitable, is the moment it will be flooded with a tsunami of Euros desperate to find safe haven in a new, Swiss Franc denomination, somewhere deep in the vaults under the Swiss Alps. A tsunami which would crush SNB credibility all over again, and when capital controls will also become inevitable .. Perhaps the best way to preserve some of said credibility, especially if it is already borderline non-existent, is to frontrun capital controls tomorrow, by imposing them today.”

LINK HERE to the article

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The following was taken from The Template For How the Next Crisis Will Unfold by Graham Summers at  Phoenix Capital Research

WHAT LIES AHEAD

1)   Those in charge of regulating the system will lie, cheat and steal rather than be honest to those who they are meant to protect (individual investors and the public).

2)   Any financial problem that surfaces will be dealt with via fraud or lies rather simply allowing those who screwed up to be fired or go to jail.

3)   When the inevitable collapse finally does hit, it will be individual investors and the general public who get screwed (not bank executives or politicians).

4)   The problem will be prolonged as much as possible, likely fixed years down the road, if ever and individuals will have little or no say in how it pans out.

This is the likely template for what’s coming.

The following is the proof cited that the above can be expected:

1. EUROPE AS THE MODEL
2. THE ‘BANKIA” EXAMPLE

READ DETAILS

WHAT LIES AHEAD

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Interview transcript with Rick Rule on the economy, global counterparty risks & the natural resource sector .. on the issue of capitulation in the finacial markets for natural resources: “We came close last October. There were some moments of absolute panic .. but we didn’t follow through with a capitulation… Capitulation usually follows a protracted period of diminished volume… I have never seen a bear market in the juniors end without one .. just because I haven’t seen it doesn’t mean it has to be that way.” .. identifies financial repression: “The fiscal regime that has been in place since the financial crisis is one where the political class has decreased the interest rate artificially, allowing the very large money center banks to borrow at extraordinarily low costs both from their retail deposit banks but also from their central banks and lend the money back to sovereigns. In effect what happens is that the central governments loan the banks money at .75% or 1% and borrow the money back from the banks at 2.5% or 3%, giving them a 1% or 1.5% interest rate carry at very, very, very low risk. That’s the way the Japanese subsidized their banks and made their banks solvent again after their currency crises.” .. 28 minutes accompanying video

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Is deflation or inflation on the financial horizon? .. here is what Axel Merk thinks: “For me, it’s a slam dunk. We are going to get inflation. There are negative real interest rates in the developed world as far as the eye can see. Just about every country has negative real interest rates, and we have financial repression everywhere. I think we cannot afford positive real interest rates over an extended period. Just think about the U.S. with the entitlement wave coming against us. We got strong incentives in place to have negative real rates when the government has too much debt and when consumers have too much debt. The reason why we have this battle with inflation and deflation is we are clearly facing a deflationary bust, and central banks are fighting against it. If we didn’t have central banks, I’d be fully onboard with deflation, but because we cannot have bankruptcies, we will inflate our way around it .. Ultimately, inflation is going to first come up in the U.S., and that inflation is going to be exported to other countries.” .. 18 minutes

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.

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.

Scotiabank’s Guy Haselmann does not see much effectiveness on the recent announcement by the euro zone on its quantitative easing (QE) program .. emphasizes the demand for mone to invest in the real economy is not high when unusually low rates are lowered even more, especially where is a lot debt in the system already – “The plummeting velocity of money is a symptom of extreme indebtedness. Imposing a negative yield of 0.20% on the excess reserves of EU banks is a tax intended to boost lending, but there are many consequences to imposing such financial repression with little evidence that the intended goal will come to fruition.” .. thinks the Federal Reserve has boxed itself into a corner as it prepares the markets for a rate hike around the June timeframe – “If it does not raise rates in June, or thereabouts, then it must have an exceptionally good reason. The reason would have to be a significant and material deterioration in the economy or a highly troubling worsening of the geopolitical environment. Regardless, risk assets are likely to suffer mightily in the near future under either scenario.” .. emphasizes the financial markets are on “the verge of learning just how damaging the unintended consequences will be from multiple years of extreme central bank promises now that the Fed has run out of the ammunition to keep the utopian market façade alive.”

