en ReTuRN OF THe APRiL FooL... <p style="text-align: center;"><iframe src="" width="762" height="1024" frameborder="0"></iframe><br /> . </p> <p style="text-align: center;">&nbsp;</p> <p style="text-align: center;">&nbsp;</p> <p style="text-align: center;">.<iframe src="" width="626" height="1024" frameborder="0"></iframe></p> Wed, 01 Apr 2015 06:22:33 +0000 williambanzai7 504102 at Dow Futures Down 400 From Monday Highs After Asian Open Flash-Crash <p><a href="">After Japan's Tankan disappointed greatly </a>and various<strong><em> talking heads from Japan came out to deliver the credibility-destroying-phrase of the day: that "the economic recovery is progressing smoothly" despite all evidence to the contrary</em></strong>... USDJPY took a dive. And when USDJPY takes a dive, all its risk-on, carry-trade-imbibed friends take a dive. <strong>Dow futures cratered 230 points in minutes </strong>only to bounce back modestly when some enterprising sell-side analyst reminded the machines that "bad news is good news." But that didn't last and US equity futures are sliding rapidly in the overnight session...</p> <p>&nbsp;</p> <p>Dow futures have retraced all of Monday's 3-step-gains and are down over 400 points from the Monday highs...</p> <p><a href=""><img src="" width="600" height="317" /></a></p> <p>&nbsp;</p> <p>and across all US equity futures, things are ugly heading into Europe...</p> <p><a href=""><img src="" width="600" height="492" /></a></p> <p>&nbsp;</p> <p>And all because... fun-durr-mentals...</p> <p><a href=""><img src="" width="600" height="407" /></a></p> <p>&nbsp;</p> <p><em>Charts: Bloomberg</em></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="2182" height="1154" alt="" src="" /> </div> </div> </div> Japan recovery Wed, 01 Apr 2015 03:40:29 +0000 Tyler Durden 504101 at A World Without The Welfare State <p><a href=""><em>Submitted Richard M. Ebeling via The Cobden Centre</em></a>,</p> <p>We live in an era in which few can even conceive of a world without the welfare state. Who would care for the old? How would people provide for their medical needs? What would happen to the disadvantaged and needy that fell upon hard times? In fact, <strong>there were free market solutions and non-government answers to these questions long before the modern Big Government Welfare State.</strong></p> <p>In fact, before the arrival of modern welfare state, voluntary, private-sector institutions had evolved to serve as the market providers for many of those &ldquo;social services&rdquo; now viewed as the near-exclusive prerogative of the government. Unfortunately, after nearly a century of increasing political and cultural collectivism,<strong> the historical memory of the pre-welfare state era has all but been lost.</strong></p> <p>Great Britain in the 19th and early 20th centuries is an historical case study in how many of these problems were handled without political intervention in the private affairs of society.</p> <p><strong>The Friendly Societies and Mutual Insurance Protections</strong></p> <p>The focal point for many of these private-sector answers was the &ldquo;friendly societies.&rdquo; When they first arose in the late 18th and early 19th century Britain, the friendly societies were mutual-aid associations for insurance for the cost of funerals of workers or their family members.</p> <p>But as the 19th century progressed, the friendly societies expanded their activities to encompass four primary services: 1) accident insurance that provided weekly allowances for the families of workers who were injured in their places of employment; 2) medical insurance that covered the cost of medical care and prescribed medicines for workers and their families; 3) life insurance and assistance to maintain family members in case of the death of the primary breadwinner or his spouse; and 4) funeral insurance to cover burial costs for the worker or members of his family. Later on, many of the societies also developed savings and lending facilities for members, fire insurance and loans for home purchases.</p> <p>By 1910, the year before Britain&rsquo;s first National Insurance Act was brought into law, approximately three-quarters of the work force of the British economy was covered by the private, voluntary insurance associations of the friendly societies. The memberships in their associations covered the entire income spectrum, from the middle- and higher-income skilled worker to the low-wage, unskilled members of the work force.</p> <p>The friendly societies also offered instruction in self-responsibility, often rotated their officer positions to teach leadership among the members, and supplied advice on better managing of members&rsquo; family financial and related affairs.</p> <p>In the years before the First World War, the free society had developed and was extending the very social institutions needed to handle all those concerns that in our own time are considered the responsibility of the state. What the modern welfare state did was to preempt and undermine the free market&rsquo;s solutions to many of what we call today &ldquo;social services.&rdquo;</p> <p>State regulation of the friendly societies, subsidized &ldquo;free&rdquo; medical and insurance services, and new taxes to cover the government&rsquo;s cost for providing these national insurance schemes all resulted in a crowding-out of the voluntary alternatives of the private sector.</p> <p><a href=""><img alt="Welfare State House of Cards" class="alignnone size-medium wp-image-24468" height="211" src="" width="300" /></a></p> <p><strong>Private Charity and Voluntary Assistance to the Poor</strong></p> <p><strong>&nbsp;</strong>For the 300 years between 1600 and 1900, British society generally took it as axiomatic that charitable work was the responsibility of individual and private corporate effort. Even the notorious English Poor Laws that generated so many negative side effects were considered to be a narrow and limited supplement to the primary activities of the private sector.</p> <p>British private philanthropy reached its zenith in the 19th century, and this was not an accident. During this epoch of classical liberalism, the state was not regarded as either the proper or most efficient vehicle for the amelioration of poverty.</p> <p>Especially for the Christian classical liberal, his faith required him to take on the personal responsibility for the saving of souls for God.</p> <p>Most of the Christians in 19th-century Britain also believed that to help a man in his rebirth in Christ, it was essential to help him improve his earthly life, as well. Soup kitchens for the hungry, shelters for the homeless, training of the unskilled for gainful employment, care for the abandoned or poverty-stricken young, and the nurturing of a sense of self-respect and self-responsibility for an independent and self-supporting life were all seen as complements to the primary task of winning sinners over for salvation.</p> <p>By the 1890s, most middle-class British families devoted 10 percent of their income for charitable works &mdash; an outlay from average family income second only to expenditures on food. Total voluntary giving in Britain was greater than the entire budgets of several European governments, and more than half a million women worked as full-time volunteers for various charitable organizations.</p> <p><strong>Individual Initiative and Leadership in Voluntary Giving</strong></p> <p>Individuals of position, wealth, or vision felt it their Christian duty to take up the saving of souls and the caring for these people&rsquo;s material circumstances as steppingstones to the &ldquo;remaking&rdquo; of Christ&rsquo;s children. For example, Anthony Ashley-Cooper, the seventh Earl of Shaftsbury, who was considered a prominent evangelical Christian, and as one historian of the period put it, &ldquo;a sort of conscience of the nation, a man of such outstanding virtue that the association of his name with any enterprise gave it instant respectability and mass appeal.