Sunday, February 25, 2018

Extremes in Unsound Money and Finance Will (Eventually) Lead to Catastrophe

We live in a time of utter and complete corruption of government, media, central banks and our political parties. They are corrupted and held hostage by moneyed elites who are manipulating money and government for their ends-- not yours.

Where we are today is due to utter failure of government and central banks, corruption of all elements of government and moral and intellectual decay of our population. We have a massive and expensive surveillance state, weaponized police and government departments, massive financial deficits and debt with nothing to show for it, bloated money supplies, a hollowed-out economy stripped of entire industries and well-paying jobs, corrupted and lying media outlets spreading nothing but political propaganda and persecution of Conservatives.

Everything in Washington is broken and failed. Nothing is fixed. Much of Washington is plotting to illegally and unconstitutionally overthrow the Trump administration and has been from day one. Despite all the spending, our infrastructure and military has decayed. Our government is interfering with and manipulating many foreign countries -- yet half of our nation is obsessed with a largely non-existent influence of Russia in ours. These people which include the previous administration have been risking war with a country that has 10,000 nuclear bombs. For what??

It's all become this way because we are told nothing but lies by politicians, corporate chieftains, and other elites that everything is fine even though it's obvious that everything is broken. Only Trump was able to say the obvious truth much to the delight of one-half of the nation who were tired of lies.

Our inner cities, mostly black and ruined by government failures and the resulting moral decay, are like burned-out hulks of a previously high-level civilization as if we're replaying some dystopian movie like Robocop or Planet of the Apes complete with murder, crime, gangs and massive decay. Our status quo is completely and utterly unsustainable.

We also live in a time of  nothing but massively unsound finance and banking thanks to the failures of our Central Bank and the corrupted government. Even our current concept of money is completely corrupted. It's as if no one alive even knows or remembers what sound money or sound finance is. Maybe that's why there are somewhat regular society-wide and world-wide crises happen about every 80 years as described in The Fourth Turning by Howe and Strauss. Eighty years is the length of a long human lifetime. After 80 years, there is no one alive who can remember the cause of the last crisis. Think about it. Our current crisis started with the crash of 2009 which is exactly 80 years from the last one in 1929.  Our current crisis is causing economic upheavals that is also causing social distress and unrest.

Since we're 10 years into a 20 year long crisis phase it also means that, in the next 10 years, we're facing total war and crisis that will threaten the survival of our nation and maybe even mankind itself. From The Fourth Turning:
..the next Fourth Turning ends in apocalypse – or glory. The nation could be ruined, its democracy destroyed, and millions of people scattered or killed. Or America could enter a new golden age, triumphantly applying shared values to improve the human condition. The rhythms of history do not reveal the outcome of the coming Crisis; all they suggest is the timing and dimension
Fourth Turnings end in total war, crisis and destruction. Interestingly, from Howe and Strauss' research, a grey champion often arrives to lead the nation through the crisis period. Surely, that grey champion is Donald J. Trump.

The last Fourth Turning ended with 65 million persons dead in World War II. How many will die in the next 10 years? Our current crisis might even end with a war against or succession from our own government. Our current government deserves to be vanquished so that we can start again. This is the only way to bring the country back to its founding principles and the restoration of the U.S. Constitution. It will require that you and I act with honesty, integrity, and honor during the coming struggle (war). Almost certainly there will financial calamity, hardship, system-wide failures and we will have to once again restore our country, sound finance, sound money and sound banking again from the ashes our proximate financial calamity.  After all, our status quo is completely and utterly unsustainable.

What Sound Finance Looks Like

Not long ago, banks used to be a place where savers put their savings and the banks, in turn, lent out this money out to borrowers. That saved money was a surplus from the saver's hard work and productivity.

For many periods of history, gold was money and money was gold, so growth in the money supply was limited by the quantity of gold mined or ~2% per year. Nations historically turned to gold as money because no government can be trusted. That's more true than ever. With the exceptions of wartime, money used to be generally limited even when it wasn't backed by gold --- it was limited by responsible and high-integrity bankers (and no central bank prior to 1913). As a result, the nation's labor productivity led to long periods of falling consumer prices and rising international exchange rates---giving consumers more spending power and prosperity (the opposite of today). Deflation was often the norm and that was a good thing for consumers and the country.

So, the nation's and world's money supply growth was limited for significant periods of history. This meant that the growth of debt was similarly limited to money saved. And there weren't trade and budget deficits--it just couldn't happen in a sound money regime. With sound money and sound banking, if a government spent too much and issued bonds (which takes scarce money out of the economy), it would cause interest rates to rise to attract more savings to re-establish equilibrium and crowd-out the private sector and immediately contract the nation's money supply (there was no "accommodation" of such pressures by central "money printing" to avoid the consequences of excess government spending ---like what is happening now all over the world).  Too much government spending used to cause adverse real world consequences, so we had built-in budgetary discipline---thanks to sound money.

