05/13/2016 - FINANCIAL SENSE NEWSHOUR: Gordon Long on Secret ‘Shanghai Accord’
Speculation abounds of a closed-door meeting between leaders of the world’s largest economies to take down the US dollar. The reason: to provide relief to commodities, oil, and emerging markets. Gordon Long, co-founder of Financial Repression Authority, discusses the so-called Shanghai Accord and, if such a deal was struck, why it won’t have the same success compared to other accords formed in the past for the same purpose.
05/12/2016 - Satyajit Das: DISCUSSES FINANCIAL REPRESSION & THE AGE OF STAGNATION
FRA Co-founder Gordon T. Long is joined by Satyajit Das in discussing the consequences of financial repression and current policy making, along with the effects of the Chinese economy.
SATYAJIT DAS is an internationally respected expert in finance, with over 35 years’ experience. Das presciently anticipated many aspects of the global financial crisis in 2006. He subsequently proved accurate in his warnings about the ineffectiveness of policy responses and the risk of low growth, sovereign debt problems (anticipating the restructuring of Greek debt), and the increasing problems of China and emerging economies. In 2014 Bloomberg nominated him as one of the fifty most influential financial thinkers in the world.
Mr. Das is the author of a number of key reference works on derivatives and risk management. Das is the author of two international bestsellers, Traders, Guns & Money (2006) and Extreme Money (2011). His latest book is A Banquet of Consequences (2015) (published in North America as Age of Stagnation).
He was featured in Charles Ferguson’s 2010 Oscar-winning documentary Inside Job, the 2012 PBS Frontline series Money, Power & Wall Street, the 2009 BBC TV documentary Tricks with Risk, and the 2015 German film Who’s Saving Whom.
VIEWS ON FINANCIAL REPRESSION
It started around 2008 and prices relate to debt. Fundamentally, the way the surprises were dealt with were in a very old fashioned way to grow and inflate their way out of debt. As we know, this process hasn’t really worked, and there’s really only two choices left. One of them is to default, which is hugely unpalatable because writing off peoples’ savings like that has consequences for future consumption, and a huge amount of wealth loss in the world. The other option is financial repression, which is a way of managing excess debt. The most common way is by very high levels of taxation.
“I don’t think people, when talking about financial repression, are talking about taxation as being something that shouldn’t happen.”
There’s obviously a point of taxation which is to run social services and infrastructure and government, but at some point under the condition of high debt it starts to bring taxation rates up for the simple reason of using the state to absorb everyone’s debt, in other words socialize the debt and then try to use the taxes to pay it off. That can be hugely unproductive for the economy but we’re starting to see it happen around the world.
The next stage is what we call financial repression, where we start to devalue the debt. The most important way we can see that is through a period of low interest rates.
“People forget that since 2008, we’ve had over 600 interest rate cuts globally. Interest rates are pretty much around zero around the world.”
Roughly 30% of global government bonds are trading at negative yields. Either you have nominal yields that are positive but below the rate of inflation to use that to try and ease the purchasing power of debt. Alternatively as we’re now finding that because inflation is low and the debt levels are so high, we’ve gone to negative interest rates. There’s something perverse about negative interest rates because people get very technical about it. This is actually a way of writing down the debt, and are very dangerous, as the market’s reaction to the negative interest rates in Japan and Europe have proven.
Firstly, there’s no real proof that these types of policies are going to create growth or inflation. They’ve been put in place to write down the debt. First we have -5% interest rates, and after ten years we’ve written off half the debt. That’s now a sort of stealth tactic the central banks and policy makers have put in place. Everybody knows that they said, look, in the next crisis we’re going to cut interest rates and interest rates are so low that we’re going to have to go to negative territory, but we all know that if we go to negative territory people are just going to take money out of the bank and just hold the cash.
“They’re going to have to stop people from taking out cash, and the interesting way that’s being channeled by policy makers is that they’re pretending that banning cash is necessary to prevent criminality or terrorism.”
There are also other forms of financial repression as well, like redirecting investment. There’s a whole variety of these measures that we see come into play, and it all has to do with the fact that they try to use these measures to deal with the debt crisis.
“I would argue that it’s not going to be able to be dealt with, and it creates enormous social and political pressures… What we’re going to see is a period of financial repression, which is very, very dangerous.”
POLITICAL EXTREMISM AND POLICY MAKING
We’re starting to see signs of this via the political extremism that’s starting to come about. The reason these popular extremist policies are being promoted in the United States and elsewhere is because financial repression and the lack of honesty of dealing with the world’s financial and economic problems.
If you look at this period of history and the way the Europeans have deal with the European Debt Crisis, it’s almost single-handedly created parties like Ciudadanos in Spain, but in Germany these policies would never have gotten any sort of traction. Even the German Finance Minister has said that these parties are really the creation of the economic policies that people are playing around with, and that’s setting up this confrontation we see in play between Germany and the European Central Bank.
“I honestly don’t know how it’s going to end. In the 1920s and 1930 when similar pressures built up, it didn’t actually have a very good ending.”
THOUGHTS FOR THE NEXT YEAR (12-14 MONTHS)
“I think, fundamentally, we know what the problems are: it’s debt.”
It built up in the system, it’s not properly funded, we know the global imbalances are unsustainable, and add on top of that the financialization of the economy where people are rewarded for trading claims on real cash flows and real assets.
“You have financial institutions which are too big to fail but too big to jail, and frankly, too big to regulate or too big to manage.”
So all of those we know, and on top of that there’s climate issues, resource scarcity, so we’ve got a very toxic set of problems. Things are going to play out in one of three scenarios. One is the ‘Lazarus economy’, where all the skeptics are wrong and everything goes back to normal. It’s not likely, but it might happen. The most likely one is a period of stagnation, which might happen with a 70% chance. What happens is we’re stuck in this environment of very low growth, disinflation, the debt keeps building up, we use policies like financial repression and low interest rates in a predominant way, and we stretch this out for as long as we possibly can. One lesson we learned from Japan is that we can’t do this for a very long time. The policy makers are going to try to keep this game going for as long as possible. The problem is that it’s not sustainable.