&rdquo;</p> <p>Thomas Barnardo, associated with the Church of Ireland, founded his own charitable organizations that came to care for, house, and educate tens of thousands of children in the poorest circumstances throughout England. William Booth created the Salvation Army, saving souls as well as teaching those who came to Christ through his organization the importance of self-responsibility and paying their own way through work and honesty in all avenues of life. William Cadbury (of Cadbury chocolates) and William Lever (of Lever Brothers&rsquo; soap) created, with their own money, model workplaces and communities for their workers.</p> <p>An advantage of this world of private charity is that it enabled innovation and experimentation to discover the means most likely to bring people to God and improve their earthly conditions. At the same time, the competition among charities for voluntary contributions rewarded those organizations that demonstrated the effectiveness of the methods they used and weeded out the less successful ones.</p> <p><strong>The Rise of Socialism and the Demise of the Private Sector</strong></p> <p>At the turn of the century, however, a sea change began to occur in the philosophy and ideology of many charities and their corporate sponsors. In a period experiencing the rise of socialist ideas, the view developed that government needed to assist or supplant the efforts of private individuals and organizations. And among a growing number of Christian groups concern for earthly improvement of the poor began to take first place over the previously primary task of saving souls.</p> <p>As the government began to create the welfare state, many of the private charities found it increasingly impossible to compete with the &ldquo;free&rdquo; services supplied by the state. And, at the same time, many people now paying higher taxes to finance government welfare programs came to believe they had paid their &ldquo;fair share&rdquo; through taxation, so private giving was either not needed or no longer affordable.</p> <p>Also, as the 20th century has progressed, many private charitable organizations have themselves become dependent upon government funding for large fractions of their activities. This has resulted in increasing government regulation and supervision of their programs. Furthermore, since &ldquo;he who pays the piper calls the tune,&rdquo; Christian charities have had to diminish or remove the evangelical element in their activities under government rules against religious proselytizing by those receiving government funds.</p> <p><a href=""><img alt="Mouse in the Welfare State Trap" class="alignnone size-full wp-image-24469" height="195" src="" width="258" /></a></p> <p><strong>From Private Action to Government Control</strong></p> <p>Another aspect of this politicization and co-opting of these private sector solutions to &ldquo;social problems&rdquo; is that it really has involved a massive growth in governmental power and decision-making.</p> <p>The rhetoric is often of transferring income and wealth from &ldquo;the rich&rdquo; to the poor or more disadvantaged. But as a number of critics have pointed out, it has really and mostly involved a transfer of power and control from the hands of the citizenry to that of those in political authority.</p> <p>This theme was especially emphasized by the French social critic, Bertrand de Jouvenel, in a book on <em>The Ethics of Redistribution</em>(1951). Income is not merely a means for physical maintenance of oneself and one&rsquo;s family plus a few dollars for leisure activities. What we do with our income is an expression of ourselves, a statement about what we value, how we see ourselves, and what we wish and hope to be.</p> <p><strong>How We Spend Our Wealth Reflects and Teaches Values</strong></p> <p>The way we use our income enables us to teach future generations about those things that are considered worthwhile in life. Income acquired above some notion of a &ldquo;minimum&rdquo; is also the way individuals have had the means to perform many activities &ldquo;for free&rdquo; that are considered the foundation of the social order, from community and church work, to support for the arts and humanities.</p> <p>Deny an individual the honest income the has earned, even when it is above some hypothetically &ldquo;reasonable maximum,&rdquo; and you deny him the ability to formulate, and give expression to, his own purpose as a human being. And you deny him the capacity to make his voluntary contribution to the civilization and society in which he lives, as he sees best</p> <p>De Jouvenel argued that such contributions have been, and remain essential for a good society. This is demonstrated, he shows, by the common belief of most of those who advocate redistribution: since most people will no longer have the &ldquo;independent means&rdquo; to perform such social services and activities, the state must now perform them.</p> <p><strong>Elitist Contempt for the Common Man</strong></p> <p>And there is a strong elitist element among redistribution advocates. They do not trust &ldquo;the poor&rdquo; to have the intelligence or wisdom to spend their income in &ldquo;socially desirable ways.&rdquo; The poor prefer to spend their money on beer rather than Beethoven. So, the state takes over that responsibility for them. And it is in this that de Jouvenel sees the real significance of redistributive policies. What is redistributed is not wealth from the rich to the poor, but power from the people to the state.</p> <p>Individuals no longer plan their own lives, and use their own money, to fulfill those plans. Individuals no longer care for their own children, teach them how to live as human beings or guide them as to what to value and pursue in life. In terms of time, income and talent, individuals are now reluctant to contribute themselves to the society in which they live.</p> <p>No, these are now in the hands of the state because, through taxation, the state has denied individuals the capacity to do them. The state plans our lives, cares for our children, and decides what should be supported in society as socially desirable and to what extent.</p> <p>And as the state grows stronger, the individual grows weaker. We become weaker, not only in relation to the state, but also as human beings because we no longer exercise those qualities and habits of mind that only self-responsibility teaches and makes possible.</p> <p>In spite of the pervasiveness of the Welfare State in our modern society and the tax burden that is imposed to fund it, it is worth remembering that Americans&rsquo; generosity and benevolence still stands as a beacon for the world. In 2013, Americans donated nearly $420 billion to charitable causes, and this was a nearly 13 percent increase over the 2012 level of voluntary philanthropy in the United States.</p> <p>But a culture of self-responsibility and benevolence can be and is undermined by a paternalistic state, in which the government not only takes away the income and wealth through which individuals can express and reflect their values and beliefs, but weakens the very idea that such decisions and judgments should be in private rather than political hands.</p> <p>The Welfare State makes us all poorer in character and independence. Confiscation of freedom through abridgements of individuals&rsquo; rights to their life, liberty and honestly acquired property, also brings with it a less humane and civil society.