If a nation imported too much, then that nation would find their gold reserves (money) leaving their country and slowing their economy and imports to correct the trade imbalance. This controlled international trade and financial balances.

Oh, the beauty of a sound money regime. It limited spending -- meaning it required financial and government spending discipline. It limited debt levels, it controlled and balanced international finances and trade. It's TOO good because governments often did away with it when the going got tough --usually when they needed to spend money to fight wars. Therefore sound money, if strictly maintained, even has the effect of preventing wars!

Where We Are Now

All of that is history.

In 1970, US debt was $275 Billion. It took 188 years to achieve that.  This past week alone, the government sold $258 billion!  In the past 6 months alone, US debt has exploded by $1 Trillion. And this is during "good times."

In 1971, Nixon ended the Post WWII Bretton Woods arrangement which ended any semblance of (gold-backed) sound money. As an immediate result, our national debt and inflation began to skyrocket. Central bank activism and "experimentation" increased as they tried to tame the increasingly unstable business cycle---that THEY caused!

The big banks have once again become highly risky hedge funds using your money to gamble with highly leveraged positions in risky derivatives (again) thanks to the repeal of Glass-Steagall. They act with impunity since they have the government's backing when they fail again. Just 10 years ago, the world had a financial near-death experience as derivatives failed, banks failed and markets failed. The world economy come to a halt as finance failed. And here we are again thanks to lobbying money and corrupted politicians. Remember, if finance fails then everything else fails and millions, even billions, of people may die as supply chains collapse, commerce halts, shortages develop, grocery store shelves empty and people begin starving. Longer term, infrastructure fails including even electricity and utilities. I know it's unthinkable, but that's how bad it could get.

Central banks, created to be a lender of last resort in panics, and were charged to control inflation. Now, central bankers are thoroughly dedicated to creating it!  And what's worse, inflation is already raging and they don't see it!! These people should be tarred and feathered and run out of town. Personally, I prefer public executions.

The size, cost and ineffectiveness of government has ballooned beyond belief. All of this has led to increasingly unstable business cycles and financial instability, wealth inequalities which favor those who hold securities, huge and chronic trade deficits and intractable international financial imbalances. Debt, deficits, financial and real inflation, repeated bubbles and the resulting instability (burst bubbles) and deep recessions have serially eroded our economy and culture. The result, in part, is that our society, our culture, our civic order, our work ethic, our moral bearings have all decayed and diminished. Our social contract has also been torn asunder.

From Credit Bubble Bulletin: "Now the world operates with a financial “system” devoid of limits on either the quantity or quality of “money” and Credit. Unlike a gold standard (or other disciplined monetary regimes), there is no mechanism to contain the creation of new finance. As such, traditional supply/demand dynamics have little relevance in the pricing of finance. Today’s contemporary financial apparatus – where central bankers largely dictate the price of Credit – lacks effective regulation of supply and demand. Importantly, the contemporary system fails to self-correct or adjust. Left unchecked, it feeds serial Bubbles and busts."

"Unfettered finance, much of it directly targeted to asset markets, had created powerful asset inflation and Bubble Dynamics. Indeed, by the late-nineties the perilous instability of contemporary finance had become abundantly clear. One could point to “portfolio insurance” contributing to the ’87 crash; the role of non-bank finance in late-eighties excess; the 92/93 bond/derivatives Bubble that burst in 1994; the 1995 Mexican collapse; the ’97 Asian Tiger collapses; and the spectacular simultaneous 1998 Russia and Long-Term Capital Management debacles."

Our "experiment in unconstrained world finance spurred an experiment in economic structure. The U.S. economy was free to deindustrialize. With newfound access to unlimited finance and inflating asset prices, Americans were to indefinitely trade financial claims for endless cheap imports. The bane of “twin deficits” had been eradicated. Even more miraculously, the flood of finance the U.S. unleashed upon the world would, largely through foreign central banks, be recycled right back into booming American securities markets."

"The 2008 crisis marked the failure of a great financial experiment. Fannie, Freddie and GSE risk intermediation failed. Wall Street structured finance failed. Derivatives markets and Wall Street firms failed. Counterparties failed. Across the financial landscape, catastrophic flaws were exposed. In short, contemporary finance failed spectacularly."

"The ‘08/’09 crisis should have provided an historic inflection point. It should have sparked a debate about the failures in finance. The greatest upheaval in decades should have marked the beginning of an era of more stable finance – of sounder money and Credit and firmer economic underpinnings. It would have no doubt been an arduous process."

