Stocks and Precious Metals Charts - A Rising Tide of Whatever - Option Expiration Tomorrow

 

"Stock prices have reached what looks like a permanently high plateau.  I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted.  I expect to see the stock market a good deal higher within a few months."

Irving Fisher, Ph.D., Oct. 17, 1929 

 

"We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices." 

Goodbody and Company, The New York Times, October 25, 1929 

 

"This is the time to buy stocks.  This is the time to recall the words of the late J. P. Morgan that any man who is bearish on America will go broke.  Within a few days there is likely to be a bear panic rather than a bull panic.  Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years." 

 R. W. McNeal, NY Herald Tribune, October 30, 1929 

 

"America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years.  On this basis we now have three more years to go before the tailspin." 

Stuart Chase, NY Herald Tribune, November 1, 1929 

 

"If you're going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it." 

Charlie Munger "

 

"Life is a school of probability." 

Walter Bagehot 

 

That last quote is the money quote.  No one can predict an improbable event like a crash. 

Unless you have real time access to critical insider information perhaps.

There are far too many variables, and too many degrees of freedom for the powers that be in the regime of a fiat currency and an oligarchical political structure in campaign funding.

But there are periods of increasing risk, even for lower probability events.

And if the Fed keeps saving the one percent and their Banks, and letting Main Street fend for itself, then stagflation becomes a more likely outcome, even though it is an economic distortion of the first order.

But, with no disrespect to Mr. Charlie Munger, unless you are part of the one percent, expect to be told to 'suck it up' if half of your savings evaporate.

Do not let greed overwhelm your common sense, no matter how persuasive the siren songs of easy money may be.

If you still had any doubts, this recent and pervasive scandal of insider trading at the Fed demonstrates how rotten and inefficient and rigged for the benefit of a few that the existing 'market' economy has become.

Stocks were off to the races, as fear was shed and greed became the theme of the day for traders.

Gold rose, and silver rose even more, rising the wave of fearless beta.

The Dollar fell slightly, slipping off the 94 handle.

The VIX dropped through its moving averages on an upswelling of exuberance.

The root cause of these supply chain disruptions are fragile operational systems driven by self-serving greed, the growth of behemoth corporate monopolies, and reckless, short term management.

Stock option expiration tomorrow.

Have a pleasant evening.

 

 

 

 

 

 

 

 

 

 

Stocks and Precious Metals Charts - The Recovery™ - Bare Ruined Choirs

'Bare Ruined Choirs' - Detroit, Michigan

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.  By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. 

The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth."

John Maynard Keynes


"In reality high profits tend much more to raise the price of work than high wages."

Adam Smith


"That time of year thou mayst in me behold
When yellow leaves, or none, or few, do hang
Upon those boughs which shake against the cold,
Bare ruined choirs, where late the sweet birds sang."

William Shakespeare, Sonnet LXXIII

The FOMC increased the target range for its benchmark interest rate by 0.25% to a range of 1.75%-2%.   There was no dissent among the eight voting members.

In its statement the Fed said the economy is growing at a 'solid rate,' a change from its May statement that the economy was growing at a 'moderate rate.'   They eliminated their language about policy being 'accomodative' for some time, and said that 'recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.'

Fed officials thank that monetary policy is near the interest rate at which the economy would experience full employment and price stability, which the Fed has defines as 2% inflation.

The Fed’s statement also includes a summary of economic projections, which are economic, labor market, and interest rate forecasts from Fed officials.

The Fed raised its outlook for growth and inflation this year, while lowering its expectations for the unemployment rate.

The dot plot now shows most Fed officials believe that two additional rate hikes are coming in 2018, bringing the year’s total up from three to four.

In other words, The Recovery™ is alive and well.

In the press briefing, Chair Powell said that the Fed is keeping an eye on non-financial corporations and households, and see no real problems with either with regard to debt and leverage there.

Are you kidding me? The average American working household is living paycheck to paycheck, with almost no cushion to cover a myriad of common incidents that occur in life that can quickly become personal tragedies.

I see no reason yet to change my longer term forecast of economic stagflation to be resolved through exogenously motivated systemic changes, prompted perhaps by broad rejection of the status quo and expressions of civil dissatisfaction reminiscent of the late 1960s.

Stagflation is such an unnatural economic outcome that it takes a remarkable dedication to policy errors and self-deception to achieve it.  And as surprising and utterly improbable an outcome it seemed back in 2005, it sure seems more likely now given what the Fed and fiscal authorities have done.