</p> <p>With liberty comes not only the individual&rsquo;s right to make his own choices concerning how best to live his life. The experience of the Great Britain and the United States before the modern Welfare State makes it clear that free man are also civilized human beings who demonstrate appropriate and reasonable interest and concern with others in society deemed deserving of charitable benevolence.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="737" height="522" alt="" src="" /> </div> </div> </div> Ireland Wed, 01 Apr 2015 02:30:51 +0000 Tyler Durden 504100 at China Builds $6 Million Bridge To Nowhere <p>As Beijing gets set to expand its global footprint via the launch of multinational institutions like the AIIB which are <a href="">aimed squarely</a> at disrupting the post-World War II economic order and shaking up a system that’s been underpinned by the notion of dollar hegemony for decades, it’s important that China keep up the momentum when it comes to besting the US wherever and whenever it can. Presumably that’s why the country sunk nearly $6 million and 12 months of work into building the world’s longest glass bridge that leads absolutely nowhere. The key point, apparently, is that the structure is a whopping 5 meters longer than its US competitor.</p> <p>Via <a href=""></a></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>Workers are finishing the construction of a glass cantilever bridge in Longgang scenic area in Yunyang, Southwest China's Chongqing municipality. <strong>The transparent structure, 718 meters above the ground, has a cantilever extending 26.68 meters from the edge, five meters longer than the Grand Canyon Skywalk. The project, with a total investment of 35 million yuan($5.6 million), started in March 2014. The bridge has a carrying capacity of 1000 tons. </strong>[Photo/China News Service]</em></p> </blockquote> <p><a href=""><img src="" width="600" height="323" /></a></p> <p><a href=""><img src="" width="600" height="368" /></a></p> <p><a href=""><img src="" width="600" height="267" /></a></p> <p><a href=""><img src="" width="600" height="288" /></a></p> <p><a href=""><img src="" width="600" height="266" /></a></p> China Yuan Wed, 01 Apr 2015 02:00:00 +0000 Tyler Durden 504091 at OECD Economic Review Chair Warns, Central Bankers "Are Doing More Harm Than Good, Policy Must Be Reversed" <p>In Part (<a href="">Part 1 here</a>) of Hinde Capital&#39;s latest note ascribes, we go further down &quot;The Road to Nowhere&quot; in this excellent discussion with former BIS Economic Adviser, and current Chairman of the Economic and Development Review Committee of the OECD (and teller-of-the-truth) William White explains it all..&nbsp;</p> <p>&nbsp;</p> <p><a href=""><img height="483" src="" width="600" /></a></p> <p><a href="">From Part 1...</a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><em>&quot;<strong>I&#39;m not sure [European QE] is going to do anything - certainly, nothing that&#39;s good.</strong> The fundamental problem here, as I see it anyway, is that the European banking system is still broken... I think, increasingly, bankers are discomforted more than anything else (it&#39;s not just the ex central bankers but increasingly the people that are still holding the levers)... <strong>they are starting to ask whether they have somehow been backed into a place where they don&#39;t really want to be</strong>.... Unfortunately, [it] is getting bigger and bigger. <strong>There is a possibility at least that this whole exercise could end very badly</strong>.&quot;</em></p> </blockquote> <p><em>*&nbsp; *&nbsp; *</em></p> <p><em>Part 2...</em></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><em>&quot;I fear that central bankers may have been inadvertently drawn into what they are currently doing... <strong>[QE] won&#39;t work and may have many undesired side effects that will build up over time.</strong> Many of the central bankers at Davos this year said explicitly that they were only buying time for governments to act but, seven years into the crisis, it already seems we have been waiting forever...&nbsp; the <strong>effectiveness of monetary policy in terms of stimulating aggregate demand goes down with time, because you&#39;re constantly bringing spending forward from the future</strong>...&nbsp; Logically, at this point, central bankers should say, &quot;We are doing more harm than good. <strong>This policy must be reversed.&quot; But I don&#39;t see anybody actually doing it.</strong>&quot;</em></p> </blockquote> <p><em><a href="">Via Hinde Capital,</a> <a href="">The Cobden Centre,</a> and <a href="">True Sinews</a>...</em></p> <p>Sean Corrigan: Well, we hear this line from Mr. Carney. Without getting to personalities, of course since I don&#39;t know him &ndash; he may well be a very worthy individual - but I can&#39;t read any of his pronouncements without shuddering. He explicitly says this, doesn&#39;t he? &quot;We need more borrowing. We need more borrowing,&quot; and then, &quot;Oh, we will only put up interest rates gently, because with all this borrowing, we will just shock the system again the minute we do anything.&quot;</p> <p><strong>William White: Who is that you&#39;re talking about?.....</strong></p> <p>Sean Corrigan: Mark Carney.</p> <p><strong>William White: Well I have had fundamental doubts about the merits of full transparency for at least a decade. Moreover, I&#39;ve never spoken to a market person who&#39;s disagreed with me. Transparency on the part of a central bank has disadvantages as well as benefits. </strong></p> <p>Sean Corrigan: The old Bundesbank used to be the ones. You made your play and if the Bundesbank didn&#39;t like it come a Thursday lunchtime - Bang! - they moved interest rates in your face. You always had to be wary of it, and it was a much better system.</p> <p><strong>William White: We at the BIS first started reflecting on this issue around 2004 when the Fed started talking about &ldquo;measured&rdquo; increases in interest rates, which was code for 25 basis points per meeting. if you think about a Sharpe ratio ,where the differential between the borrowing rate and the lending rate are going down, but the variance is basically going to zero, then transparency of this sort is really an invitation to take on leverage and that is precisely what people did. And I think it&#39;s the kind of stuff they&#39;re doing today.</strong></p> <p>Sean Corrigan: I absolutely concur and I&#39;ve written about this in the past as well. The central bank should be inscrutable. You should have to consult the oracle and if the oracle decides that it doesn&#39;t like what you&#39;re doing, you have to make a sacrifice then and there. Otherwise, there&#39;s no discipline.</p> <p><strong>William White: Absolutely. I go back to my early days of the Bank of Canada when we brought in inflation targeting, about three months after New Zealand. Subsequently, and only gradually, the mantra of transparency became more fully firmly embedded. And I can remember talking to John Crow who was then the Governor and saying to him that it was a huge step to go from &ldquo;Trust me to do the right thing&rdquo; to &ldquo;Now I am going to tell you what I intend to do in the future&rdquo;. Moreover, I remember saying to him I did not recall ever having a discussion of this issue at the Bank of Canada. We just morphed into it. Basically, I think it had its roots in all the academic stuff about economic agents having rational expectations. And that assumption too is, I think, fundamentally flawed.