LINK HERE TO THE ARTICLE

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In his latest monthly investment outlook letter, Bill Gross* rails against the distortions caused by central banks since the onset to the financial crisis – negative interest rates (financial repression) is eroding the foundation of capitalism .. “The rules of the finance-based economy have been substantially changed .. Competitive devaluations and the purchase of bonds at near zero interest rates is indeed a significant distortion of the markets and – more importantly – capitalism’s rules which have been the foundation of growth for centuries” .. Gross thinks that the Federal Reserve realizes the hole that they have dug by allowing interest rates to go too low for too long .. he worries about the consequences for investors: “In the final analysis, an investor must be cognizant of future low and in some cases negative total returns in 2015 and beyond. Capitalism’s distortion, with its near term deflation, poses a small but not insignificant risk to what my mother warned was the final destination for all games. ‘In the end,’ she said, ‘all of the tokens, all of the hotels, all of the properties – they all go back in the Monopoly box.’ The strong odds are that 2015’s distorted capitalism continues with anemic growth, but the box rests on the family room coffee table, waiting, waiting, for its turn.”

– Bill Gross of Janus

LINK HERE TO THE ARTICLE

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Financial Post article on how low interest rates have changed retirement planning .. emphasizes how savers are losing wealth through negative interest rates .. suggests central banks are trying to direct savers to move into riskier stocks for yields, but the potential for capital losses on these riskier stocks does not justify the move for savers .. the article suggests some ideas on getting income, with an awareness of how to handle rising interest rates if you are investing in bonds.

LINK HERE TO THE ARTICLE

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Former U.S. Presidential policy advisor Dr. Pippa Malmgren explains how the UK & the U.S. are using inflation to default on their debts & their principal creditors .. highlights how interest rates in the bond market are being repressed (financial repression) by central banks worldwide .. “the balance between the state and the market has heavily shifted to the state since the financial crisis” .. 10 minutes

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Casey Research’s Jeff Thomas on the above new term by the G20 countries used to describe the bank bailin approach in the event of banking crisis – financial repression .. bailin legislation is now put in to most of the indebted world – including the U.S. & Canada .. “The wording of the legislation differs slightly in each country, but the objective is the same. Essentially, what it means is that the banks are pre-authorized by their respective governments to confiscate the savings of depositors, should they (the banks) decide that an ’emergency’ exists. I think it’s safe to say, that, even if an emergency does not exist, one can be trumped up. The temptation to legally steal trillions of dollars from depositors will prove too great.” – some caveats as some countries will have “insured” levels which are protected from confiscation & some countries will have the banks give something back like stocks in the bank which may not have much value in the event of a bank crisis .. Thomas advises moving deposit funds to hard assets like art, jewellery & especially precious metals outside of the banking system in secure storage locations of certain jurisdictions.

LINK HERE TO THE ARTICLE

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.

Chris Whalen* highlights the desperation to save the euro zone through a program of quantitative easing (QE) .. it’s all about trying to make huge levels of debt go away .. central bankers are now combining QE with low or negative interest rates to transfer wealth from savers to debtors .. it’s all about financial repression .. “In Germany and Switzerland, for example, interest rates on government debt are already negative, meaning that governments are confiscating money from bond investors. Sounds great, yes? But the only problem is that all of these QE programs by the Fed and ECB, and also the Bank of Japan, do not really address the core problems facing the industrial nations—too little growth measured in jobs and consumer income, and too much debt.” .. on the euro zone’s desperation: “The ECB bond purchase program is a desperate effort to stave off the day of economic reckoning in Europe via inflation and currency devaluation.” .. concludes by warning these policies are setting the stage for the next financial crisis.

LINK HERE TO THE ARTICLE

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“The problem with any QE program is that debtors get bailed out while savers are repressed .. This is the argument that the FED has used as both Bernanke and Yellen have told American savers that they have benefited from QE in many ways: lower mortgages, increased jobs for their friends, relatives and neighbors and overall a healthier and more robust U.S. The fallout from the European Central Bank’s program will not be immediately realized but its potential damage has resulted in Chancellor Merkel being very upset with ECB President Draghi. The FINANCIAL REPRESSION OF GERMANY’S SAVERS WILL PROVIDE ELECTORAL POWER TO THE ALREADY GROWING INFLUENCE OF THE AfD (Alternative for Deutschland) .. Understand the ways in which governments liquidate their accumulated debt caused by wars and social welfare commitments. The power of negative real yields and inflation has the power to destroy the creditors. The use of QE is a move to cap interest rates for debtors and it will not do anything to aid the highly indebted peripheral nations. Combine capped interest rates with higher levels on inflation and you have a sorcerer’s guide to debt repudiation through the alchemy of financial repression.”