And it is still improbable.   But if stagflation does come, I am fairly confident that the establishment and their technocrats will blame it on Trump and his trade policies.    That I think is almost a sure thing.  The credibility trap would demand it.

Keep an eye on the yield curve.

Based on this more hawkish perspective gold and silver slid and then recovered and finished marginally higher. Silver took the 17 handle and gold at 1300. The dollar drifted a little lower.

Stocks gave up much of their early gains of the day to finish lower.

Need little, want less, love more. For those that abide in love abide in God, and God in them.

Have a pleasant evening.

Scholes Sees Stagflation Coming, Suggests Safety To Be Found In Assets Like Gold and Silver

"But never a truth has been destroyed;
They may curse it, and call it crime;
Pervert and betray, or slander and slay
Its teachers for a time.
But the sunshine aye shall light the sky,
As round and round we run;
And the truth shall ever come uppermost,
And justice shall be done."

Charles Mackay

A banquet of consequence is coming, but I am afraid that justice is taking a more circuitous route, thanks in large part to the credibility trap. And the masters of the feast never seem to be around to pick up the check for their revels.

Myron Scholes, of the Black-Scholes Risk Pricing Model, said in an interview from the Milken Conference this morning that stagflation is the most likely outcome for the economy.

Stagflation! And what did Myron suggest that people invest in to protect themselves? Gold and silver, among other hard assets.  He thinks that stocks are due for a decline.

Stagflation is coming, so buy gold and silver to protect at least some of your wealth. Where have we heard that forecast before?

I think a forward thinking person, looking at the nature of the Fed's serial policy errors and the economic abuses that the monied interests have been inflicting on the real economy for quite some time, could have seen this outcome coming some years ago.

And some did.   But it is nice to see the models catching up.  The only surprise is that it has gone on as long as it has.  Never underestimate the venality of unscrupulous greed, and the power of thinking in herds.

And this comes a day after Ken Rogoff has suggested that the emerging markets invest their surpluses in the safety of gold! Which of course any but the most casual observer knows very well that they have been doing, and in size, for some time.

So there we have two major economic thinkers coming out for gold and silver as safe havens this week. One might be excused if they wonder if these are not statements being made ahead of some event to protect a sage's derrière.

There is one major hurdle, however, to executing that strategy to protect yourself by buying precious metals, as depicted in a single chart of a key market factor below.

A More Ominous Note May Be Heard in the Global Bond Rout

I was only tangentially aware that there was anything that could be called a 'global bond rout' since I do not follow the bond markets much these days.

But I found this theory below to be an interesting hypothesis, because the state of global growth, and the slide into a secular stagnation in the developed Western economies in particular, is of keen interest to me. If a major market like bonds is seeing the same thing then this would indeed be noteworthy.

It would eventually result in a stagflation, as persistent money printing and competitive devaluations with no resulting organic economic growth might eventually find some inflationary traction, even if it was a break in international monetary confidence, despite the ongoing stagnation in real growth caused by policy errors.

Whatever the cause of this global bond rout, or any other trouble approaching in the gathering storm, I am sure the public will be the last to find out.

"There is a growing concern that the extreme levels of wealth and income inequality here and abroad are creating a permanent, rather than temporary, rate of tepid economic growth worldwide.  This translates into a future where governments are forced to issue ever more debt to plow into fiscal spending to prevent their economies from lapsing into deflation and, potentially, a depression.

Markets trade on anticipation of where economic data will stand three to six months down the road. The big selloff in sovereign debt is telling us that global investors see major economies mired in the hangover of the 2008 crash indefinitely with deficit spending on infrastructure soon to replace Quantitative Easing (QE) as the new monetary tool to ward off deflation...

The global rout in sovereign debt markets is a collective epiphany that we’re six years and counting from the 2008 crash and we’re still on central bank life support."

Read the rest of this at Wall Street On Parade.

Stiglitz: Why Western Capitalism Has Been Failing Since 1980

As I had written some time ago in the The Fall of the American Republic: The Quiet Coup:

"I am not so optimistic that this reform is possible, because there has in fact been a soft coup d'etat in the US, which now exists in a state of crony corporatism that wields enormous influence over the media and within the government.

To be clear about this, the oligarchs are flush with victory, and feel that they are firmly in control, able to subvert and direct any popular movement to the support of their own ends and unslakable will to power.

This is the contempt in which they hold the majority of American people and the political process: the common people are easily led fools, and everyone else who is smart enough to know better has their price. And they would beggar every middle class voter in the US before they will voluntarily give up one dime of their ill gotten gains.