</strong></p> <p><strong>Similarly, I fear that central bankers may have been inadvertently drawn into what they are currently doing.. The first set of really radical policies - the zero lower bound and the QE1 and the intervention in the interbank markets and all that stuff &ndash; was done for reasons of financial stability. My own belief is that it was absolutely the right thing to do. But then, as time wore on and as government did not do what they should have done to help resolve the crisis, central bankers got drawn into QE2 and all the rest of this stuff. But it has now got a totally different objective, one of stimulating aggregate demand. And, as I said before, my feeling is that it won&#39;t work and may have many undesired side effects that will build up over time. Many of the central bankers at Davos this year said explicitly that they were only buying time for governments to act but, seven years into the crisis, it already seems we have been waiting forever.</strong></p> <p><strong>One way to describe the dangers of waiting is that the effectiveness of monetary policy in terms of stimulating aggregate demand goes down with time, because you&#39;re constantly bringing spending forward from the future. As the future becomes today, then you have to pay it back. So just by definition, this thing only works for a short time period. Unfortunately, the side effects, not least the further accumulation of debt and excessive asset prices, go up with time. And, at a certain point, those two time lines cross. Logically, at that point, central bankers should say, &quot;We are doing more harm than good. This policy must be reversed.&quot; But I don&#39;t see anybody actually doing it.</strong></p> <p>Sean Corrigan: Well, I have this sort of aphorism that the central banks are patting themselves on the back that they had their 1933 moment early - massive intervention, a flood of liquidity, and so on - but they&#39;ve all been paralyzed ever since with what they think happened in 1937, when, supposedly, the tightening on both the monetary and fiscal side triggered a seriously adverse reaction in an economy which was still weak. In fact, there are also some compelling arguments that this was not the decisive factor, that it was more to do with Roosevelt&#39;s labour laws and union policy and the like, destroying entrepreneurial hopes again. But, nonetheless, this is how the central banks read it. In 1933, after three or four wasted years, the central banks got brave and did all the big monetary things, and we had a short-lived burn. But then, in &rsquo;37, we tried to pull the plug too soon and it was horrible again. And they&#39;re paralyzed still by this Ghost of &lsquo;37.</p> <p>And as you say, this is what this whole transparency/ forward guidance thing is all about: &quot;Let&#39;s not frighten the market.&quot; They forget the financial market should be a reflection of what&#39;s going on in the real business of wealth creation, but the market has become so big that any shock in there feeds back much more strongly on the real side. But every time they mollycoddle the market, it gives the market its head so it becomes even bigger and even more disproportionate. So again, we&#39;re in one of these vicious cycles.</p> <p><strong>William White: Well, I think there has been a growing recognition that a major explanation for market volatility having been so low, until very recently, was that the actions of the central banks were reducing that volatility, as indeed they did prior to 2007. I think a lot of people have been looking at the Swiss Franc - what happened after the peg was dropped - not just because the experience is interesting in itself , but for what it might tell us about prospective global developments when central banks begin to reverse the suppression of volatility that we&#39;ve had up until now. Personally, I could give you a dozen reasons why the reversal of rates, once begun, might move an awful lot faster than anybody is currently anticipating.</strong></p> <p>Sean Corrigan: Well, there are no buffers, are there? We know the banking system doesn&#39;t now offer a buffer.</p> <p><strong>William White: No.</strong></p> <p>Sean Corrigan: We also know that nobody in their right mind really wants to buy long-term debt down here for any prospect of income, which, of course, gives the lie to the fact that the real natural interest rate is sub-zero &ndash; and also, incidentally to Keynes&rsquo; whole &lsquo;college bursar&rsquo; nonsense about &lsquo;anchoring&rsquo; effects preventing rate declines and so shutting us in a what his followers called a &lsquo;liquidity trap&rsquo;. The rate can never really be sub-zero because we all prefer to have things now, not tomorrow. But the point is they&#39;re only here because everybody again is chasing the fact that there&#39;s a committed buyer in town with unlimited capability to buy and one which seems to be increasing its appetite at every stage. As the central bank pushes interest rates one way - whether as a deliberate policy or as a byproduct - everybody else becomes a momentum chaser. While you get the capital gains in the short run to outweigh the lack of income, this is all hunky-dory, but when it turns&hellip;</p> <p><strong>William White: You are closer than I am to the markets, but I suspect some people are doing momentum trading. I think I read in the paper yesterday that, if you bought 30- year bonds at the beginning of 2014, you have already earned a mean 6% or 7% or something like that, largely in capital appreciation. My point is that--</strong></p> <p>Sean Corrigan: A couple of basis points matter here because the durations are so long. It means a nice fat market-to-market gain. So while the trend continues, total returns on bonds look pretty good but more, and more, and more of that return is simply that we&#39;re squeezing out an extra couple of basis points, pushing the price to a higher and higher premium. And as you say, bonds could-- if we&#39;re willing to pay the government to borrow from us, as in some cases we are - actually go a lot further than we ever thought possible. But again, as I think you said earlier, if it&#39;s unsustainable, ultimately, it must end.</p> <p><strong>William White: Yes. Sadly, I don&#39;t think anybody&#39;s capable of telling you precisely how and when the whole thing will come unstuck. Nevertheless, you know that at some point, it has to. It&#39;s like all of these complex systems. What we know from studying them over time is that they fall apart on a regular basis, and it&#39;s impossible to say precisely where or what the trigger will be. That raises the obvious question of what investors can do to protect themselves.</strong></p> <p>Sean Corrigan: In all inflationary episodes - and this is one whether or not it&#39;s having an effect on final goods prices in a manner that people want to see, since we clearly have enormous influx of money and credit flooding into the world above and beyond the productive needs of industry on the one hand and the urge to saving on the other &ndash; in all these inflationary episodes we eventually make even the poorest person and the oldest person into speculators. That&rsquo;s been the lesson of history. And as we were saying among ourselves earlier, even we &lsquo;experts&rsquo; are not necessarily very good at that game. But we&#39;re all forced to become players, regardless. This is a tragedy of a wholly different order.</p> <p><strong>William White: As I said before, I sense a growing sense of unease about where this will all end up.</strong></p> <p>Max Rangeley: Relating to this is the concern with deflation at the moment as well. Is this justified, do you think? Do you think deflation is necessarily detrimental to an economy or perhaps even often beneficial to an economy?