The last scenario is the one with the 30% chance, which is the crash. The question is whether that happens suddenly, or if we get gradually to where the system breaks down. You have all these nodes of instability going on and it’s all held together by chicken wire, which is basically central banks putting more and more money in and coming up with more and more far fetched and less effective schemes.
The crucial thing that people forget is that this is the ultimate act of faith. The central bankers who completely misread things in the lead-up to 2007 and contributed to the crisis have suddenly after that becomes the saviors.
“At some point in time it’ll turn into, ‘oh dear, the emperor has no clothes, they don’t actually know what they’re doing’.”
What people need to keep in mind is that it’ll be very different from 2007-2008. The problem is much bigger, and the emerging markets that were a source of strength in 2008 and provided demand for the people in advanced economies, along with abundant savings that helped push the problem, are no longer a source of strength. The third thing is the fact that the policy makers are all wrong. The social and political pressures are in a much worse place than 2007-2008 and socially the tensions are starting to build up.
“Whatever happens now will be far more difficult to control than they were in 2007-2008 and I think essentially we are at a very dangerous inflection point… And the one thing I do know is if something cannot go on, it won’t go on, and if something happens it happens suddenly.”
The central banks have this under control for the moment, but in complex systems they tip over extremely suddenly and extremely quickly, and none of us know what the trigger will be, but there will be a trigger and in hindsight it would be obvious it was the trigger.
“Everyone now is chasing risky assets because it’s the only way they can feed themselves.”
INVESTMENT DIRECTION AND PREPARATION
“In this crazy world of the 1980s onward, we sort of reversed priority and put capital gains first, income next, and security of capital last.”
You have to think about how to recover, rather than worry about capital gain. One of the key things is to find things that people need: food, oil, scarce resources, and guns (security).
“You’re looking for areas that are absolutely crucial in the terms of the actual needs of ordinary people, and that will be protected.”
The policies are hugely repressive because they’re forcing people to take risks with their savings, and intentionally they’re going to go broke or grow poorer over time.
“I’m actually astonished, when you mentioned pitchforks earlier, that investors haven’t picked up their pitchforks and gone after some of these policy makers, though given time I suspect that’s going to happen.”
VIEWS ON CHINA
The pre-2008 period was very sound, but after that the Chinese Public Bureau placed a strong emphasis on social stability and launched a program to create employment opportunities. What that’s done is increased the amount of debt in China. In 2000 the amount of debt was $2T. In 2007 it went to $7T. In 2014 it’s $28T. It’s gone up by a factor of 14 times.
“You can’t have that kind of growth being leveraged by debt in a financial system without consequences.”
If you look at where the money’s gone, it’s this massive overcapacity in their industries, there’s a lot of real estate; about 15-20% of China’s GDP is tied up in real estate. It’s inevitable that they’re going to have some problems. The last few debt crises that happened in China, the States stepped in, created asset management companies, bought the bad loans to the banks, selected government guarantees on some bonds, and sold it back to the same banks and let time to take care of the problem.
The problem now is the bad debt problem is much larger, and they’re not going to have the same GDP growth that they had. The way that they’re trying to deal with this is by keeping deposit rates low and the system very liquid so the banks can gradually absorb these losses.
“I think the best case is that China becomes like Japan, which is putting all these bad debts on their balance sheet and gradually slowing down.”
The problem is if they miscalculate, the problem is bigger and comes upon them in a way that is much quicker that you could potentially get a banking meltdown. The problem with that is that would spread from China out very quickly because there’s about a trillion dollars of exposure that far end lenders have to Chinese banks and Chinese companies.
Abstract by: Annie Zhou <a2zhou@ryerson.ca>
Video Editor: Min Jung Kim minjung.kim@ryerson.ca
05/12/2016 - Charles Hugh Smith – WHY OUR STATUS QUO FAILED & IS BEYOND REFORM
The Financial Repression Authority is delighted to have Charles Hugh Smith, prolific writer on the web and author of the highly acclaimed book, Why Our Status Quo Failed and is Beyond Reform. FRA Co-Founder, Gordon T. Long delineates with Charles on the core topics that are mentioned in his book as well as go over key diagrams to supportive diagrams.
Charles Hugh Smith is the Publisher of the site “Of Two Minds”. From its humble beginnings in May 2005, Of Two Minds now attracts some 200,000 visits a month and has been listed No. 7 in CNBC’s top alternative financial sites. His commentary is featured on a number of sites including: Zerohedge.com. The American Conservative, Peak Prosperity and AOL’s Daily Finance site (www.dailyfinance.com. He has written eight books. Charles Hugh Smith graduated from the University of Hawaii, Manoa in Honolulu. Charles Hugh Smith currently resides in Berkeley, California and Hilo, Hawaii.
Mr. Smith’s articles, which critique the status quo, had influence from Braudel’s historical account of early capitalism. Smith’s economic works stress the value and efficacy of decentralizing power and wealth, the individual’s power of self-determination and the value of community, which in his view has been diminished by the state. His blog covers an eclectic range of timely topics: finance, housing, Asia, energy, long term trends, social issues, health/diet/fitness and sustainability.
“I wanted to encapsulate in a very short form that the status quo is broken and it is not going to be able to solve the problems. In order for us to move forward we first need to accept this reality.”
The core thesis in this book is that humanity has 6 problems which are interconnected:
“The idea that we are going to reach every human on the planet has been proven incorrect.”
“The share of our national output that is going to wages is declining. The rise of automation and technology has decreased the demand for human labour and this will continue as a trend into the indefinite future.”
“I call it cartel state capitalism and we see it everywhere where the industries are controlled by a handful of players who have a great degree of influence.”