But my model says that the oligarchs will continue to press their advantages, being flushed with victory, until they provoke a strong reaction that frightens everyone, like a wake up call, and the tide then turns to genuine reform."

 

The article which I wrote was based on the insightful and largely ignored work by renowned economist Simon Johnson called The Quiet Coup.

 

This lecture by Stiglitz below is a little 'wonky' and uses some terminology which may be unfamiliar.

Nevertheless if you listen to it and just try to capture the main points of his discussion it will be worthwhile.

 

His basic premise is to ask why capitalism has shown a tendency to stagnation since 1980 in the United States and other parts of the West.

 

I am, as you know, an adherent to the belief that there has been a soft coup d'état in the US.  One can always quibble about the exact dates, but that is of less importance.   I have said it was shortly after Greenspan's 'irrational exuberance' speech, although the stage was certainly set for this during the 1980's with the rise of the efficient markets hypothesis, the assumption of rational wealth optimizers in the markets, and of course, the laughable supply side economics which are the old trickle down canard in drag.

 

The point, rather, is to understand what has happened, to continue to shine a light on it, and to hope that Simon Johnson is correct, that the overreach of the 'winners' will eventually provoke a reaction. 

 

Quite frankly I had thought it would have come by now.  One can rarely go wrong betting on the power of apathy and momentum, and the persistent greed of the sociopaths and their enablers.

 

After all, in the aftermath of a tragic derailment of the flagship train line in the US from Washington to Boston that could have been prevented by continuing investments in fundamental railroad infrastructure, the House of Republicans have voted to further slash Amtrak funding by $260 million. 

They are instructed to hate anything that benefits the public without putting an abundant stream of income into the pockets of their corporate money masters.  This explains their virulent animosity to Social Security, public transportation, public healthcare, public education, public infrastructure, consumer protections, environmental laws, safety regulations, product safety measures, and any sort of financial regulation that inhibits the greed and power of the Banks.

And we should be ashamed for continually standing quiet in the face of such pathological incivility.

 

But I can almost guarantee that if this crash had been the result of some sort of despicable act of terrorism for example, the public coffers would already be wide open, flowing with a Niagara of funds for homeland security and the militarization of domestic law enforcement.   Millions for the corporatized state, but little or nothing for the people.

 

I am increasingly concerned that, as has happened so many times in the past, the status quo will greet this eventual reaction for reform, justice, and equality with repression and even draconian measures to maintain what they perceive as their rightful place and power. 

 

Like apathy and momentum, it is also difficult to underestimate the self-delusion and overreach of sociopaths who would be as gods, even if they are gods of the damned.

History is replete with examples.

 

Deflation, Hyperinflation, Stagflation, and Where We Are Going

 

This is a repost of a column from four years ago almost to the day.

This is where I make the case most explicitly for the stagflation forecast I made in 2005.

Although I add one parenthetical note and some underlining for emphasis, otherwise I did not have to change a word.  I could have rewritten a few things a little more smoothly but at this point why bother.

I believe that things are playing out pretty much as I had thought with a few notable exceptions on the particulars.    The 'top down' approach to monetary stimulus favored by the Fed and their Banks and their politicians is fostering more inequality and slack aggregate demand while inflating select asset prices, a type of stagflation.  The 'inflation' component of that has not yet set in yet generally, but is certainly visible to anyone who uses incidental things like healthcare, higher education, and food. 

I think that the same dynamic is playing out in Europe and the UK.

It will end involuntarily in a social dislocation, or by a voluntary reform.  Since the oligarchs have apparently not yet been satisfied in their acquisition and looting, they believe that they can keep pushing the envelope for now.

One new area of thought for me now is how China and Russia and a few of their friends will attempt to implement a new regional currency and a global reserve currency with some inclusion or reference to gold, and perhaps silver.  That they are leaning into this area is to be found in their own words and actions.  

What I am struggling with is how they might do this without exposing themselves to currency manipulation and rigging, which is probably a lot easier to accept as a given now than it was in 2011, although it was certainly occurring before all these market rigging scandals broke.   I don't think a market was left untouched.

I suspect it will center around the terms for the exchange and the valuation or peg.  A misstep will open them to the predations of the global hedge funds and the Banks, and the status quo centered on the Dollar. 

One of the more interesting facets of this will be how this new monetary group deals with the bucket shops on the Hudson, that great price setting mechanism without a firm tie to reality.  I believe that recent developments are suggesting that they will make those markets as they are less relevant to the real world, which is precisely both their strength and their weakness. 

