Fed Opens Negative Interest Rate Pandora's Box: What Happens Next

As we already commented extensively, while the Fed's dovish non-hike was a violent surprise for the market, and has led to what may be the first thoroughly unanticipated (at least by the market) policy mistake by the Federal Reserve (judging by the market), the biggest news was the very symbolic, yet all too ominous, negative interest rate forecast in the Fed's projection materials by one FOMC member.

This was the first time in Fed history that an FOMC member has on the record predicted NIRP in the US.

Janey Yellen's subsequent non-denial during the press conference did not exactly inspire hope that the Fed was just "joking":

I don’t expect that we’re going to be in a path of providing additional accommodation. But if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools. And that would be something that we would evaluate in that kind of context.

Furthermore, when considering that virtually all of Europe is already flooded by NIRP, and earlier Bank of England's Andy Haldane, one of the otherwise more rational members of the central bank, advocated negative rates in the UK, one can be virtually certain that unless there is a dramatic rebound in the global economy, the next step by Yellen will not be a rate hike, but easing (just as Goldman predicted) right into negative interest rate territory.

What would NIRP in the US mean in practical terms?

For the answer we go straight to, drumroll, the Fed itself whose New York economists discussed precisely this topic just three years ago and issued a very stark warning (which apparently the Fed itself decided to ignore), saying "If Interest Rates Go Negative . . . Or, Be Careful What You Wish For."

This is what the New York Fed said in August 2012:

If Interest Rates Go Negative . . . Or, Be Careful What You Wish For

One way to push short-term rates negative would be to charge interest on excess bank reserves. The interest rate paid by the Fed on excess reserves, the so-called IOER, is a benchmark for a wide variety of short-term rates, including rates on Treasury bills, commercial paper, and interbank loans. If the Fed pushes the IOER below zero, other rates are likely to follow.

Without taking a position on either the merits of negative interest rates or the Fed's statutory authority to fix the IOER below zero, this post examines some of the possible consequences. We suggest that significantly negative rates—that is, rates below -50 basis points—may spawn a variety of financial innovations, such as special-purpose banks and the use of certified bank checks in large-value transactions, and novel preferences, such as a preference for making early and/or excess payments to creditworthy counterparties and a preference for receiving payments in forms that facilitate deferred collection. Such responses should be expected in a market-based economy but may nevertheless present new problems for financial service providers (when their products and services are used in ways not previously anticipated) and for regulators (if novel private sector behavior leads to new types of systemic risk). 

Cash and Cash-like Products 

The usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash. But cash is not a realistic alternative for corporations and state and local governments, or for wealthy individuals. The largest denomination bill available today is the $100 bill. It would take ten thousand such bills to make $1 million. Ten thousand bills take up a lot of space, are costly to transport, and present significant security problems. Nevertheless, if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.

If rates go negative, we should also expect to see financial innovations that emulate cash in more convenient forms. One obvious candidate is a special-purpose bank that offers conventional checking accounts (for a fee) and pledges to hold no asset other than cash (which it immobilizes in a very large vault). Checks written on accounts in a special-purpose bank would be tantamount to negotiable warehouse receipts on the bank’s cash. Special-purpose banks would probably not be viable for small accounts or if interest rates are only slightly below zero, say -25 or -50 basis points (because break-even account fees are likely to be larger), but might start to become attractive if rates go much lower.

Early Payments, Excess Payments, and Deferred Collections

Beyond cash and special-purpose banks, a variety of interest-avoidance strategies might emerge in connection with payments and collections. For example, a taxpayer might choose to make large excess payments on her quarterly estimated federal income tax filings, with the idea of recovering the excess payments the following April. Similarly, a credit card holder might choose to make a large advance payment and then run down his balance with subsequent expenditures, reversing the usual practice of making purchases first and payments later.

We might also see some relatively simple avoidance strategies in connection with conventional payments. If I receive a check from the federal government, or some other creditworthy enterprise, I might choose to put the check in a drawer for a few months rather than deposit it in a bank (which charges interest). In fact, I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.

Certified checks, which are liabilities of the certifying banks rather than individual depositors, might become a popular means of payment, as well as an attractive store of value, because they can be made payable to order and can be endorsed to subsequent payees. Commercial banks might find their liabilities shifting from deposits (on which they charge interest) to certified checks outstanding (where assessing interest charges could be more challenging). If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.