“We are borrowing from the future to fund present day consumption.”
“People need work, they need livelihoods and they need a positive social role within their community. Paying them to sit home and do nothing creates a whole new assortment of problems. People need work and a sense of importance and contribution.”
THE NEW NORMALS
It is all the central planning arrangements and policies that have been implemented since the 2008 Financial Crisis. One new normal is the federal government ownership of student debt. It is now on this incredible increase where the government is buying all of the student loans because it is the only way to mask the bankruptcy of the student loan system. The GDP in the US, EU, Japan and other developed economies has been subpar. It has been barely over 1% and it is being driven by extraordinary expansion of debt. More debt is working against us because there is not enough real wealth being generated to pay for it. Throwing more debt at it does not work. Another new normal is this increasingly popular practise of growing more debt to hide your nonperforming loans.
“The problem is that the debt is inextinguishable. The central banks can do a great job in creating liquidity but they cannot solve solvency problems. And this is suggesting the central issue that debt is a solvency problem now”
The fed creates money out of thin air and buys more assets and then it levels off until markets and the economy weaken. Then the Fed ramps up the balance sheet again which is shown by the stair step pattern of the figure. The Feds’ balance sheet never declines it only plateaus briefly and then goes up again. The new normal is that central banks are cropping up markets because if the markets collapse to their true value it would reveal the bankruptcy of the entire system.
In The New Normal “recovery,” the percentage of the population with a job has advanced all the way back up to where it was 40 years ago, in the late 1970s. During booms eras many more people were employed, but today we are at employment levels similar to that of the 1970s. Fewer people are working and they are earning less money if we were to adjust for inflation, it’s stagnation.
“Most of the gains that have been registered are flowing to the top 5%. This is not just because of a few greedy people at the top have taken the gains, but also the factor of mixing global competition with technology places a premium on workers who have the skillet set to generate value with increasing technology. Just working in a factory or doing some white collar job does not create a premium in an economy that is pressured by global competition and automation. “
Money velocity has been falling and everybody is concerned as to why it is doing so, but the fact of the matter is that there is no growth. The jobs themselves are paying minimal which is why people are dropping out of the labour force to start their own personal endeavour of sorts.
“A notable feature of the chart is the divergence being shown in 2008-2009 and this is when we went into hyper printing of money to put the system on life support. The productivity numbers in the developed world has fallen off; there is lack of growth. Growth in present day is not real, the growth we are seeing is artificial.”
STRUCTURAL REFORM
“We all know the system broke since the last crisis. We now need structural reform of entitlements. We need a new form of capitalism that is more accessible to people and that is not just controlled from the top through central planning. We are having a hyper-monetary policy where the status quo is looking to central banks to solve all the problems by issuing more debt and liquidity. These problems cannot be solved this way; we have to deal with the reality that we need deep structural reforms.”
If you observe caterpillars in construction sites you will notice the driver has many levers in front of him to control. An economy is managed the same way, there are many levers to pull, but we are running the economy pulling the same lever and that is monetary policy. The other levers are fiscal policy which we are not using, public policy, and taxation policy and so on. These are elements that come out of the political process, it is on political leaders to realize this and make appropriate decisions.
“One of the things you can have a lot of faith in is mankind. It will reset, we will survive and we will come out of it, but unfortunately it leads to crises and it is always the innocent that are most burdened.”
Abstract written by, Karan Singh Karan1.singh@ryerson.ca
Video Editor: Sarah Tung sarah.tung@ryerson.ca
05/10/2016 - Financial Repression Pillar: Forced Inflation To Reduce The Burden Of Government Debt
“If interest rates go up, we can buyback debt at a discount if we are liquid enough as a country. People say I want to default on debt – these people are crazy. First of all you never have to default because you print the money I hate to tell you, so there is never a default. It was reported in the NYT that I want to default on debt – you know I am the king of debt, I love debt, but debt is tricky and its dangerous. But let me just tell you: if interest rates go up and bonds go down, you can buy debt – that’s what I’m talking about. So here is the story, if we have an opportunity where interest rates go up and you can buy back debt at a discount. I always like to be able to do that if you can do that. That’s all I was talking about, they have it like I’m going to go back to creditors and I am going to renegotiate or restructure debt. It’s ridiculous.”
05/09/2016 - Jim Bianco: Gold Is A “High Yield” Asset In A Negative Rate World
“The amount of debt yielding negative is now $8.1 trillion…65% of which is in Japan and pretty much the rest of it is in Europe right now. 20% of world sovereign bond markets are now at negative interest rates. If you exclude the U.S., it’s about 50%… My friend Jim Grant likes to say that the problem with the barbarous relic is for 5,000 years…it’s always yielded zero; it had no yield, and that’s always been the argument against owning it: ‘Why would you want to put your money in something that doesn’t yield you anything?’ Well, guess what? Today, a zero yield as gold has is a high-yield alternative when compared to $8 trillion dollars’ worth of investment options in sovereign bonds. So we are really in an alternative universe where the high yield is now zero.”