Their strength is that they may set price without the necessary reference to real world market supply and demand for surprisingly protracted periods of time.  And this is also their weakness, because with the right push in the right direction it will not take much to displace them since they do not have their feet firmly planted on anything substantial. 

The trick to be to throw them over without undue collateral damage to the real economy, a task that is not without some significant efforts.  If only the Banks would show the same forethought and courtesy when triggering their own financial crises.

16 April 2011

A Review on Where We Stand with Regard to Deflation, Hyperinflation and Stagflation

Well, the good news for everyone is that nothing seems inevitable here, that there is almost always a choice, but it is often wrapped up in a nice looking rationale, with all the compulsion of a necessity, for the good of the people.  Us versus them in a battle for survival and all that. 

And clever leaders on the extremes provide the 'them' to be dehumanized and objectified.  The leftist wishes to murder the bankers, and the fascist the lower classes and outsiders.  The extremes of both end up making life miserable for almost everybody except for a privileged few.

And so I reiterate that in a purely fiat currency, the money supply is indeed fiat, by command.

People like to make arguments about this or that, about how so and so has proved that the Fed does not or cannot do this or that, that banks really create money only by borrowing, that borrowing must precede this or that.

It's mostly based on a fundamental misunderstanding of what money is all about, with a laser beam focus on hair-splitting technical definitions and loquacious arguments more confusing than illuminating, lost in details.  In a simple word, rubbish.

Absent some external standard or compulsion, the only limiting factor on the creation of a fiat currency is the value at exchange of the issuers bonds and notes, and currency which is nothing more than a note of zero duration without coupon.

If I had control of the Fed, unless someone stopped me, I could deliver to you hyperinflation or deflation without all that much difficulty from a technical standpoint. The policy reaction of those who might be in a position to fire or lynch me is another matter.  The Fed not only has the power to influence money creation in the private banking system.  It has the ability to expand its balance sheet and take on existing debt of almost any type at will and at any price it chooses.

But that is the case as long as the Fed has at least one willing partner in the primary dealers, and the Treasury is in agreement. And even that requirement for a primary dealer is not all that much of an issue given the amounts of existing sovereign and private debts of which the Fed might avail itself for the forseeable future.

So at the end of the day, a thinking deflationist is almost reduced to the argument that 'the authorities will not allow it' or 'will choose deflation rather than inflation'  And this is technically correct. However, let us consider my earlier statement about those who might fire or lynch one for making a highly unpopular choice.

It is economic suicide for a net debtor to willingly engage in deflation when they have other options at their disposal, and especially when those decisions involve people outside the system.

That is not to say that the deciders could not opt for economic suicide, but the people designated to suffer and die for that choice and cause might not take kindly to it. Deflation favors the creditors significantly, and those creditors tend to be a minority of domestic elites and foreign entities.   Both the extremes, hyperinflation and deflation, are choices best implemented in autocratic governments.

There are those who observe that Franklin Roosevelt 'saved capitalism' by his actions in the 1930's and I believe they are correct. If one considers the various other outcomes in large developed nations to the Great Depression, whether it be Italy, Germany, Russia, or Spain, the US came out of it fairly intact politically. People conveniently overlook the undercurrent of insurrection and violence that was festering amongst the suffering multitudes, and the growth of domestic fascist and communist organizations.  There were several plots to overthrow the elected government by military means, although the history books tend to overlook them.

So it is really about making the best choice amongst bad choices. This is why governments choose to devalue their currency, either with quantitative easing, or explicitly against some external standard as the US did in 1933. Because when the debt is unpayable, it must be liquidated, and the pain will be distributed in a way that best preserves the status quo.

Hyperinflation and a protracted deflation are both very destructive choices. So therefore no rational government will choose either option.

They *could* have those choices imposed upon them, either by military force, political force, or by economic force. Economic force is almost always the cause of hyperinflation.

So you can see why a 'managed inflation' is the most likely outcome at least in the US. The mechanism has been in place and performing this function for the last 100 years.

The problem or twist this time around comes when the monetary stimulus does not increase jobs and the median wages, because of some inherent and unreformed tendency in the economy to focus money creation and its benefits to a narrow portion of the populace. The result of this is stagflation which although not indefinitely sustainable can be maintained for decades. 

Most third world republics are like this.  A vibrant and resilient middle class is sine qua non for a successful democratic republic, and this has strong implications for the median wage.  The benefits and the risks of growth and productivity must be spread widely amongst the participants.  Oligarchies tend to spread only the risks, keeping most of the benefits to themselves.

