Special Guests: Charles Hugh Smith – OFTWOMINDS.COM; Rick Ackerman – rickackerman.com

Charles Hugh Smith is an American writer and blogger. He is the chief writer for the site “Of Two Minds”, which started in 2005. His work has been featured on a number of highly acclaimed sites including: Zerohedge.com., The American Conservative and Peak Prosperity.

Rick Ackerman has professional background including 12 years as a market maker on the floor of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader. Rick Ackerman is the editor of Rick’s Picks and a partner in Blue Fin Financial LLC, a commodity trading advisor.

Co-founder of The Financial Repression Authority, Gordon T. Long has an in-depth discussion on the current financial situation with Charles Hugh Smith, of OfTwominds.com and with Rick Ackerman, trader and forecaster of Rickackerman.com.

THE OUTLOOK ON QUANTITATIVE EASING

Rick:

“I’ve been shouting from the rooftops that the fed will never raise interest rates.”

If you want to find out if QE is working the first person you have to go to is the retiree. The whole idea of stimulus should have been refuted simply by the fact that savers have been cheated for so long.

Charles:

They may go ahead and do the quarter point rates increase because they have built up so many expectations to that. They will need to do this to create the allusion that the economy is recovering or else it’s robust.

Gordon:

The market may be a key driving factor, not because of the wealth effect; but because of collateral.

THE STATE OF JAPAN:

Charles:

“The Juggernaut of deflation is so huge now, that there isn’t going to be any time to react. Keep a shoebox full of cash because on that day we might wake up and the banks won’t be open, we will need that cash.”

I don’t see the possibility of massive inflation. The only viable way of getting money into the system is to borrow it into existence.

Japan, is a developed economy that has been in a deflationary setting for almost 25 years now. We can see what they’ve done and what effects it has. They have attempted to stimulate their economy by improving roads and infrastructure. But it has not worked. Japan refuses to cleanse their financial system to allow real investment so they have consequently brought in mal-investment with borrowed money.

Rick:

Japan had something over the last 20 years that we didn’t have, and that is us. Japan has a global economy to export into; we were the buyer of last resort.

NEGATIVE INTEREST RATES

Rick:

“If you can extrapolate a somehow positive benefit from negative interest rates, where would this benefit be and how long would it last?”

The idea is if people can no longer park money anywhere, they can only spend it or invest it, we have to ask, where are they going to invest or spend it? It’s inconceivable that money can find itself into somewhere in the economy that would promote growth and economic health.

Charles:

In a current example of negative interest rates we see what is happening with Sweden who is actively pursuing negative rates. The net result is that it is taking their housing bubble and inflating it even further. Basically it is pricing everybody out of housing and creating a credit bubble.

COLLATERAL GUARANTEES

Gordon:

“It is in the cards, in the middle of the next crisis.”

We have an approximately $500 trillion swaps market that is underpinned with collateral. So if bond prices were to drop it would be a horrendous situation. We were able to stop the 2008 crisis, we did not fix it we only stopped it. Now it will be a global issue, and the central banks will be forced to come in and pay attention to these collateral values. We have a huge pool of bond ETF’s that have exploded in the past few years, somebody has to sell these bonds but they are not easily transferred. The central banks will have to intervene in a massive way. I believe many people are betting on this, and are therefore taking risk adjusted positions.

Rick:

“We are really talking about a quadrillion dollar bubble.”

Much of borrowing and leveraging shifted into rehypothecation. It occurred mostly in London markets that were more unregulated than US markets. So when we had the real estate bust in 2008 we needed something to pledge as collateral.

When you look at the entire quadrillion dollar enchilada, somebody may say the actual size of the bubble is only several hundred trillion dollars. When in reality the gross amount is something everyone involved in the daisy chain thinks they have a claim on a particular asset.

Charles:

We must own real assets, and have no debt. Whatever financial wormhole we are going to go through,we must own the right tools, because the tools will still exist after we get through the wormhole.

THE INDIRECT EXCHANGE:

Regarding a recent show with Warren Buffet, and Ty Andros, Editor at Tedbits Newsletter,

Warren Buffet so masterfully utilizes the indirect exchange. He takes paper, which is his entire insurance side of business and plows it back into real hard assets that will sustain themselves at a fair price. Buffet has don’t this so consistently for so many years and that is why balances; paper products (insurances, bonds, and structures against real assets). Buffet has certainly been a consistent winner without question.