05/05/2016 - Larry Lindsey: The End Game Consequences Of Financial Repression
“Our training and bias have always been toward policy activism — that tweaking this or changing the dial on that can always make things better. But critics of activism, often lumped into the ‘Austrian School,’ argue that this will inevitably end badly .. Tweaking and dialing are addictive, both to the policymaker and to the governing class. Inevitably, this will lead to an unsustainable amount of tweaking and dialing and an endgame in which policymakers become powerless as the state’s monetary and fiscal dials are no longer functional and the state is, in effect, bankrupt. But as states never go bankrupt, they then must seize the assets under their dominion through either inflation, taxation and confiscation .. The Roman Empire tried all three. The medieval popes had their Jubilee Years in which all debts, particularly their own and those of other sovereigns, were forgiven. Debasement, grinding taxation, and confiscation from disfavored groups (often the Jews) were all part of the process .. The growth of societies trying these schemes diminishes. Long-term capital moves from growth-enhancing productive investment, which dries up as it increasingly gets channeled into the hands of the state.” – Larry Lindsey
05/05/2016 - Financial Repression: Ring-Fencing Regulations – Transatlantic Trade Investment Partnership (TTIP)
“These so-called ‘free trade agreements’ are not trade agreements. The purpose of the ‘partnerships,’ which were drafted by global corporations, is to make corporations immune to the laws of sovereign countries in which they do business. Any country’s sovereign law whether social, environmental, food safety, labor protections—any law or regulation—that impacts a corporation’s profits is labeled a ‘restraint on trade.’ The ‘partnerships’ permit corporations to file a suit that overturns the law or regulation and also awards the corporation damages paid by the government of the country that tried to protect its environment or the safety of its food and workers. The lawsuit is not heard in the courts of the country or in any court. It is heard in a corporate tribunal in which corporations serve as judge, jury, and prosecutor .. In other words, the ‘partnerships’ give global corporations the power to overturn democratic outcomes All of the blather about free trade and tariff reduction is mere cover for the only purpose of TTIP, which is to establish American economic imperialism over the peoples whose governments sold them out for money.” – Dr. Paul Craig Roberts, Former Assistant Secretary to the U.S. Treasury
05/05/2016 - GREENPEACE LEAK: Exposes Corporate “Regulatory Ring Fencing” Through TTIP
The secret documents represent roughly two-thirds of the latest negotiating text, and in several cases expose for the first time the position of the U.S.
Confirming that the TransAtlantic Trade and Investment Partnership (TTIP) amounts to “a huge transfer of power from people to big business,” Greenpeace Netherlands on Monday leaked 248 secret pages of the controversial trade deal between the U.S. and EU, exposing how
Environmental regulations,
Climate protections, and
Consumer rights
are being “bartered away behind closed doors.”
The documents represent roughly two-thirds of the latest negotiating text, according to Greenpeace, and on some topics offer for the first time the position of the United States.
“Total secrecy was the only way the European Commission could keep the European people from learning the truth about these appalling negotiations, and now the cat is out of the bag.” —John Hilary, War on Want
Before Monday, elected representatives were only able to view such documents under guard, in a secure room, without access to expert consultation, while being forbidden from discussing the content with anyone else. This secrecy runs “counter to the democratic principles of both the EU and the U.S.,” the website ttip-leaks.org declares.
And in the absence of transparency, “hard won environmental progress is being bartered away behind closed doors,” said Faiza Oulahsen, campaigner for Greenpeace Netherlands.
“Whether you care about:
Environmental issues,
Animal welfare,
Llabor rights or
Internet privacy,
you should be concerned about what is in these leaked documents,” Oulahsen said. “They underline the strong objections civil society and millions of people around the world have voiced:
TTIP is about a huge transfer of democratic power from people to big business.
Greenpeace Netherlands zeroes in on four aspects of serious concern in the obtained texts, including:
The apparent omission of the so-called “General Exceptions rule,” which allows nations to regulate trade “to protect human, animal and plant life or health” or for “the conservation of exhaustible natural resources;”
The absence of language about climate protection, plus provisions that would “stimulate imports and exports of fossil fuels—like shale gas from fracking or oil from tar sands—while clean energy production for local communities and associations would be considered unfair competition and a barrier to trade.”
A clear threat to the “precautionary principle,” which requires regulatory caution where there is scientific doubt, shifting the burden of proof on whether a product is safe to public authorities, not on those who seek to sell it;
The heretofore shrouded “high degree” of corporate influence over the talks.
According to the Guardian, which saw the original documents (retyped by Greenpeace and available here):
U.S. proposals include an obligation on the EU to inform its industries of any planned regulations in advance, and to allow them the same input into EU regulatory processes as European firms.
American firms could influence the content of EU laws at several points along the regulatory line, including through a plethora of proposed technical working groups and committees.
“These leaks confirm what millions of people across Europe have suspected all along—that this toxic trade deal is essentially an enormous corporate power grab,” said Global Justice Now trade campaigner Guy Taylor on Monday.
“It’s no secret that the negotiations have been on increasingly shaky ground,” Taylor continued, citing petitions signed by millions of Europeans and ongoing public protests. “These leaks should be seen as another nail in the coffin of a toxic trade deal that corporate power is unsuccessfully trying to impose on ordinary people and our democracies.”
Similarly, War on Want executive director John Hilary declared: “Today marks the end of TTIP.
Total secrecy was the only way the European Commission could keep the European people from learning the truth about these appalling negotiations, and now the cat is out of the bag.”
“We have long warned that TTIP is a danger to democracy, food safety, jobs and public services,” Hilary continued. “Now we see it is even worse than we feared. Today’s leak shows the European Commission preparing to sell us down the river, doing deals behind closed doors that will change the face of European society for ever.
It is simply unacceptable that a group of unelected officials should be allowed to contemplate such a thing without any public scrutiny.”
The 13th round of TTIP talks took place last week in New York. U.S. President Barack Obama, who was stumping for the deal last month in Germany, had hoped to wrap up negotiations by the time he left office—a timeline that looks increasingly unrealistic.
Public support on both sides of the Atlantic has plummeted; leading U.S. presidential candidates oppose the deal and others like it; and President François Hollande on Sunday became just the latest French official to express skepticism about the deal.
05/03/2016 - ALERT: PIMCO’S Global Economic Advisor, Joachim Fels Suggests QE Should Buy Equities Next
Speaking at a panel in the Milken conference titled “Monetary Policy: Out Of Ammunition” moments ago Pimco’s global economic advisor Joachim Fels, formerly of Morgan Stanley and Goldman Sachs, had a few observations on QE vs NIRP, not surprisingly nudging central banks that explicitly central bank buying, i.e., QE, is far more powerful than the implicit deflationary signal which is NIRP.