This is essentially the reasoning that occurred to me when I looked at the US economy and monetary system in the year 2000.

The one point I remain a little unclear on is how 'hard' the law is regarding the direct monetization of debt issued by the Treasury. I am not an attorney, but I am informed by those familiary with federal statutes that this is a gray area in the existing law but currently prohibited.  But it is easily overcome as I said with the inclusion of one or two amiable primary dealers who will allow the debt issued by Treasury to 'pass through' their hands in the market, on its way to the Fed at a subsidized rate.  For this reason, and for purposes of policy matters, and occasional economic warfare, countries may tolerate TBTF financial institutions with whom they have 'an understanding.' 

I have also come to the conclusion that no one knows the future with any certainty, so we must rely probability and risk management to guide our actions.

So really absent new data the argument is pointless, a matter of uninformed opinions. The dollar will continue to depreciate, (but the DX Index will be highly misleading - Jesse) and gold and silver and harder currencies appreciate (Well that one has gone sideways for now in this metals bear market - Jesse), until the fundamental situation changes and the US economic system is reformed.

I think there are other probable outcomes that involve world government and a currency war, and this also is playing out pretty much as I expected.  Fiat currency can take on the characteristics of a Ponzi scheme, whose survival is only possible by continuing growth until all resistance is overcome.

This is the conclusion I came to in 2000. I admit I was surprised by the Fed's willingness to create a massive housing bubble, and the willingness of the US government to whore out the middle class in their deals with mercantilist nations; their hypocrisy knows no bounds.

So that is the basis of much of my thinking and I wanted to take a moment to share it with you in a compact, highly condensed format.

I remain a little unsettled on the issue of hyperinflation, because there is the possibility that a large bloc of countries could join together to repudiate the dollar. Since so much dollar debt is held in these foreign hands, that is the kind of exogenous force that could trigger a bout of what might be termed hyperinflation. I don't see the dollar going to zero in this, but rather the dollar having a couple of zeros knocked off it, with a new dollar being issued. I have read John Williams case for hyperinflation several times now, and see nothing more compelling in it.

Indeed I think the reissue of the dollar with a few zeros gone is inevitable. It is the timing of that event that is problematic. It could be one year, or it could be fifty years. There is a big difference there for your investment strategy.

“One day you will go the ATM and the dollars will be Blue---not Green ---and you will get a few less than you expected.”

And yes, the government could just get medieval on your asses, and seize all the gold and silver, force you to take the value of the dollar at whatever they say it should be.  (As the MMT crowd has suggested - Jesse)   They could also seize all the farm land, all the means of production, and tell certain groups of people to get on freight trains for resettlement in Nevada. I think we can stipulate that governments can do this, and the people can accept it to varying degrees. If you wish to make this the dominant assumption in your planning then by all means.

For those who simply say "I disagree" or "Go read so and so he has proved this or that" I say that people believe lots of things, and can find data selectively to support almost any outcome they prefer,  But the market is the arbiter here, and the verdict so far is beyond all question. The Fed is doing exactly what they said they would do, so there should be no surprises. And they have more in their bag of tricks.

If there is new data I would certainly adjust my thinking but absent that I now consider this settled to my satisfaction, and wish to turn instead to more thinking on what changes need to occur to prevent the system breaking down, and restoring it to some semblance of reasonable functionality.

Stagflation Watch: Philly Fed Misses By a Mile

I try not to react to a single month's number, and instead keep an eye on the trend.

Still, the Philly Fed came in at 18.5 versus a consensus expectation 33, and that is enough of a miss to make me spill my coffee. 

The taxes on the real economy from the unreformed financial sector and the gasoline spike are taking their toll.  There were also supply chain disruptions associated with the Japan earthquake that may have played a part.  The price paid section of the report showed rising prices.

The data are looking and quacking like stagflation to me.  And I think stagflation is the result of an exogenous shock or egregious policy error.  I'll take that second door, Alex, for a lower 90 percent of the public strangled by corrupt fiscal and monetary policy, and unfortunately, their own gullibility.

Let's see how the trends continue to develop.

SP 500 and NDX Futures Daily Charts

Stock futures are moving sharply lower after hours based on reports such as this: US Calls Radiation 'Extremely High' and Urges Deeper Caution.

The emphasis was clearly on the risk in Japan today. The Middle East situation continues to deteriorate.

The PPI and import prices are rising at a rate that suggests inflation, and continuing sluggish growth in GDP suggest stagflation is developing.