</p> <p><strong>William White: Well, there is actually a big pre-war literature about what they used to call the productivity norm. In a nutshell, if you&#39;ve got an economy that&#39;s got positive productivity growth, then real wages should be going up. Now, the question is, if the real wage is defined as the nominal wage divided by the price level, should the real wage rise through higher nominal wages or lower prices? In the post War period, we&rsquo;ve just basically assumed that the prices should be constant and wages should go up in nominal terms. But the pre-War literature basically said, &quot;Well, maybe that&#39;s not true. Maybe it ought to be the other way around.&quot; Actually, I have in my files two more recent papers on this. One of them was written by George Selgin and is called &ldquo;Less Than Zero&rdquo;. Another one written by David Beckworth is called &lsquo;Aggregate Supply-driven Deflation and Its Implications for Macroeconomic Stability&rsquo;. I must say, I think there&#39;s a very reasonable case for saying that if you had moderate deflation, it would benefit everybody as opposed to the wage driven approach in which some people get the benefit and some don&rsquo;t. So there would be a benefit here too on the income distribution side, which has become a source of particular concern in almost every country in recent years. I think that might be a good idea.</strong></p> <p><strong>But your question is also relevant to how we got into the current mess in the first place. I would contend that central banks were too focused on avoiding deflation at a time when productivity increases coming out of China and elsewhere were causing prices to fall. This was a &ldquo;good&rdquo; deflation like many others seen throughout history. By resisting these trends through monetary and credit creation, we have actually turned a &ldquo;good&rdquo; deflation into a &ldquo;bad&rdquo; deflation of the sort described in the 1930&rsquo;s by Irving Fisher. Allowing deflation at this point could seriously exacerbate the debt servicing capacity of many borrowers, including sovereigns. Part of the solution must be to have the courage to write some of this stuff off. </strong></p> <p>Sean Corrigan: But I think you should go back to your earlier quote that it&#39;s the unpalatable or the impossible. There are lots of ways to do it but, as always, reforms only ever come in a crisis and the central banks in their own way have been trying to avoid us having one. Let&#39;s not blame them exclusively, but the policy makers as a group are happy enough to risk an inflationary crisis to reduce the debt whereas, in fact, the quickest way to get through it would be a deflationary crisis because we would then have no choice but to deal with the debt issue immediately. We&#39;d have to get together tomorrow and say, &ldquo;I can&#39;t pay this on the original terms. This is what I can offer you instead.&quot; And next, &quot;Certainly, if we don&#39;t agree, let&#39;s go to arbitration and then let&rsquo;s start over again and let bygones be bygones.&quot; Instead we have this fear that we have too much debt so we cannot ever afford to let prices go down, but to push process up we need to encourage more indebtedness. And because we&#39;re so worried about growth, we don&rsquo;t notice we&#39;re suppressing it through our own policy. The deflationary crisis would be truly horrible but at least it would be over in a matter of months!</p> <p><strong>William White: It is worth looking back at the banking crises of the early 1990s in the Nordic countries and Japan respectively. The Nordics faced up to their problems and resolved them and growth quickly returned. The Japanese did not and the return to growth took a lot longer.</strong></p> <p>Sean Corrigan: I can&#39;t remember if it&#39;s was Juncker or Barosso. I think the former, very early on in 2008 said, &quot;We will not allow any systemically important bank to fail.&quot; Then he paused and added: &quot;And, yes, all the banks are systemically important.&quot; That&rsquo;s where we went wrong, that&#39;s where we&#39;ve been ever since, and that&#39;s why we&#39;re in so much trouble. In fact, it&#39;s now &ldquo;all borrowers are systemically important. All debt is systemically important. We cannot have a failure anywhere.&rdquo; But by trying to prevent any failure, you ultimately make it more likely that everyone will fail.</p> <p><strong>William White: No, absolutely. It&#39;s the Japanese model from 30 years ago. It&#39;s the Japanese convoy system, where everybody is sort of in everybody else&#39;s back pocket. That is, everyone is supporting everybody else. And it works like a charm, until it doesn&#39;t. And when it doesn&#39;t, it can take everybody down. It&#39;s as simple as that. What can I say other than that I share your concerns. Unfortunately, the current belief system is very likely to be maintained until some crisis shows that it is a system of false beliefs, and perhaps not even then. Daniel Kahneman suggests that it is human nature, when our beliefs are sorely tested by events, to retreat further into those beliefs rather than to reassess them. Something very similar has been going on with policy since the crisis began. On the monetary and regulatory fronts, policy has essentially been &ldquo;more of the same&rdquo; and &ldquo;still more of the same&rdquo;</strong></p> <p>Sean Corrigan: there is a perfect example of this, Bill, of retreating to a belief rather than relying on something which is proven and known. I&rsquo;m referring to the fact that, suddenly, no matter which economy you are considering, or what financial structure, or institutional framework, 2% inflation has become the absolute golden ratio of all modern economics. If we do not have 2% a year price increases, the economy cannot function, we&rsquo;re always being told. Where did THIS ever come from?</p> <p><strong>William White: It came from nowhere. I remember many years ago when I was at the Bank of Canada and we introduced inflation targeting. What was the target number, or band, to be? Clearly the path down to where we wanted to be had to reflect where we started from, and the price in terms of lost output of the transition. However, the final destination should have reflected work on the distortions and welfare losses associated with that target, not least distributional implications, and that work was never done. Similarly, I remember when the Bank of Canada introduced monetary targeting in the 1970s, when again a target had to be chosen The Governor and the Senior Deputy Governor made it up in the car on the short journey to a Parliamentary Committee to discuss the new policy regime. Perhaps the underlying logic was, and is, that the numbers chosen have to be &ldquo;not obviously unreasonable&rdquo;. That does not of course set the bar very high.</strong></p> <p><strong>Talking about belief systems, I did a lecture for OMFIF in 2013 which is up on my website and deals in large part with such issues. I contend that one important reason why we got into this mess was that the behaviour of each set of relevant actors was being driven by a set of false beliefs. That includes the lenders, the borrowers, the central bankers, the regulators and the politicians. In each case, the false belief was &ldquo;comforting&rdquo; and thus easy to hold onto. For borrowers, by way of example, the false belief was that you could borrow without ever having to pay it back, using your house as an ATM.. For lenders, the false belief was that lower lending standards were acceptable because the economy had become inherently less risky. For central bankers, the false belief was that, if inflation was under control, nothing could go wrong. Note that this central banking belief essentially morphed out of a much less extreme belief that low inflation was better than high inflation. I have no idea how this transformation took place, but it was certainly not based on any careful reading of either economic history or the history of economic thought.? Of course, speculating about such issues belongs more to the realm of psychology, or even anthropology, than it does to the realm of economics</strong></p> <p>Max Rangeley: Bill, I have just one more major question actually, which is last November our Founder, Member of Parliament Steve Baker, led the first debate in Parliament for 170 years on monetary reform. So what are your thoughts on, for instance, the Chicago plan or Martin Wolf&#39;s article in the Financial Times last year discussing endogenously created money; do you have a perspective on any of those themes?