– Yra Harris

LINK HERE TO THE ARTICLE

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New IMF paper by Carmen Reinhart & M. Belen Sbrancia .. presents how public debt is often reduced through the use of financial repression – a tax on bondholders & savers via negative or below market real interest rates .. from abstract:High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or below-market real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt .. Financial repression is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were ne gative ½ of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5% of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.”

LINK HERE TO THE ARTICLE

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The Financial Times defines it: “Financial repression is a term used to describe measures sometimes used by governments to boost their coffers and/or reduce debt. These measures include the deliberate attempt to hold down interest rates to below inflation, representing a tax on savers and a transfer of benefits from lenders to borrowers. Financial repression is also used to describe measures to facilitate a domestic market for government debt and the imposition of capital controls. The combined effect of all these measures means funds are channeled to the government that would otherwise flow elsewhere.”

LINK HERE TO THE ARTICLE

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Patrick Barron predicts (via Mises Canada)…

I predict that the Fed will start charging negative interest rates on bank reserve accounts, which will ripple through the markets and result in negative interest rates on savings at banks.

I make this prediction only because it is the logical action of the Keynesian managers of our economy and monetary policy.

Our exporters will scream that they can’t sell goods overseas, due to the stronger dollar.

So, what is the Fed’s option? Follow the lead of Switzerland and Denmark and impose negative interest rates in order to drive down the foreign exchange rate of the dollar.

It is the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing “aggregate demand”.

If savers won’t spend their money, the government will take it from them

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“When I first heard of financial repression, it was from some IMF document, and I immediately thought it was a mistake. Why would they use a term that conveys authoritarianism or something negative when they really wanted to use some sort of boring academic phrase? It’s actually ironic they chose that term .. I think what the IMF calls financial repression is better described as financial authoritarianism. Because we’re not just talking about repressing financial things, like artificially low interest rates to help a government finance its debt, which sounds pretty academic or abstract to most people. But when you look at the indirect and the immeasurable effects that come from financial repression, it negatively affects all aspects of life. That’s why I believe it is more accurate to call it financial authoritarianism, because that’s what it basically is. Central banking and a fiat money are the main enablers of financial repression. It gives the government the tools to manipulate the currency, to manipulate the interest rate that they otherwise wouldn’t have under a sound-money kind of system. Financial repression is needed to help governments finance debt .. Dealing with an out of control government debt burden which comes from out of control government spending, is where the impetus for financial repression comes from.”

LINK HERE TO THE ARTICLE

LINK HERE TO THE RELATED ARTICLE

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INET Economics posted essay on new research shedding light on how today’s advanced economies depend on private sector credit more than anything we have ever seen before .. the research work indicates that our economic future could be very different from our recent past, when financial crises were relatively rare .. “Crises could become more commonplace, which will impact every stage of our financial lives, from cradle to retirement. Do we just fasten our seatbelts for a bumpy ride, or is there a way to smoothe the path ahead?” ..  more financial instability will introduce more uncertainty down the line .. “Operating in this milieu, the central banks, the governments, the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and other parts of the macro-financial policy world are now taking a much keener interest in what the pros and cons of different financial regulatory structures and various macroprudential tools (designed to identify and lessen the risks to the financial system) might be.” – [Macroprudential tools entail financial repression – inflation, negative interest rates, ring fencing regulations & obfuscation.]

LINK HERE TO THE ARTICLE

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“As investors we are all now the subjects of a grotesque monetary experiment. This experiment has never been tried before, and its outcome remains uncertain. The unproven thesis, however, runs something like this: six years into a second Great Depression, the only ‘solution’ is for central banks to print ever greater amounts of money. Somehow, gifting free money to the banks that helped precipitate the crisis will lead to a ‘trickle down’ wealth effect. Instead of impoverishing those with savings, inflation will be some kind of miraculous curative, and it must be encouraged at all costs. It bears repeating: we are in an extraordinary financial environment. In the words of the fund managers at Incrementum AG: ‘We are currently on a journey to the outer reaches of the monetary universe.’ .. The market – a quaint concept of a bygone age – has largely disappeared. It has been replaced throughout the West by bureaucratic manipulation of prices, in part known as QE but better described as financial repression.”

– Tim Price

LINK HERE TO THE ARTICLE

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.