Stagflation, when not caused by an exogenous event such as occurred in the 1970s with the oil embargo, is the result of an obvious policy error in fiscal, public, and monetary decisions.

It takes an unusual set of circumstances to create stagflation. Before the 1970's economists used to say it was not possible.

Therefore it is a tribute to Obama's Wilsonian dithering, Bernanke's general spinelessness, and the Congress' rapacious venality that they will preside over stagflation's resurgence, without the scapegoat of an oil embargo to blame.  They are presiding over the wholesale looting of a generation, and abetting the tranfer of that money and the future prosperity of the public to a wealthy few, their real constituency, in the manner of an oligarchy or crony capitalism. 

Here Is Why the Fed Cannot Simply Continue to Inflate Its Way Out of Every Financial Crisis That It Creates

The return on each new dollar of US debt is plummeting to new lows according to figures from the Federal Reserve.

The chart below is from the essay, Not Just Another Greek Tragedy by Cornerstone.

I have been watching this chart for the past ten years, as part of the dynamic of the sustainability of the bond and the dollar as the limiting factor on the Fed's ability to expand the money supply.

The ability to expand debt is contingent on the ability to service debt. If the cost of the debt rises over the net income of the country's capital investment, or even gets close to it, the currency issuing entity is trapped in a debt spiral to default without a radical reform.

In other words, if each new dollar of debt costs ten percent in interest, largely paid to external entities, and it generates less than ten cents in domestic product, it is a difficult task to grow your way out of that debt without a default or dramatic restructuring.

So we are not quite there yet. But we are getting rather close on an historic basis. Without the implicit subsidy of the dollar as the world's reserve currency it would be much closer.

As it is now, this chart indicates that stagflation at least, rather than a hyperinflation, is in the cards for the US. But the trend is not promising, and the lack of meaningful reform is devastating.

A 'soft default' through inflation is the choice of those countries that have the latitude to inflate their currencies. Greece, being part of the European Monetary Union, did not. The US is not so constrained, especially since it owns the world's reserve currency.

The economy is out of balance, heavily weighted to a service sector, especially the financial sector which creates no new wealth, but merely transforms and transfers it. With stagnation in the median wage, and an historic imbalance in income distribution skewed to the top few percent, with the banks levying de facto taxation and inefficiency on the economy as a function of that income transfer, there should be little wonder that the growth of real GDP is sluggish in relation to new debt.

Or as Joe Klein so colorfully phrased it, the elite have been strip-mining the middle class in America for the past thirty years.

Along with the 'efficient market hypothesis,' trickle-down economics is also a fallacy. This is why the stimulus program being conducted by the Federal Reserve, in an egregious expansion of its authority to conduct monetary policy, in subsidies and transfer payments to Wall Street is not working to stimulate the real economy. It merely inflates the bonuses of the few, and extends the unsustainable.

So obviously one might say, "The Banks must be restrained, and the financial system reform, and the economy brought back into balance, before there can be any sustained recovery.

Obama's Economic Policy Has Doomed the US to Stagnation - Or Worse

This was the very moment of Obama's failure, when he allowed Summers, Geithner and Bernanke to establish the principle of "Too Big To Fail" and set up a financial oligarchy at the expense of taxpayers. We would have expected this out of the Treasury under Hank Paulson, but to see this kind of policy error favoring Wall Street over the US taxpayers from a government elected on the promise of reform is inexcusable, a disgrace.

Be Prepared For the Worst - Ron Paul

Bloomberg
Stiglitz Says U.S. Is Paying for Failure to Nationalize Banks

Nov. 2 (Bloomberg) -- Nobel Prize-winning economist Joseph Stiglitz said the world’s biggest economy is suffering because of the U.S. government’s failure to nationalize banks during the financial crisis.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”

Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks’ share prices climbed this year.

U.S. Treasury Secretary Timothy Geithner, appearing yesterday on NBC’s “Meet the Press” program, said the country’s economic recovery hinges in part on banks taking more risk and restoring the flow of credit to businesses.

“The big risk we face now is that banks are going to overcorrect and not take enough risk,” Geithner said. “We need them to take a chance again on the American economy. That’s going to be important to recovery.”

President Barack Obama said on Oct. 24 that the nation’s lenders, supported by taxpayers in the crisis, need to “fulfill their responsibility” by lending to small businesses still struggling to get credit.

Companies such as Citigroup Inc. and Bank of America Corp. benefited from a $700 billion taxpayer-funded bailout package last year. In contrast, Obama said that too many small businesses are still short of money, adding that his administration will “take every appropriate step” to encourage banks to lend.