He then proceeded to point out the obvious;
By which he was of course referring to wages; as we showed recently rent inflation is currently running at a record 8% Y/Y (ignoring the double digit increases in health insurance costs).
He then had some more big picture ideas of how the world can get rid of its excess debt: central banks should just buy it all up and then “cancel it” (of course by doing so they would also cancel the offsetting balance sheet entry which is bank reserves which also happen to prop up global capital markets).
And finally, he hinted what he, and/or Pimco, would prefer that the Fed should buy next. Stocks.
What he did not note is that by the time it’s all over, central banks will be buying not just credit and equities, but virtually every asset class, both directly and indirectly through helicopter money. That said, we prefer that “other” proposal by Pimco’s Harley Bassman from two weeks ago, according to which the Fed should monetize gold to a price of about $5,000 to “shock” inflation expectations higher. However, somehow we doubt if given the option of buying gold or stocks (directly as opposed to through Citadel), the Fed will pick the former.
05/03/2016 - Better Finance: Financial Repression Destroys Savings – European Savers Bailed In By ECB
At the end of 2013, at the occasion of the publication of its yearly report on the real return of pension savings, Better Finance warned of the risk of a disastrous eradication of European savings across the board. Nearly two and a half years later and the warning goes unheeded, with the European Central Bank intensifying the financial repression of European Savers by further lowering its main interest rate from 0.5 to 0.25 percent. Now this fear is spreading to all actors – savers and retirees, insurers, pension funds, even bankers – threatening the whole edifice of pensions and savings.
Axel Kleinlein, the head of Germany’s Association of Insured Persons (BdV) and member of Better Finance, stresses the fact that lowering interest rates even further effectively crushes all hopes of decent pensions in the future and has started a campaign against the role of the ECB, which was relayed by the media all over Europe.
What is at stake is the entire monetary policy of the European Central Bank. This is the climax of financial repression.
Financial Repression refers to a set of governmental or central bank policies that keep real interest rates artificially low or negative and regulate or manipulate a captive audience into investing in government debt. Central banks started to fund banks at very low interest rates, most often asking for government debt as eligible collateral. Then central banks engaged in quantitative easing campaigns buying up sovereign bonds directly on the market. To complete the picture central banks try to keep inflation alive through quantitative easing policies in an attempt to further reduce the weight of sovereign debt in the EU Member States, but in the process also obliterating the value of all savings.
Indeed, we know that inflation is the weapon of mass destruction of savings and savers. Today, thankfully, the desired inflation has so far failed to materialise. Policymakers believe that low interest rates will encourage consumption but fail to take into account basic human nature: a small saver faced with low or even negative returns, is more likely to brace for hard times, tighten the belt and stow money under the mattress for a rainy day.
As President Jean Berthon says: “It is more than time to oppose by all means this disastrous policy and we call on all Member Associations of Better Finance to actively campaign in their home country to force the central banks to drastically change their policy.”
05/03/2016 - Kroll Bond Rating Agency: “ECB Doubles Down on Financial Repression”
The Kroll Bond Rating Agency just released a report Achieving Stability & Growth in Europe.
They preface the report with this interesting comment:
We just posted a comment on the situation in the EU, where financial repression is still increasing. Big concern from my perspective is that negative rates and central bank market intervention seem to be frightening investors and convincing savers to abandon the financial system. Look at the earnings reports from UBS and the other large EU banks. Banks are 80% of the EU balance sheet and virtually all are shrinking. It is hard to envision how this situation does not end in tears for the nations of Europe given the policy mix. Or to put it another way, should we worry about Brexit or Gexit?
The economic policy debate seems comprised of a binary choice. On the one hand, we are offered radical action by global central banks including the forced transfer of value from savers to debtors, and on the other, increased fiscal spending funded via either more debt or higher taxes. We believe that there is a third choice, namely to make public policy pro-growth as well as pro-consumer, with a balanced approach that is constructive rather than punitive. Good luck getting the current cast of characters in the global central banking community to start talking about growth. But if we don’t see a change in policy by the ECB, there could be a German-led political crisis in Europe before end of the year.
05/03/2016 - Capital Preservation In The Era Of Financial Repression
Article highlights the views of Saxo Bank in emphasizing gold & silver in your investments to preserve capital in a world beset by negative interest rates .. “What do you do as a trader or investor in this environment? ,. No one knows how this ends, but one thing is for sure now: it’s now more a game of capital preservation .. There is no holy grail, but from a macro perspective, I think you have to look at precious metals.”
05/03/2016 - Is The Next Trend A Tax On Wealth?
“It is becoming increasingly clear to us that the level of yields at which credit expansion in Europe and Japan will pick up in earnest is probably negative, and substantially so. Therefore, the ECB and BoJ should move more strongly toward penalizing savings via negative retail deposit rates or perhaps wealth taxes. With this stick would also come a carrot – for example, negative mortgage rates .. Central banks should move more strongly toward penalizing savings, rather than just the institutions that ‘house’ those savings – the banks.”
– Deutsche Bank’s Dominic Konstam
05/01/2016 - Financial Repression Is Resulting In Stagflation
“We are overdue for a U.S. equity bear market and if we get a bear market it will have ripple effects across other asset classes. But the other thing that worries me even more than that is the central banks losing credibility and losing control .. Let’s suppose that headline inflation, already up to 2.3% in the last 6 – 8 months, hits 3% in the next 6 or 8 months. All of a sudden the central bank (the Fed) has lost control. The central bank can’t keep interest rates down at zero when inflation is running around 3%. That winds up being a massive wealth expropriation from anyone with savings. The government is intentionally engaging in wealth destruction for the affluent savers. That’s the essence of negative real interest rates. But if you are trying to carry zero interest rates in a 3% inflation environment, it stimulates all sorts of crazy behavior on behalf of the general public, and it winds up defeating the purpose of low interest rates, which is to stimulate the macroeconomy. So, ironically, you could have the Fed’s efforts to stimulate the economy with low interest rates having the unfortunate effect of stimulating hoarding instead of stimulating inflation in the macroeconomy. And you could have inflation get out of hand anyway so that you wind up with the worst of both worlds — a stagnation in the macroeconomy and outright recession, paired with renewed inflation. It’s called stagflation. We had that in the 1970s and it was brutal. That’s a risk. It’s certainly possible and if the Fed loses control, watch out.”