</p> <p><strong>William White: I find it extraordinary that some economists still do not recognize that we have a fiat money system. Banks do not lend money that has been saved. They create money by making loans and simply writing up both sides of their balance sheet.</strong></p> <p><strong>This system clearly greases the wheels of commerce, but it can also get badly out of control as we have seen in recent years. There really is an issue here. Do we want to go back to 100% reserve banking, or something of that nature, as suggested by the Chicago school and Irving Fisher in the 1920&rsquo;s. While I have not thought enough about it to say where I&#39;d come out on this debate, it certainly is an issue that we should be thinking about. This has also been suggested quite recently by Martin Wolf and John Kay of the Financial Times. These are serious people whose suggestions should be treated equally seriously. And, in a similar vein, I repeat what I said a few moments ago. We also need to go back and look at the whole International Monetary System, or Non System as I and others have called it.</strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="986" height="793" alt="" src="" /> </div> </div> </div> Central Banks China Davos Fail Fisher Japan Monetary Policy New Zealand Sovereigns Swiss Franc Transparency Volatility Wed, 01 Apr 2015 01:30:10 +0000 Tyler Durden 504099 at 2015 Or 1987? Computerized Trading & "A Crash Is Coming" Or Rates Mean "Bull's Not Over" <p><span style="text-decoration: underline;"><strong>1987 Or 2015?</strong></span></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>"They are not real buyers and sellers... these are computers that drive the markets down extremely fast..."</em></p> <p>&nbsp;</p> <p><em>"A crash is coming..."</em></p> <p>&nbsp;</p> <p><em>"A correction will prompt rate cuts which will ensure The Bull Market is not over..."</em></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>It's never different this time... The Friday night before Black Monday 1987...</p> <p>&nbsp;</p> <p><iframe src="" width="480" height="360" frameborder="0"></iframe></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="489" height="349" alt="" src="" /> </div> </div> </div> Wed, 01 Apr 2015 01:15:07 +0000 Tyler Durden 504085 at World Inflation Falls To A New 5-Year Low <p><em>From <a href="">Gavekal Capital Blog</a></em></p> <p><strong>World Inflation Falls To A New 5-Year Low </strong></p> <p><a href="" target="_blank">It's become a running theme</a>, at least since last September, but the latest release of CPI numbers from around the world has brought our simple average World CPI proxy to its lowest level since the financial crisis. For the period ending in February, our World CPI proxy hit just 1.01% year-over-year. This is the lowest rate of change since November 2009. <strong>The year-over-year rate in our World CPI proxy has been falling for six months straight.</strong></p> <p><img src="" width="500" height="285" /></p> <p>Oil has undoubtedly dragged down the headline CPI for many countries around the world. However, our World CPI proxy has the highest correlation (0.78) to the Citi Inflation Surprise Index which is near its lowest levels ever. <strong>14 of the 33 countries that we track currently have a year-over-year change in consumer prices at or below 0%.</strong></p> <p><img src="" width="500" height="285" /></p> <p><img src="" width="500" height="285" /></p> <p>Our World PPI proxy bounced back slightly in February but still remains squarely in negative territory year-over-year (-2.43%).</p> <p><img src="" width="500" height="285" /></p> <p><img src="" width="500" height="285" /></p> <p><img src="" width="500" height="285" /></p> <p><img src="" width="500" height="285" /></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="500" height="285" alt="" src="" /> </div> </div> </div> Consumer Prices CPI Rate of Change Wed, 01 Apr 2015 01:01:14 +0000 Tyler Durden 504087 at Imperial Collapse And A License To Kill <p><em><a href="">Submitted by Dmitry Orlov via Club Orlov blog</a>,</em></p> <p><u><strong>The story is the same every time:</strong></u> some nation, due to a confluence of lucky circumstances, becomes powerful&mdash;much more powerful than the rest&mdash;and, for a time, is dominant. But the lucky circumstances, which often amount to no more than a few advantageous quirks of geology, be it Welsh coal or West Texas oil, in due course come to an end. In the meantime, the erstwhile superpower becomes corrupted by its own power.</p> <p>As the endgame approaches, those still nominally in charge of the collapsing empire resort to all sorts of desperate measures&mdash;all except one: <strong>they will refuse to ever consider the fact that their imperial superpower is at an end, and that they should change their ways accordingly.</strong> George Orwell once offered an excellent explanation for this phenomenon: as the imperial end-game approaches, it becomes a matter of imperial self-preservation to breed a special-purpose ruling class&mdash;one that is incapable of understanding that the end-game is approaching. Because, you see, if they had an inkling of what&#39;s going on, they wouldn&#39;t take their jobs seriously enough to keep the game going for as long as possible.</p> <p><strong>The approaching imperial collapse can be seen in the ever worsening results the empire gets for its imperial efforts</strong>.</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>After World War II, the US was able to do a respectable job helping to rebuild Germany, along with the rest of western Europe. Japan also did rather well under US tutelage, as did South Korea after the end of fighting on the Korean peninsula. With Vietnam, Laos and Cambodia, all of which were badly damaged by the US, the results were significantly worse: Vietnam was an outright defeat, Cambodia lived through a period of genocide, while amazingly resilient Laos&mdash;the most heavily bombed country on the planet&mdash;recovered on its own.</p> <p>&nbsp;</p> <p><strong>The first Gulf War went even more badly:</strong> fearful of undertaking a ground offensive in Iraq, the US stopped short of its regular practice of toppling the government and installing a puppet regime there, and left it in limbo for a decade. When the US did eventually invade, it succeeded&mdash;after killing countless civilians and destroying much of the infrastructure&mdash;in leaving behind a dismembered corpse of a country.</p> <p>&nbsp;</p> <p><strong>Similar results have been achieved in other places where the US saw it fit to get involved</strong>: Somalia, Libya and, most recently, Yemen. Let&#39;s not even mention Afghanistan, since all empires have failed to achieve good results there. So the trend is unmistakable: whereas at its height the empire destroyed in order to rebuild the world in its own image, as it nears its end it destroys simply for the sake of destruction, leaving piles of corpses and smoldering ruins in its wake.</p> </blockquote> <p><strong>Another unmistakeable trend has to do with the efficacy of spending money on &ldquo;defense&rdquo; (which, in the case of the US, should be redefined as &ldquo;offense&rdquo;).