Rick:

Buffet has also resisted the temptation of going after easy money. His money is not in Uber, Dropbox, and Instagram etc. It’s simple to see that it is not going to end well, not only for the companies but for the whole city, if I were to short any city in this country it would be San Francisco. Everything is so pumped up in that city because there are companies that hire these people that are extremely overvalued.

Buffet has demonstrated amazing restraint and discipline for sticking with the nuts and bolts, instead of going after the alluring high attraction companies. He has found real businesses with real products that have a sustaining capability to survive during good times and bad.

Charles:

Raising the issue of risk, how do we deal with the kind of systemic global risk that we currently have? Risk is extremely misrepresented to the average middle class American. We are trying to help people make a realistic assessment of the global risk they are engaged in by having a 401k that is involved in these risky financial assets.

CLOSING REMARKS

Rick:

“You can’t look at what’s in prospect as hypothetical, if you don’t think there is going to be a collapse then you don’t understand the problem.”

There is no way we can continue to muddle on, for one its taking a lot more debt to create the dollars’ worth of GDP growth at the margin. We are really going to face a day of reckoning. The most important thing is for us to be resourceful and ready for when it comes.

Charles:

“This enormous supernova of debt is going to implode and whatever is left will not be a financial instrument.”

Gordon:

“Crisis is nothing more than change trying to happen.”

We have so many global imbalances. We have political, economic, and financial systems that are not correct, we are still running from a Bretton Woods; post WWII model. And during this process, mal-investment, lack of price discovery and mispricing are rampant.

But on the flip side, for those who have prepared themselves for this storm, I think the world is going to see its greatest years. The advancements in technology, and so many other endeavors is staggering.  !5-25 years out will be an incredible time for the world but meanwhile we are going to go through some rough times, but there will be winners and there will be losers, and the winners are always the ones who prepare.

Abstract written by Karan Singh karan1.singh@ryerson.ca

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.

Article explaining recent research paper to address the big problem with forced negative interest rates – depositors would see the numerical value of their bank deposits go lower & withdraw the cash to put it into their safety deposit box or to store it at home .. Miles Kimball, professor of economics at the University of Michigan, explains that flight to cash could be prevented in the latest economic review from the National Institute of Economic and Social
Research (NIESR) .. the basic idea is to attribute a negative interest rate for banks to accept physical cash if you deposit the cash into your bank account & to set this negative rate higher (more negative) than the negative interest rates you are getting at the bank account .. that way you are not only encouraged to spend your money before you have less of it, but also to bring in your physical cash as quickly as possible to the bank before it losses even more value faster .. “Paper money would be depreciating in value more quickly than electronic money. In effect, paper money would have higher inflation than electronic money.”

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.

Vulpes Investment Management Founder Stephen Diggle goes through the math to explain the challenges for investing sufficient capital & generating enough yields for retirement .. how do you get yield in today’s environment of repressed interest rates & quantitative easing ., on concerns these investments are illiquid: “These sorts of solutions to the Yield Problem do have the major disadvantage of being illiquid and that is a real consideration. However, well run endowment and pension funds are supposed to have a clear idea of the ‘long term liability matching’ which they exist to do, so while a cash reserve of liquid assets would always be prudent, it’s hard to see how that safety amount would ever exceed 10-15% of assets. Liquidity is a nice thing to have, and usually better than illiquidity (although some make an argument that a long term commitment when enforced produces better returns); but when the price of liquidity is investment failure; as we would see the whole sovereign bond market, it is a crutch that must be foregone. In the real world no-one will have a pension fund comprising of one alternative asset, but the returns above are not fictional. We believe they are distinctly possible both for the pension disaster of traditional assets and the transformational impact of high yielding alternatives. We’d go further to say that it is almost inevitable that the coming crisis in retirement will lead pension funds of the near future into many more alternative assets, agriculture and real estate included.”

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.

“Financial repression is not a conspiracy theory, it is rather a collective set of macroprudential policies focused on controlling and reducing excessive government debt through 4 pillars – negative interest rates, inflation, ring-fencing regulations and obfuscation – to effectively transfer purchasing power from private savings.” – The Financial Repression Authority

LINK HERE to our 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.