"Instead of a re-examination of our failures, Central bankers instead adopted the most extreme rate, “money printing,” and market manipulation measures ever. They have guaranteed abundant cheap (virtually free) finance for about a decade now. What was meant to be a temporary rescue of fragile private-sector, market-based finance morphed into history’s greatest global Bubble."

"Reflationary measures also incentivized Trillions to flow into sovereign debt, corporate Credit, structured finance and the emerging markets on the belief that central bankers would not tolerate another market crisis. Trillions have flowed into various derivative trading strategies on the view that central bankers would ensure liquid and continuous markets – no matter the degree of market excess."

"The upshot has been market distortions and the accumulation of risks on an unprecedented scale. Fragilities have surfaced on occasion (i.e. “flash crashes”), spooking the central banker community sufficiently to ensure that “temporary” reflationary measures evolved into Permanent Market Support Operations. Central bankers had slipped fully into the markets’ trap. Cautious measures expected to normalize policy over time only ensured that financial conditions loosened further - and global Bubble inflation accelerated."

"Booming asset inflation and 4% unemployment weren’t enough to convince the Fed it was time to tighten up the reins. Meanwhile, the ECB and BOJ clung stubbornly to negative rates and massive QE programs. Chinese Credit went nuts. Awash in international flows, EM just kept borrowing. Through it all, wealth disparities only worsened, fueling in the U.S. a populist movement and anti-establishment revolt that placed the Trump administration in power."

"Markets are beginning to realize there are unfolding risks not easily resolved by monetary stimulus. Deficit spending has become completely unhinged, while inflation is gaining sufficient momentum to garner concern. As such, central bankers may feel compelled to actually tighten financial conditions. Bond markets are on edge, commencing a long-overdue price adjustment."

"Where has all this led us? Global “Financial Sphere” inflation has been nothing short of spectacular. QE has added an astounding $14 TN to central bank balance sheets globally since the crisis. The Chinese banking system has inflated to an almost unbelievable $38 TN, surging from about $6.0 TN back in 2007. In the U.S., the value of total securities-to-GDP now easily exceeds previous Bubble peaks (1999 and 2007). And since 2008, U.S. non-financial debt has inflated from $35 TN to $49 TN.

"The end result has been way too much “money” slushing around global securities and asset markets – “hot money” of epic proportions. This has led to unprecedented price distortions across asset classes – unparalleled global Bubbles in sovereign debt, corporate Credit, equities and real estate – deeply systemic Bubbles in both (so-called) “risk free” and risk markets. And so long as securities prices are heading higher, it’s all widely perceived as a virtually sublime market environment."

But it's all ending now. It had to end at some point. The extremes of bubbles and imbalances have probably peaked for the following reasons: 1) US stock market prices went unsustainably parabolic in recent months up until January 29 to arguably reach the highest valuations in history followed by a sudden retreat of more than 10%.  2) The Bitcoin bubble also went parabolic and it burst with a 60% decline erasing $100s of billions of funds.  3) The short volatility bubble blew up a few weeks ago wiping out $100s of billions in speculator money. And there are another $1.5 Trillion of explicit "short volatility" related investments (risk parity funds and target volatility vehicles) that may not have yet finished selling yet. In reality, unusual market calm created by the central banks have, in reality, led all the debt and equity markets to become one giant $22 Trillion "short volatility" trade. That's how we got to the highest valuations in history. 4) Just in the past two weeks, China arrested and seized the giant conglomerates of Anbang and HNA and arrested their managers. Expect a fire sale of their assets in the coming weeks. This is just the beginning. These are examples how excess liquidity gets wiped-out: it goes "poof!" Money goes to "money heaven."

It's amazing how, since abandoning sound money in 1971, it's led us down a long road to our extremely precarious state at this time. There are even more things signaling collapse, see: We're reaching, the end of that road. I think that we're on the verge of another and worse financial crisis: the 3rd in the past 18 years. Thank your government and Central bankers. 

There's no way out now. Normalization is probably not possible. Even a relatively small rise of interest rates to historically low rates has already resulted in a equity flash crash of over 10% a few weeks ago, wiping-out $trillions worldwide. And it's probably just starting. To be honest, no one really knows how things will play out in the coming months. There is too much money sloshing around and the Fed has started to withdraw money from the markets as they vow to continue to raise the Fed funds rate.. Yes, markets might appear to recover, then in a short period, it'll go "poof" and go to "money heaven." 

When massively inflated financial markets crash, they will take the economy with it --like in 2008/20009. I'm just hoping that the world's financial system does not fail permanently this time. Keep in mind that we have about 10 years to go to complete our current Fourth Turning crisis and Western civilization is potentially at risk.


1 comment:

Anonymous said...

There's also this.