– Rob Arnott
05/01/2016 - Negative Interest Rates Are Destroying The Very Fabric Of Society
“Thanks to negative interest rates destroying pension funds, we have a tempting pot of money government just cannot keep its hands out of. Governments are turning to ‘asset recycling’ – which includes even Canada. The federal government of Canada, for example, is looking at a potential source of cash to reduce the cost of government by shifting Canada’s mounting infrastructure costs to the private sector. They want to sell or lease stakes in major public assets such as highways, rail lines, and ports. In Canada, they sneaked in a line hidden in last month’s federal budget which reveals the Liberals are considering making public assets available to non-government investors, like public pension funds. They will sell the national infrastructure to pension funds .. This latest trick is being called ‘asset recycling,’ which is a system designed to raise money for governments. This idea is surfacing in Europe & the United States (especially among strapped cash States). They are destroying Western Culture because they are simply crazy and people who vote for them blindly are out of their minds. They are destroying the very fabric of society for they cannot see what they are doing nor where this all leads.”
– Martin Armstrong
link here to the reference
05/01/2016 - Everbank VP: First ZIRP, Then QE .. Will NIRP Be Next In The U.S.?
Everbank’s VP considers the progression of financial repression in the U.S. – from zero interest rate policy to quantitative easing to the increasing potential for negative interest rates .. “In response to disappointing growth, many central banks are testing a new monetary tool: NIRP. The European Central Bank (ECB) was the first major institution of its kind to adopt NIRP. Others have joined the party. Sweden, Denmark, Switzerland and Japan have also adopted sub-zero rates.2 In fact, around a quarter of the world economy by output is now experiencing official rates that are less than zero.3 Will the U.S. be the next country to implement a negative interest rate policy? .. It seems monetary authorities agree that NIRP might be implemented in the U.S. if our economy enters a sharp downturn. This would have important implications for the markets. In fact, the current negative rates in other countries are already having a major impact on certain asset classes, especially on precious metals.”
04/29/2016 - Anthony Wile: The Emerging Legalized Cannabis Industry and the Rising Latin Star, Colombia.
FRA Co-founder, Gordon T. Long is joined by Anthony Wile, Founding Chairman and CEO of The Wile Group, to discuss the future of the emerging legalized Cannabis Industry on a global scale, along with the war on drugs and the next upcoming star in the global theater, Colombia.
Mr. Anthony Wile, founding Chairman and CEO of The Wile Group Ltd., is an active investor, business strategist and consultant, financial markets commentator, publisher and author. Mr. Wile founded The Daily Bell, where he served as chief editor until February 2016. He now publishes Wile Reports, a free subscription publication with new material from Anthony Wile and occasional introductions to investment opportunities of potential interest that are being supported by The Wile Group. Mr. Wile is the author of High Alert: How the Internet Reformation is causing a financial hurricane – and how to profit from it. Ron Paul has said, “High Alert should be read by everyone who wishes to educate themselves about the dangers fiat money poses to American liberty and prosperity. I wish I could get every member of Congress to read this book.”
WAR ON DRUGS
“I think the entire world is repressed as a service to benefit a very few.”
I believe that people should be able to invest their capital in whatever way they want to. Bottom line is, we should not be trying to organize society in a way that monetarily determines who is and who isn’t capable of making decisions for themselves.
Special Session of the General Assembly UNGASS 2016 – The meeting happened as a results of several factors:
Authorities discuss how to reduce drug use, which surely we can all agree on, is a noble topic to talk about, but more importantly we must ask, how do we reduce the demand? Too much attention is spent on the supply side of the equation. I think it’s important we begin to consider the demand side as well. A major idea is that if you’re going to educate somebody, you need to know who you are talking to. Today the demand side of the industry is unknown other than as a group, an umbrella which you don’t deal with as a whole; rather, you deal with individual people within the system. The regulation of the industry, like it or not, will ensure that the drugs will be maturely distributed, and as a result of that you will get the appropriate data.
“If we open up the system and have a rational understanding that the demand already exists … We are not talking about normalizing drugs; we are talking about creating a highway system that develops the communication ability for those who wish to impart their views on how you should reduce consumption of these products. By doing this you remove the black market from the distribution side, which then cuts off funding to the ‘terrorism’ of the war on drugs.”
If you want to make a change and cease the funding of these illegal organizations throughout the world, then you must simply cut off their funding source. In many cases, these funds are related to the war on drugs. The rest of the world is beginning to realize that the problem can be alleviated through a mature discussion that recognizes human nature being what it is, and that it is individuals who are deciding for themselves to consume these products. We don’t endorse it; we are simply saying that we must get to know who these people are-; profile, understand and get to know people on a personal and real level.
“This is a big boys’ game that will be handled by the big boys when it comes to the determination of what the products are and how they’re distributed.”
Without a doubt there are investment opportunities in this arena, but people should take their time and not rush in. The regulatory environment has not yet shaped itself. That will determine where the profit margin will lie. Big change is coming, for instance, in distribution. Some of the largest associations in Canada have come out saying that they are behind this shift towards a pharmacy distribution model. This immediately puts an “X” over the revenues that would have belonged to the licensed producers in Canada who distribute through the mail. Today they have the whole vertical, but tomorrow they won’t. As a result, those investments are dramatically affected and thus the viability of anybody who invested in those investments.