LINK HERE to the Article

“Financial repression is not a conspiracy theory, it is rather a collective set of macroprudential policies focused on controlling and reducing excessive government debt through 4 pillars – negative interest rates, inflation, ring-fencing regulations and obfuscation – to effectively transfer purchasing power from private savings.” – The Financial Repression Authority

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.

Essay by our strategic partner Charles Hugh Smith who explains the challenges and issues for Americans (applies also to Canadians and Europeans) to retire, especially when interest rates are repressed to virtually 0% by central banks to the point where it is difficult to get any yield out of savings. Is there a way to retire on little or no savings and little or no income?

OLYMPUS DIGITAL CAMERA

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.

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.

Special Guest: Ty Andros – CIO Sanctuary Fund, Publisher of “Tedbits”

FRA Co-Founder Gordon T. Long deliberates the Austrian School of Economics with Ty Andros of Tedbits Newsletter. Ty Andros began his commodity career in the early 1980’s and became a managed futures specialist beginning in 1985.Mr. Andros attended the University of San Diego, and the University of Miami, majoring in Marketing, Economics and Business Administration. Mr. Andros is active in Economic analysis and brings this information and analysis to his clients on a regular basis.

WHAT IS AUSTRIAN ECONOMICS?

“Austrian economics is just human behaviour, and common sense, and history.”

“But what’s happening is human behaviour, nonsense, and history. We are at a period where people have forgotten history and are doomed to repeat it. “

“Austrian school and capitalism are one in the same.”

“Austrian Economics is production of wealth, producing more than you consume. Meeting people’s needs and doing it in a superior manner; in other words, capitalism.”

The historical school, had argued that economic science is incapable of generating universal principles and that scientific research should instead be focused on detailed historical examination. The school thought the English classical economists mistaken in believing in economic laws that transcended time and national boundaries.

APPLYING AUSTRIANISM TO INVESTING

“You have to prey on paper.”

“The only real way the middle class will get to success is going out serving others and getting rewarded for it.”

“Austrian school is just history, common sense, and the production of wealth; everything else will flow from there. The reason middle classes cannot rise is somehow the public has gotten the idea that they are going to raise their lifestyle through the stroke of a pen at a central bank or other government bodies.”

THE INDIRECT EXCHANGE

“In today’s world economic growth is a function of a printing press; consumption presented as production.”

It is a situation in which goods, services, etc. are traded between two countries using the currency of a third country. Real wealth can only be created by growing it, mining it, building it, manufacturing it; being rewarded for providing more goods and services for less to consumers. What we have now is phony capitalism, which is more money for less goods and services, while consumer demand is being mandated by government planning and controlled by central banking.

EVENTS TO UNFOLD IN THE UPCOMING YEARS

“We are in a death event.”

“If you date interest rates going back 600-600 years, we have never once had a scenario where they were kept at zero for 6 years. What we have is a flat line; just like in any medical monitor a flat line is fatal.”

“The system is dead, we are just sitting there on the fumes and they can’t relight it because they have outlawed free enterprise capitalism, and wealth creation. Look at the health care system right now, it is just a leviathan. They went in there and wrote Obama Care for themselves and that’s how they became supporters. It was government sanctioned.”

“Just look at Japan, we are headed right there.”

“The long term the yield curve is going to invert, but it is going to invert near zero. There is no growth, the only growth there is, is just credit creation. To spurt credit creation they have to make it easier for people to borrow so people can miscalculate their returns.”

CURRENCY EXTINCTION

“Currencies expire when people wake up, the value that currencies hold are only values within people’s minds.”

There is absolutely no value in them. As long as they are perceived as having real worth, you can purchase real things; this is the indirect exchange. Money is a store of value because it is not pegged to anything, as long as this allusion is there; we are substituting it to grab a hold of real cash flowing assets.

THE LEVERAGE COLLAPSE

“The dollar is going down, and it is going to die; but it will be the last to die.”

“They really have people thinking that the dollar is a risk free asset, and it is not. It is a worthless junk bond.  Currencies don’t float, they just sink at different rates, and the sinking is managed by the BIS and the ECB, Bank of England, Bank of Japan etc. and they all mange the theft of remaining value with their printing presses.”