</strong> Having a lavishly endowed military can sometimes lead to success, but here too something has shifted over time. The famous American can-do spirit that was evident to all during World War II, when the US dwarfed the rest of the world with its industrial might, is no more. Now, more and more, military spending itself is the goal&mdash;never mind what it achieves.</p> <p>And what it achieves is the latest F-35 jet fighter that can&#39;t fly; the latest aircraft carrier that can&#39;t launch planes without destroying them if they are fitted with the auxiliary tanks they need to fly combat missions; the most technologically advanced AEGIS destroyer that can be taken out of commission by a single unarmed Russian jet carrying a basket of electronic warfare equipment, and another aircraft carrier that can be frightened out of deep water and forced to anchor by a few Russian submarines out on routine patrol.</p> <p><strong>But the Americans like their weapons, and they like handing them out as a show of support.</strong> But more often than not these weapons end up in the wrong hands: the ones they gave to Iraq are now in the hands of ISIS; the ones they gave to the Ukrainian nationalists have been sold to the Syrian government; the ones they gave to the government in Yemen is now in the hands of the Houthis who recently overthrew it. And so the efficacy of lavish military spending has dwindled too. At some point it may become more efficient to modify the US Treasury printing presses to blast bundles of US dollars in the general direction of the enemy.</p> <p><strong>With the strategy of &ldquo;destroying in order to create&rdquo; no longer viable, but with the blind ambition to still try to prevail everywhere in the world somehow still part of the political culture, all that remains is murder.</strong> The main tool of foreign policy becomes political assassination: be it Saddam Hussein, or Muammar Qaddafi, or Slobodan Miloševi?, or Osama bin Laden, or any number of lesser targets, the idea is to simply kill them.</p> <p>While aiming for the head of an organization is a favorite technique, the general populace gets is share of murder too. How many funerals and wedding parties have been taken out by drone strikes? I don&#39;t know that anyone in the US really knows, but I am sure that those whose relatives were killed do remember, and will remember for the next few centuries at least. <strong>This tactic is generally not conducive to creating a durable peace, but it is a good tactic for perpetuating and escalating conflict.</strong> But that&#39;s now an acceptable goal, because it creates the rationale for increased military spending, making it possible to breed more chaos.</p> <p><u><strong>Recently a retired US general went on television to declare that what&#39;s needed to turn around the situation in the Ukraine is to simply &ldquo;start killing Russians.&rdquo; </strong></u>The Russians listened to that, marveled at his idiocy, and then went ahead and opened a criminal case against him. Now this general will be unable to travel to an ever-increasing number of countries around the world for fear of getting arrested and deported to Russia to stand trial.</p> <p>This is largely a symbolic gesture, but non-symbolic non-gestures of a preventive nature are sure to follow. You see, my fellow space travelers, murder happens to be illegal. In most jurisdictions, inciting others to murder also happens to be illegal.<u><strong> Americans have granted themselves the license to kill without checking to see whether perhaps they might be exceeding their authority. </strong></u>We should expect, then, that as their power trickles away, their license to kill will be revoked, and they find themselves reclassified from global hegemons to mere murderers.</p> <p><strong><em><u>As empires collapse, they turn inward, and subject their own populations to the same ill treatment to which they subjected others. Here, America is unexceptional: the number of Americans being murdered by their own police, with minimal repercussions for those doing the killing, is quite stunning. When Americans wonder who their enemy really is, they need look no further.</u></em></strong></p> <p><strong>But that is only the beginning: the precedent has already been set for deploying US troops on US soil.</strong> As law and order break down in more and more places, we will see more and more US troops on the streets of cities in the US, spreading death and destruction just like they did in Iraq or in Afghanistan. The last license to kill to be revoked will be the license to kill ourselves.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="572" height="284" alt="" src="" /> </div> </div> </div> Afghanistan George Orwell Germany Iraq Japan Somalia Ukraine Wed, 01 Apr 2015 00:30:02 +0000 Tyler Durden 504097 at Abewrongics: Nikkei/USDJPY Tankin' After Terrible Tankan <p>Bad news isn't even good news anymore in Japan. A sushi-boat-load of data this evening show once again that Abenomics is failing dismally. In no particular order... Large Manufacturing Index <strong>MISS </strong>(lowest in 9 months), Large Manufacturing Outlook <strong>BIG MISS</strong>, Large Services Outlook MISS, Small Manufacturing Index <strong>MISS</strong>, Small Manufacturing Outlook <strong>BIG MISS</strong>, and drum roll please... Tankan <strong>Large Industry Capex Outlook crashes to -1.2% (from +8.7%) - the lowest in 2 years</strong> (since Abewrongics was unleashed). The response... USDJPY and Nikkei are dumping...</p> <p>&nbsp;</p> <p>So much for unleashing animal spirits... Capex outlook plunges...</p> <p><a href=""><img src="" width="600" height="311" /></a></p> <p>&nbsp;</p> <p>And bad news is no longer good news in Japan as investors lose faith...</p> <p><a href=""><img src="" width="600" height="318" /></a></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>Charts: Bloomberg</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="963" height="499" alt="" src="" /> </div> </div> </div> Abenomics Japan Nikkei Wed, 01 Apr 2015 00:15:03 +0000 Tyler Durden 504098 at This Is How Many Times Blogger Bernanke Use The Word "Debt" In A Post About Secular Stagnation <p>By now <strong>everyone</strong>, any by everyone we mean even that pillar of orthodox "economic wisdom" , <a href="">McKinsey</a>, has realized that the reason the world is blanketed in a period of secular stagnation and soon, contraction, is simple: an unprecedented, record amount of debt:</p> <p><a href=""><img src="" width="545" height="452" /></a></p> <p>... debt which the world should have restructured as part of the resolution of the global financial crisis, however neither was the financial crisis resolved, nor was the debt overhang fixed. In fact, in all his brilliance, then Fed Chairman Ben Bernanke decided to "fix" record debt with more debt and so did all his other central bank peers leading to this:</p> <p><a href=""><img src="" width="555" height="972" /></a></p> <p>&nbsp;</p> <p>In fact <a href="">McKinsey could not be clearer</a>, even for those central bankers who at first, or second, sight may suffer from congenital comprehension defects:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>&nbsp;“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.” </strong></p> </blockquote> <p>So considering that in his latest blog post "<a href="">Why are interest rates so low, part 2: Secular stagnation</a>" none other than the abovementioned Ben Bernanke decides to tackle precisely the topic of global growth, or lack thereof, and specifically "secular stagnation", one would think that debt would be the dominant word under discussion in Ben Bernanke's <a href="">latest Brookings Institute post</a>.