Areas of negative environmental impact can be alleviated if the focus is on the cultivation in areas that can generate a positive environmental impact. You will see in the coming future that international bodies will be quite focused on the environmental side of this new industry in which the standards can be determined upfront by the private sector with support of agencies that see this is in fact the better way to approach this.
There is a lot of discussion happening at this point in time within the international circles of how best to embrace, monitor, secure and develop international trade in this industry. For investors who want to get involved in this big shift, I suggest to pay attention to the nations that on a production side are leaving a positive environmental footprint, and are producing medicinal-grade products which are standardized at legitimate price points.
COLOMBIA’S ROLE
“In the war on drugs, Colombia has suffered more than any other nation on Earth.”
Colombia desires to rehabilitate its reputation. The aftermath of the war is a way for Colombia to recreate the way they are viewed by the world. The country is far from backwards in regards to their research capabilities. Their universities are top notch. There is more than enough capability and infrastructure for Colombia to establish a new role in the world with respect to their contribution in pharmaceutical products.
The government has paved the way for a legal business to develop in Colombia. Colombia has means to be a world leader in a scientific and technological way for how these products should be standardized, regulated, and distributed and pave the way by example.
BUSINESS OPPORTUNITIES IN COLOMBIA
“I don’t see a country in the world today that offers as much opportunity as Colombia.”
I try to stay away from global stock markets as much as possible. I am more interested in generating real wealth with real businesses that generate positive and sustainable cash flow. We’re focused in private equity and in Colombia. There are so many areas of Colombia which have been sealed off for decades, inaccessible and totally under-explored in terms of natural resources. There is great opportunity for investing – real estate, tourism, a myriad of opportunities exist. I also think the hemp industry in Colombia is going to develop rapidly; we’re conducting due diligence on that now. It is a nation that is about to spring forward in many ways.
ECONOMIC SHIFTS IN SOUTH AMERICA
The Latin American nations surrounding Colombia are unfortunately lagging far behind. They are not learning as much as they should be from the example of Venezuela. After Colombia, the next rising star would be Chile. It is a country that offers reasonable stability, but it is still difficult to compare the opportunities it offers with those of Colombia.
“At the end of the day, the leading nation in Latin America, in terms of growth, opportunity, and economic prosperity, is undoubtedly Colombia.”
Abstract written by, Karan Singh Karan1.singh@ryerson.ca
Video Editor: Sarah Tung sarah.tung@ryerson.ca
04/28/2016 - Economist Joseph Stiglitz On The Negative Effects Of Financial Repression
Economist Joseph Stiglitz discusses the problem of extreme income inequality in the U.S. & the negative economic impact of macroprudential monetary policy .. 4 minutes
04/28/2016 - The Portfolio Effects Of Holding Gold Or Gold Mining Stocks In A Portfolio
Report by Nick Barisheff of Bullion Management Group Inc. on the effects of holding physical gold or gold mining stocks in a portfolio .. “Mining shares are an investment that can make up a small portion of the overall tactical equity allocation of a sophisticated investor’s portfolio. However, the facts show that gold mining shares are not a prudent long-term strategic investment for most individuals. Physical gold has a long history that spans thousands of years, and it should make up a portion of every person’s assets. The world’s wealthiest people hold bullion to protect their wealth. As Doug Casey, author and institutional investor, says, ‘The hurricane hit in 2008, we have been sitting in the eye of the storm since the last financial crisis and the full breadth of the storm is beginning to hit us once again.’ Globally, the problems we face today are markedly worse than those of the Great Recession. In the coming years, portfolios without physical gold to offset losses in financial assets and currencies will suffer.”
04/27/2016 - Michael Hudson: “THE WALL STREET ECONOMY HAS TAKEN OVER THE ECONOMY & IS DRAINING IT!”
FRA Co-founder Gordon T. Long is joined by Professor Michael Hudson in discussing his concept of the FIRE economy and its influence on the production and consumption economy, along with some of his writings.
Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Killing the Host (2015), The Bubble and Beyond (2012), Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971), amongst many others.
ISLET engages in research regarding domestic and international finance, national income and balance-sheet accounting with regard to real estate, and the economic history of the ancient Near East. Michael acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law.
FIRE ECONOMY
FIRE is an acronym to the Finance, Insurance, and Real Estate sector. Basically that sector is all about assets, not production and consumption. Most people think of the economy as being producers making goods and services and paying labor to produce them, and then labor is going to buy the goods and services. But this production and consumption is rife in the asset economy of who owns assets and who owns other things.
The Finance, Insurance, and Real Estate sector is dominated by finance. For instance, 70-80% of bank loans in North America and Europe are mortgage loans against real estate. The only way of buying a home or commercial real estate is on credit, so the loan to value ratio goes up steadily, banks lend more to the real estate sector, and real estate is worth whatever banks are willing to lend against it.
As banks loosen credit terms, lower interest rates, take lower down payments and basically lower amortization rates, interest only loans, they’re going to lend more hand more against property.
“Property’s bid up on price, but all of this rise in price is debt leverage.”
A financialized economy is a debt leveraged economy, whether it’s real estate or insurance or just living, and debt leveraging means a larger portion of assets are represented by debt, raising debt-equity ratios, but also that more and more of people’s incomes and tax revenue is paid to creditors. So there’s a flow of revenue from the production and consumption economy into the financial sector.
WE’RE STILL IN CAPITALISM, NOT CREDITISM
There’s a huge amount of gross savings, about 18-19% of the US economy, coded in part in debt. The savings that are lent out to borrowers are debt. So you have the 1% lending out their savings to the 99%, but the gross savings are higher.
“Every economy is a credit economy.”
“The IMF has this Austrian theory that pretends money began as barter and capitalism operates on barter, and this is a disinformation campaign. This is a very modern theory that is basically used to say “oh, debt is bad”, an what they really mean is that public debt is bad, the government shouldn’t create money or deficit, and you should leave it all to the banks who should somehow run off debt and in-debt the economy”.