“The financial systems were given the keys to the castle. These economies are not run for the benefit of the entrepreneur; they are run for the benefit of the financiers. It is a game that the central banks have been playing since the 1600’s when the Rothschild’s went after the Bank of England. We are in troubling times and we need to be well informed. If you are an investor and you do it right, it will be the greatest time in history.”

Abstract written by Karan Singh karan1.singh@ryerson.ca

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: Chris Casey – Managing Director, WindRock Wealth Management

FRA Co-Founder, Gordon T. Long interviewed Chris Casey of Windrock Wealth Management on the concept of inflation and other applications of Austrian economics to investment theory.  Mr. Casey, an Austrian economist, is a frequent speaker and writer on macroeconomic topics and their related investment implications.

WHAT IS AUSTRIAN ECONOMICS AND WHY DOES IT MATTER?

The Austrian school offers the “most realistic interpretation” of society and economics according to Mr. Casey.  Gordon agrees in noting that “mathematical models are only as good as their assumptions.”  While equations and models may be useful as a construct to frame concepts, any social science cannot be scientifically tested due to the inability to control the countless variables at work.  As such, Mr. Casey prefers the Austrian approach which “looks at basic self-evident axioms as it relates to mankind in nature and then uses deductive reasoning to describe how the real world works.”  According to Mr. Casey, the unique Austrian explanations of inflation and the business cycle (recessions) have direct applications to practical investment ideas.

THE AUSTRIAN EXPLANATION OF RECESSIONS

Most mainstream economists believe recessions are inherent to capitalism since their repeated cycles largely began during the industrial revolution.  The Austrian school recognizes a different causation occurring at the same time: fiat money with or without central banking.  By artificially increasing the money supply through fiat money, interest rate levels are temporarily lowered.  This incents businesses and individuals to make investment decisions they would not otherwise have made: in short, malinvestments.  Recessions to liquidate the inevitably follow monetary mischief.

THE AUSTRIAN EXPLANATION OF INFLATION

The Keynesian school of economics has two theories of inflation which fail to comport with reality and are theoretically faulty.  Their “demand-pull” explanation requires full employment and full capacity in an economy, but Mr. Casey demonstrates that fails to account for a doubling of prices during the 1970’s during economic weakness.

The “cost-push” theory is equally wrong.  By blaming a particular price increase in a commodity such as oil for all price increases, it would have predicted pronounced inflation and deflation over the last 15 years as the oil price gyrated wildly.  In addition, it is theoretically faulty as more money spent on oil means less money is spent on other goods and services – which lowers their prices and renders the overall price level largely unaffected.

“Prices are merely a function of the supply and demand for money” states Mr. Casey.  More supply means dollars are worth less while higher demand lowers prices as people seek to increase cash balances by selling goods and services through lower prices.

WHEN WILL WE EXPERIENCE INFLATION?

Mr. Casey believes that “once we have another downturn, the Fed . . . will step right in.  Once we have that . . . we’ll really start to see the inflation take off.”

What will the Federal Reserve’s next move be?  They have other options besides another round of quantitative easing.  Mr. Casey notes they may stop paying interest on excess reserves held by commercial banks at the Federal Reserve, and they may also lower the reserve requirement which could have a pronounced and immediate impact on increasing the supply of money.

WHAT SHOULD INVESTORS DO?

“Timing is everything, so utilize investments which pay well now, but in an inflation will be a home run.”

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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: Doug Casey – Casey Research Personal Freedom Through Financial Freedom

FRA Co-Founder Gordon T. Long interviews Doug Casey on the different and emerging trends that are taking place in the U.S. Doug is an author, investor and founder of Casey Research.

On trends and changes in the U.S, Doug relates it to a “lush, comfortable and well maintained prison”. In his opinion th
e country is gradually degrading. He points out that the standard of living in other countries is steadily going up unlike before when the standard of living in the U.S was clearly ahead of others.

He agrees with Gordon on the fact that very soon people will be forced to retire outside of the U.S due to the rising health and medical costs. Doug points out this trend will only just increase because for years the current good standard of living being enjoyed by the U.S is a result of the heavy borrowing that has been taking place for years.