Bank Lending

“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse,” Stiglitz said. “What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.”

While the U.S. economy grew at a 3.5 percent annual rate in the third quarter, the first expansion in more than a year, the Columbia University economist said the recession is “nowhere near” its end, citing rising unemployment and weak demand.

The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system. (And it is an inherently unfair plan that creates even additional moral hazard by penalizing sound banking by forcing it to pay for reckless bank management. - Jesse)

Citigroup and Bank of America shares have quadrupled from this year’s lows in March.

Confessions of a 'Flationary Agnostic

I have no particular allegiance to either the hyperinflation or the deflationary camps. Both outcomes are possible, but not yet probable. Rather than being a benefit, occupying the middle ground too often just puts one in the middle, being able to see the merits in both arguments and possibilities, and being unwilling to ignore the flaws in each argument. But this is where reason takes me.

In a purely fiat regime, where a monetary authority has the ability and the willingness to monetize debt, there is NO mandated, no predetermined outcome for hyperinflation or deflation in the event of a credit crisis, unless that money is pegged to an external standard, which is ruled out by definition in a purely fiat regime.

In a credit crisis there is often a 'credit crunch' which is what was seen in the financial system when short term credit transactions seized up out of fear. This is not the same as a true monetary deflation which is a real contraction in the money supply, at the least. So far we have not seen this. And we may never.

Also, I would have to agree that the eventual fate of all fiat currency is failure and reissuance of a 'new' currency, due to the sustained erosion of a seemingly incessant, if gradual, inflation. This does not HAVE to be, but it is, as an outcome of human nature. Men will always and everywhere eventually succumb to the temptation of currency debasement, a free lunch, and so they cannot be trusted to manage a nation's affairs with the unrestrained keys to the Treasury.

And at the end of a currency's lifespan, there is quite often a bout of serious inflation that precipitates the reissuance and restructuring. How long this period of time can be no one can say.
That is the simple fact of it. The only limitation on the Fed's ability to inflate is the value of the dollar and the bonds; that is, their acceptability to 'creditors' who are willing to exchange goods and services with real value for paper.

And it should be perfectly clear that to choose a monetary deflation as a fiat policy decision for a country that is a net debtor would be bizarre to say the least.

Everything else is noise and generally ad hominem attacks. And the louder the noise, the less likely the person speaking knows anything about monetary systems.

I read that the Fed has taken on (a euphemism for 'monetized') roughly half of the Treasury debt issued in the second quarter of 2009. And it is quite likely that this is only a part of it, that a good portion of the rest of the debt was arranged for with other central banks, including those who are engaged in large scale currency manipulation of their own which is a de facto monetization on the road to default as China will be finding out most likely some day.

There is quite a bit of misunderstanding on the issue of deflation. As we have discussed before, deflation driven by slack demand is not uniform across product and service classes as it would be during a true monetary deflation. That is because goods and services vary in the elasticity of their demand.

Yes some prices will decrease, as one would expect, especially in those assets whose value has been inflated during a preceding bubble and discretionary items with a significant elasticity of demand.

But other items will remain stable or even increase in price, particularly essential items, and those provided from a sector with an oligopolistic framework.

Why? Because those who control access to essentials will seek to increase prices and 'rents' even during severe recessions to make up for lost revenue streams and profits in other areas of their business. Barring government intervention, every crisis has its profiteers.

So we have the phenomenon of banks being bailed out by the government, with public funds, not lending as they had promised, and greatly increasing fees and cutting services whenever and wherever they can on certain instruments such as credit cards, for example. Or other financial firms taking advantage systemic flaws and leverage and loopholes to game the markets, extracting what amounts to increased rents, a tax, on the nation's transactions, further dragging down the real economy.

Credit is not money. Debt is not money per se. These are things that are instrumental to the process of money creation and destruction.

If I 'owe you' ten dollars, are you ten dollars richer? Not unless you hold some sort of legally enforceable piece of paper to back it up, and even then there is a discount on the value of that paper which is repayment risk, the possibility that I might default on that arrangement.

Money is the sanction of the monetary authority on a particular debt arrangement. It is limited to only that which has been sanctioned, that which passes through the hands of the creditor "into" the money system. This may occur at the point of origin, the central bank, or one of its officially designated representatives, sanctioned by executive order or under the law created by the Congress.

One does not count a private debt obligation held by the creditor as money, in addition to the actual currency that was delivered to the debtor. That would be double counting, a misunderstanding of the accounting system. The debt held by the creditor is an asset, of varying liquidity and risk.