“You can usually ignore just about everything the IMF says, and if you understand money you’re not going to be hired by the IMF.
They impose austerity programs that they call “stabilization programs” that are actually destabilization programs, almost wherever they’re imposed.
“When you have an error repeated year after year, decade after decade, it’s not really insanity doing the same thing thinking it’ll be different. It’s sanity. It’s doing the same thing thinking the result will be the same again and again.”
The result will be austerity programs making the budget deficit even worse. The successful era of monetarism is to force countries to have self-defeating policies that end up having to privatize their natural resources, public domain, public enterprise, their communications and transportation, and sell it off.
Everything that the classical economists saw and argued for – public investment, bringing costs in line with the actual cost of production – that’s all rejected in favor of a rentier class evolving into an oligarchy. Financiers in the 1% are going to pry away the public domain from the government and privatize it so that they get all of the revenue for themselves. It’s all sucked up to the top of the pyramid, impoverishing the 99%.
“As long as you can avoid studying economics, you know what’s happened. Once you take an economics course you step into the brainwashing of an Orwellian world.”
KILLING THE HOST
Finance has taken over the industrial economy. Instead of banks evolving from usurious organizations that leant to governments, finance was going to be industrialized. They were going to mobilize savings and flow it back into financing the means of production, starting with heavy industry. In Germany in the late 19th century, banks worked with government and industry in a kind of triangular process. But that’s not what’s happening now. After WW1 and especially after WW2, finance reverted to its pre-industrial form and instead of allying themselves with industry, they allied with real estate and monopolies because they realized they can make more money off real estate.
You had David Ricardo arguing against the landed interest in 1817. Now the banks are all in favor of supporting land rent, knowing that today people can buy and sell property, renters are paying interests, and they’re going to get all of the rent.
“You have the banks merge with real estate against industry, against the economy as a whole, and the result is that they’re a part of the overhead process, not part of the production process.”
THE WALL STREET ECONOMY
“The Wall Street economy has taken over the economy and is draining it.”
Instead of the circular flow between producers and consumers, you have more and more of this flow being diverted to pay interest and insurance and rent. In other words, to pay the FIRE sector, most of which is owned by the 1%. The agency is active politicking by the financial interests and the lobbyists on Wall Street to obtain all of the growth of income and wealth for themselves, and that’s what happened in America and Canada since the late 1970s.
INVESTMENT STRATEGIES FOR TODAY
What all the billionaires and heavy investors do is they’re simply trying to preserve their wealth. They’re not trying to make money, they’re not trying to speculate, and if you’re an investor you’re not going to outsmart the billionaires because the markets are basically fixed. It’s the George Soros principle.
“If you have so much money, billions of dollars, you can break the Bank of England. You don’t follow the market, you don’t anticipate it, you actually make the market and push the market up.”
You have to be able to control the prices and you have the insiders making money but the investors are not going to make money.
The Canadians don’t buy stocks until they’re up at the very top and then they lose all the money, and finally when the market’s all the way at the bottom the Canadians begin selling because they can see a trend, and then they miss the upswing.
“J” IS FOR JUNK ECONOMICS
“It begins as a dictionary of terms just so I can provide people with a vocabulary. The vocabulary that is taught to students today, used by the mass media and government spokesmen, is basically a set of euphemisms. Almost all the words we get are kind of euphemisms to conceal the actual dynamics that’s happening. For instance, “business cycles”. Nobody in the 19th century used “business cycle”. They spoke about “crashes”. They know that things go up slowly and then plunge very quickly. It was a crash, not the sine curve you have in Josef Schachter’s business cycle. A cycle is something that is automatic, and if it’s a cycle then you’d think “oh, okay, everything that goes up will come down and everything that goes down will come up, just wait your turn.” And that means you should be passive. That is the opposite of everything that’s said in classical economics in the progressive era, when they realized that economies don’t recover by themselves”.
“You need the government to step in, you need something exogenous, as the economists say. You need something from outside the system to revive it.”
This idea of the business cycle analysis is, somehow you leave out the whole role of government. If you look at neoliberal and Austrian theory, there’s no role of government spending or public investment. And the whole argument of privatization, for instance, is the opposite of what was taught in American business schools in the 19th century.
The first professor of economics at the Wharton School of Business, Simon Patten, said public infrastructure is a fourth factor of production but its role isn’t to make a profit. It’s to lower the cost of public services and basic inputs to lower the cost of living and cost of doing business to make the economy more competitive.
“The privatization of this adds in interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions, and obviously bills all of these financialized charges into the price system and raises the cost of living and doing business.”
MORE ON FIRE ECONOMICS
We’re going into a debt deflation and the key is to look at debt. If the economy has to spend more and more money, then the reason he economy isn’t recovering isn’t simply because this is a normal cycle.
“It’s not because labour is paid too much, it’s because people are diverting more and more of their income to paying their debts, so they can’t afford to buy goods.”
Markets are shrinking, so real estate rents are shrinking, and profits are shrinking. Instead of using earnings to reinvest, hire more labor to increase production, companies are using their earnings for stock buybacks and dividend payouts to raise the share price so that the managers can take their revenue in the form of bonuses and stocks and live in the short run.
“They’re all setting up to take the money and run, leaving the companies are bankrupt shells, which is pretty much what hedge funds do when they take over companies.”
The financialization of companies is the reverse of everything classical economists were saying. They can get wrap themselves in this cloak of classical economics by dropping history of economic thought from the curriculum. Following the banks and the Austrian school of the banks’ philosophy, that’s the road to serfdom. That’s the road to debt serfdom.
“It lets universities and its government be run by the neoliberals, and they’re a travesty of what real economics is all about.”
Abstract by: Annie Zhou: a2zhou@ryerson.ca
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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