“When you take on debt, you are either mortgaging your future or you are consuming capital that somebody has saved in the past and lent to you to increase your standard of living now, but when you pay the debt you reduce your standard of living by more than that amount because you have to pay interest on it in addition”.

He predicts that when interest rates start going back up, things are going to get bad quickly, and he advises people to take precaution now by diversifying both politically and geographically while they can. He also recommends that people should acquire as many gold and silver coins as possible as it would be a great way to conserve capital.

“I don’t think in today’s high tech world, the government serves a useful purpose. There’s nothing that the state does that could not and would not be done better and cheaper and without coercion by the free market”.

“If you are the citizen of a country, the government considers you as its property this is why you are better of living in a country where you are not a citizen, and so they treat you as a guest to be cultivated as opposed to a milk cow that has to be milked”.

On the issue of people renouncing the U.S citizenship, Doug believes that this trend will simply keep on increasing. He likens this increasing exodus to what happened in the past, when the American predecessors left England in search of greener opportunities. He advises that Americans’ who value their freedom should look into getting dual citizenships.

“The quality of medical care is at least as good outside the U.S as it is in the U.S and it is much much less expensive”.

Doug believes that the popular belief held by most people, that the medical coverage you get when traveling the world is of a lesser quality as that in the United States is wrong. In his opinion you receive a cheaper and much better service.

Abstract written by Chukwuma Uwaga – chuwaga@gmail.com

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.

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.

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.

1. 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:

1. 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.

Special Guest: Michael Snyder – Lawyer, Author, Publisher – TheEconomicCollapseBlog.com

FRA Co-Founder Gordon T. Long interviews Michael Snyder on financial repression He is an author and publisher of the economic collapse, blog and other blogs.

FINANCIAL REPRESSION

On financial repression Michael prefers to look at it from the angle of who is doing the repression, which in his opinion is being carried out by the governments and central banks. He believes that markets work best when free market forces are allowed to play out without interference, and that the governments and central banks are anathemas to the market.

He says the area that has witnessed the greatest distortions as a result of outside interference are the emerging markets. He goes on to explain that the period of easy money and quantitative easing flowing into the markets caused a boom in the lending of money to emerging markets all over the world. As a result of these markets gorging on all this cheap money with low interest rates, a lot of debt has been accumulated, and most of that debt is denominated in U.S dollars.

As a result of a crash in commodity prices, the emerging markets are getting less for their exports and due to the reduction in quantitative easing, the dollar is increasing in value and its taking a lot more of their currency to service and pay these debts.

Michael noted that there is no easy way out from this, He believes that the current crisis will keep on getting worse especially as global economy is slowing down.

 “I think that what we are seeing already is just going to accelerate we are going to have emerging markets really struggle and this is carrying on into global trade”. This is a global problem created by a global bubble that was created by the Federal Reserve and others and so I don’t know that there is any easy solutions and in fact, what we are seeing now is just the initial stage of a crisis that is going to get much much worse”.

He expects that initially major financial institutions all over the world will get into trouble with some of them even failing resulting in the banks refusing to lend to themselves and us thereby causing a credit crunch or freeze, which in turn will bring economic activity to a standstill and as a result cause a short severe period of deflation.

“I believe we are  going to see financial crisis financial crash more intervention which is going to cause other problems, ultimately I believe we are going to see major financial intuitions all over the world fail, I believe we are going to see a loss of faith completely and entirely this time around in the central bank of the world and governments and I believe this is going to causes economic chaos around the globe in a scale we have never seen before in our times, and I believe this is going to be a tragedy that is going to play out over  years and it’s going to fundamentally transform our standard of living and the world around us as we move forward”.

PREPARATION

On what can be done to prepare for this eventuality Michael advises that as for the short term people should evaluate financial assets that could crash in value. He also advises a 6month emergency fund at the very least. On long term protection, he recommends gold, silver and precious metals as ways people can protect their wealth. As for a longer term of protection he suggests people should have supplies of food and supplies in the event of a long term emergency, as well as having some cash at home in the event of bank holidays or shutdowns. Finally he strongly recommends a greater level of self-sufficiency from the system as he believes that it is going to fail soon.

Abstract written by Chukwuma Uwaga – chuwaga@gmail.com

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.

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.

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.