</p> <p>One would be wrong. Here is the number of times Ben Bernanke used the word debt in an article that has 1299 words.</p> <p>&nbsp;</p> <p style="text-align: center;"><span style="font-size: 72px;"><strong>1</strong></span></p> <p>... or a "hit rate" of 0.08%. </p> <p>This is the context:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>But if we are really in a regime of persistent stagnation, more fiscal spending might not be an entirely satisfactory long-term response either, <strong>because the government’s debt is already very large by historical standards and because public investment too will eventually exhibit diminishing returns</strong>.</p> </blockquote> <p>He is, actually, correct in this sentences. It is everything else that he is incorrect about.</p> <p>For example error #1:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The Fed cannot reduce market (nominal) interest rates below zero, and consequently—assuming it maintains its current 2 percent target for inflation—cannot reduce real interest rates (the market interest rate less inflation) below minus 2 percent. </p> </blockquote> <p>of course the Fed can reduce rates below zero: just look at all of its foundering central bank peers in Europe. NIRP is coming to the US, and Bernanke knows it. Furthermore he is being utterly disingenous:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>I’ll ignore here the possibility that monetary tools like quantitative easing or slightly negative official interest rates might allow the Fed to get the real rate a bit below minus 2 percent.</p> </blockquote> <p>Oh, ignore QE please. After all it has led only to a tiny $4.5 trillion Fed balance sheet. What's that: like 25% of US GDP? Just ignore it. Not like the Fed can't raise rates and disappear trillions in bank excess reserves in "15 minutes." Of course, the S&amp;P will be trading at 15 as well, but who cares.</p> <p>The farce continues:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Does the U.S. economy face secular stagnation? <strong>I am skeptical</strong>, and the sources of my skepticism go beyond the fact that the U.S. economy looks to be well on the way to full employment today. </p> </blockquote> <p>It <a href="">sure does</a>:</p> <p><a href=""><img src="" width="600" height="395" /></a></p> <p>&nbsp;</p> <p>Oh, and please ignore the <a href="">following too</a>.</p> <p><a href=""><img src="" width="600" height="569" /></a></p> <p>&nbsp;</p> <p><a href="">And this</a>:</p> <p><a href=""><img src="" width="600" height="383" /></a></p> <p>Just keep repeating: on way to "full employment." Affter all Ben Bernanke said it.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>First, as I pointed out as a participant on the IMF panel at which Larry first raised the secular stagnation argument, at real interest rates persistently as low as minus 2 percent it’s hard to imagine that there would be a permanent dearth of profitable investment projects. As Larry’s uncle Paul Samuelson taught me in graduate school at MIT, if the real interest rate were expected to be negative indefinitely, almost any investment is profitable<strong>. For example, at a negative (or even zero) interest rate, it would pay to level the Rocky Mountains to save even the small amount of fuel expended by trains and cars that currently must climb steep grades</strong>. It’s therefore questionable that the economy’s equilibrium real rate can really be negative for an extended period. </p> </blockquote> <p>The days of the Rocky Mountains may well be numbered. And then the bubble master himself says something truly profound.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>I generally agree with the recent critique of secular stagnation by Jim Hamilton, Ethan Harris, Jan Hatzius, and Kenneth West. In particular, <strong>they take issue with Larry’s claim that we have never seen full employment during the past several decades without the presence of a financial bubble. </strong>They note that the bubble in tech stocks came very late in the boom of the 1990s, and they provide estimates to show that the positive effects of the housing bubble of the 2000’s on consumer demand were largely offset by other special factors, including the negative effects of the sharp increase in world oil prices and the drain on demand created by a trade deficit equal to 6 percent of US output. They argue that recent slow growth is likely due less to secular stagnation than to temporary “headwinds” that are already in the process of dissipating. <strong>During my time as Fed chairman I frequently cited the economic headwinds arising from the aftermath of the financial crisis on credit conditions; the slow recovery of housing; and restrictive fiscal policies at both the federal and the state and local levels. </strong></p> </blockquote> <p>Ironic Bernanke should say that, because what the world will most remember him for are the sayings on the linked page: <a href="">Federal Reserve Board Chairman Ben Bernanke's Greatest Hits</a>. Everyone should read these to recall what the Fed chairman was really saying.</p> <p>But the punchline, and where Bernanke's true colors once again shine, is in his final paragraph:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>My greatest concern about Larry’s formulation, however, is the lack of attention to the international dimension. He focuses on factors affecting domestic capital investment and household spending. All else equal, however, the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home. <strong>The foreign exchange value of the dollar is one channel through which this could work: If US households and firms invest abroad, the resulting outflows of financial capital would be expected to weaken the dollar, which in turn would promote US exports. </strong>Increased exports would raise production and employment at home, helping the economy reach full employment. In short, in an open economy, secular stagnation requires that the returns to capital investment be permanently low everywhere, not just in the home economy</p> </blockquote> <p>Clearly that theory has worked so well for all hyperinflating countries who took Bernanke's advice and crushed their currency only to not reap the numerous benefits of monetary collapse and the resultant economic devastation.</p> <p>However, where everything clicks, is Bernanke's insistence that it all goes back to crushing the dollar, i.e., printing so much of it that it is devalued. Which in turn brings us to Bernanke's far more seminal and important speech from November 2002, "<a href="">Deflation: Making Sure "It" Doesn't Happen Here</a>", in which he laid out very clearly how this entire episode of market, financial and economic idiocy will end.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>... the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. <strong>A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money</strong>.</p> </blockquote> <p>And there you have it: when all else fails, the helicopter will come out. A helicopter that will drown the world in crisp $100 (and soon <em>$100,000,000,000,000</em>) bills, which in turn will hyperinflate everything. The debt included. </p> <p><img src="" width="280" height="281" /></p> <p>Is it thus any wonder then why Bernanke used the word "debt" only once in a blog post that was all exclusively about debt?</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="280" height="281" alt="" src="" /> </div> </div> </div> Ben Bernanke Ben Bernanke Credit Conditions Ethan Harris Excess Reserves Federal Reserve fixed Housing Bubble Jan Hatzius McKinsey None Paul Samuelson Quantitative Easing Real Interest Rates recovery Trade Deficit Tue, 31 Mar 2015 23:45:19 +0000 Tyler Durden 504095 at