If you have an unused credit card with a $1000 credit limit, do you have $1000 dollars? Does that $1000 dollars exist anywhere? No, clearly not. You may act differently in having it, it may influence your behaviour, but it is not money.

Once you use that card, and 'borrow' $1000 on that credit line, then it does exist as money, and a corresponding liability of $1000 is created and is held by the bank as an asset.

Is that $1000 debt obligation being held by the bank the same as the $1000 in money that was created when you borrowed it and spent it, putting it into motion within the real economy? No. If anything we might have learned from this credit crisis should sink in, the value of collateralized debt obligations, a collection of assets on a variety of instruments, is deeply affected by risk.

This is why a private debt obligation cannot be money, because it is not significantly riskless and is more an asset. Anything that bears a significant risk of default that is not tied to the full faith and credit of the central monetary authority is not money. It is a product, some proxy for money.

Is the savings deposit in excess of FDIC at my local bank 'money?' Yes, but not of the same quality as cash in my pocket. That is why there are a variety of money supply figures.

Is the reduction of debt directly correlated to the levels of money in the nation's monetary supply? It depends on how it is accounted. The debt can be written off, and no 'money' is destroyed per se but the bank will take a writedown on assets. We are seeing this in action today, as vast amounts of CDS and MBS are devalued on the books of the banks.

We make a distinction obviously between the existence of the money itself, and the means or ability to create money through a particular process, which can itself be impaired, without a reduction in the aggregate supply of 'money' depending on how you account for it.

Here is an interesting chart. It clearly shows the precipitous dropoff in commercial lending, and the actions of the monetary authority and the government to step in and support lending, primarily in the programs of the Fed.



This lack of productive economic vigor is impairing the ability of the Fed to maintain an organic growth in the money supply. But it does not stop it. They have some limitation or impairment in their ability to manage the money supply, because of the slack demand in the economy and the loss of the aid of the 'money multiplier' and the moribund velocity of money. The money that is created by the Fed without a corresponding increase in economic activity is 'hot money' that is particularly dangerous from an inflationary perspective.

Here is an interesting paradox. At a time of slower growth rate of money supply, many might think that this is 'good' for the dollar, because less dollars means more value for each dollar, right? In essence, this is one of the major tenets of those called 'deflationists.'

First, there are not less dollars. The growth rate of dollars is slowing but as one can see, this is a relative thing historically.









But here is the key point.

The growth rate of dollars is slowing at the same time that the 'demand' for dollars, the velocity of money and the creation of new commercial credit, is slowing. GDP is negative, and the growth rate of money supply is still positive, and rather healthy. This is not a monetary deflation, but rather the signs of an emerging stagflation fueled by slow real economic activity and monetization, or hot money, from the Fed. The monetary authority is trying to lead the economic recovery through unusual monetary growth. All they are doing is creating more malinvestment, risk addiction, and asset bubbles.

Money supply and the rate of money supply growth is a confusing topic, primarily because lots of commentators twist it and split hairs about it to make points, without really caring to explain what is actually happening to those who are not specialists. 'Experts' hide behind terminology to obfuscate the situation to support particular policy initiatives under a cloud of fear, uncertainty and doubt. Despicable.

We have not written it out and worked the details yet, and the lags and expectations are always a significant issue, but generally the growth in the broad money supply should bear a positive relationship to the growth rate of real economic activity, with the appropriate lags. It ought not to lead it or lag it artificially except in extreme circumstances. Using money as a 'tool' to stimulate or retard economic activity is a dangerous game indeed, fraught with unintended consequences and unexpected bubbles and imbalances, with a spiral of increasingly destabilizing crises and busts. The Obama Administration bears a heavy responsibility for this because of their failure to reform the system and restore balance to the economy in any meaningful way. Whether it is cowardice, ignorance, or corruption is difficult to judge, but it is a failure without regard to motives.

What makes matters worse is that given the cumulative years of government 'tinkering' some of the key economic measures are hopelessly spoiled. The Consumer Price Index is probably the best example as is shown at Shadowstats. Consumer inflation is a key problem because it is used, as the chain deflator, in calculating real GDP, the basic measure of economic activity in a nation.

And so after the cumulative years of financial engineering by the government and the Federal Reserve, here we are today, caught in an ugly cycle of boom and bust, with an outsized financial sector, a government controlled by the money interests, and a productive economy in a systemic decline.

And this is why we say:

The banks must be restrained, and the financial system reformed, and the economy brought back into a balance between the productive and administrative sectors, before there can be any sustained recovery.