Special Guest: John Butler, Amphora Commodities Alpha

FRA Co-Founder Gordon T. Long discusses the Austrian School of Economics with John Butler and how its methodologies can be applied to the current global economy. John Butler has 18 years’ experience in the global financial industry, having worked for European and US investment banks in London, New York and Germany.

Prior to launching the Amphora Commodities Alpha Fund he was Managing Director and Head of the Index Strategies Group at Deutsche Bank in London, where he was responsible for the development and marketing of proprietary, systematic quantitative strategies for global interest rate markets. Prior to joining DB in 2007, John was Managing Director and Head of European Interest Rate Strategy at Lehman Brothers in London, where he and his team were voted #1 in the Institutional Investor research survey. In addition to other research, he publishes the Amphora Report newsletter which appears on several major financial websites

THE AUSTRIAN SCHOOL OF ECONOMICS

“It is the no free lunch school of economics.”

The Austrian school believes that economics systems are ultimately information systems. Some of those systems use information more efficiently and effectively than others, and in particular systems of which authorities of various kinds meddle with the market. Authorities may do this by extracting capital from the market via tax rates or even by manipulating the money of that market through some sort of artificial interest rate policy.

“From the Austrian schools point of view, anything that impedes the free price information flow of an economic system will result in a sub optimal economic outcome.”

Without the rule of law, without the ability to strongly enforce property rights, without the ability to prosecute fraud, and various other legal frameworks; the Austrian economic model cannot work.

“Our goal is to make sure economic information flows as efficiently as possible within a solid legal structure.”

HOW THE AUSTRIAN SCHOOL CAN BE APPLIED IN INVESTING

Austrianism teaches us that the future is unpredictable. The economy is made up of the billions of people in the world, with each person making transactions almost every day. Each decision is an individual’s choice, and each decision, even the decision not to spend your money has some effect on the economy.

“Austrian school provides you a way to identify distortions, a powerful way that is caused by a fiscal and monetary policy set such as interest rate or fiscal policy manipulation. Austrians are able to look at these policies and be able to see how they are impacting the investment environment. This gives you a sense of where the distortions are. In theory you get an idea of where you should be overweight and underweight from an investor’s point of view.”

CURRENT EVENTS AMPHORA IS FOCUSED ON

“Currently we are seeing a general overvaluation of risky assets that has been caused by truly an unprecedented set of highly expansionary monetary and fiscal policies throughout most of the world.”

Income growth has not kept up; assets are expensive relative to incomes. So the correct strategy is not simply to short assets, which is dangerous; but if indeed they do look for ways to stimulate aggregate demand more directly rather than through the banking system.

The correct strategies to have today are those that will perform if incomes begin to catch up to asset prices, it could be asset prices declining towards incomes or vice versa. It is impossible to know which one is going to happen, but it is highly likely looking forward that a conversion of the two will happen.

POSSIBILITY OF NEGATIVE NOMINAL INTEREST RATES

“Policy makers have become almost pathological; they have a relentless attitude to make their policies work.”

“Problem with this is, once you get to this point, you can no longer question your original set of assumption. Austrian school of economics knows that the original sets of Keynesian assumptions that have gone into forming this unconventional and aggressive policy mix are themselves flawed. We are on this course where if it were left to run itself, policy makers will operation in these counter-productive directions because they will not question whether their assumptions are wrong.”

“Banning cash will prevent people from making even the simplest transaction in their own neighborhoods; it will lead to complete riot and chaos.”

“Putting a ban on cash is a terrible idea. It is terrible for them and for the economy as a whole. Sadly, with the way things are going, policy makers are going to teach everyone a very hard lesson about blindly accept anything the bureaucracy tells you to do.”

CENTRAL BANKS ROLE IF ASSET CORRECTION OCCURRED

“If you do get a major correction in asset markets that causes collateral problems in financial markets, the policy makers are out of options. The only thing they could do is begin capital controls”

Prevent investors being able to freely liquidate or withdraw funds from their existing investments. This of course is very anti-capitalist, very inti-market. It goes directly against everything that a free enterprise economy should stand for; but when you follow these policies you will eventually get to a dead end.

Abstract written by Karan Singh karan1.singh@ryerson.ca

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.

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.

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.

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.

LINK HERE to the Article & Video

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.