As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly. This is exactly the opposite of what happened when short-term interest rates skyrocketed in the late 1970s: people then wanted to delay making payments as long as possible and to collect payments as quickly as possible. Some corporations chose to write checks on remote banks (to delay collection as long as possible), and consumers learned to cash checks quickly, even if that meant more trips to the bank, and to demand direct deposits. However, if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers. Such a reversal could impose novel burdens on payment systems that have evolved in an environment of positive interest rates.

Conclusion

The take-away from this post is that if interest rates go negative, we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation. Financial service providers are likely to find their products and services being used in volumes and ways not previously anticipated, and regulators may find that private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants.

Yes, the conclusion is staggering: the Fed itself previewed the complete debacle that the Fed itself is now preparing to unleash with NIRP which will lead to "an epochal outburst of socially unproductive—even if individually beneficial—financial innovation." Not only that but the Fed, in a moment of rare lucidity, admitted that "private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants."

Tell that to Europe, Sweden, Switzerland where NIRP already reigns supreme, and all other countries where NIRP is coming.

But what may be missed between the lines is the Fed's explicit observation that in a world of NIRP, cash will reign supreme, as everyone rushes to withdraw their "taxed" bank deposits and keep the funds in the form of paper cash, hidden safely somewhere where the bank has no access, and where no bank can collect an interest rate for the "privilege" of being funded with a negative rate liability.

Furthermore, as the Fed correctly observes, "the usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash. But cash is not a realistic alternative for corporations and state and local governments, or for wealthy individuals."

So what is the alternative?

The answer was hinted during Andy Haldane's speech earlier today in which he not only urged the banning of cash but the implementation of negative rates, two concepts which, after reading the note above, should intuitively go hand in hand: as we commented "one idea, Haldane told an audience of business owners in Northern Ireland, could be to scrap cash and adopt a state-issued digital currency like Bitcoin. Although widely reviled as the currency for drug dealers and criminals, Haldane said Bitcoin’s distributed payment technology had ‘real potential’. Which may explain the Fed's sudden fascination in the virtual currency."

And fascination it is. Below are some examples of recent Fed research on a topic which as recently as 2011 it held as a heretic taboo, and which the ECB considered a Ponzi scheme as recently as November 2012:

• Chicago Fed on Bitcoin: A Primer, December 2013
• Boston Fed on Bitcoin as Money, September 2014
• St. Louis Fed on "Bitcoin and Beyond: The Possibilities and the Pitfalls of Virtual Currencies", March 2014
• Federal Reserve on Bitcoin: Technical Background and Data Analysis, October 2014
• The Federal Reserve Bitcoin Strategy

Last but not least:

• Research: Federal Reserve Needs Power Over Bitcoin

Of course it does. Why? For two simple reasons:

• First, as noted above, cash and NIRP simply do not mix as cash provides the general population a handy way of circumventing the intentionally punitive implications of negative rates, which as a tax on all savers, would force everyone to spend savings the moment these were created. The thinking here, of course, would be that with savings immediately converted to consumption, the velocity of money would surge and boost economic growth in the process even if it was conducted under punitive rate duress.
• Second, and even more important, is the blockchain basis of bitcoin, which is precisely why the Fed is so fascinated by it. With a perpetual and current ledger of every single transaction in the monetary domain, a digital currency such as bitcoin provides the Fed something cash never would - a constant database (or ledger) of every single transaction everywhere and any given moment.

It is the second aspect of bitcoin that has led to such recent headlines as "Big banks consider using Bitcoin blockchain technology" and, of course, Bloomberg's piece from September 1 in which "Blythe Masters Tells Banks the Blockchain Changes Everything."

Yes it does, and especially in a world in which the Fed regulates all blockchain transactions under a negative interest rate regime: quite simply, the combination of blockchain and NIRP give the Fed supreme control over all transactions.

Simply said: bitcoin under NIRP is a Fed match made in heaven.

There is just one small hurdle - eliminating cash as a transaction medium entirely. However, considering the US experience with confiscating monetary intermediates most recently observed with Executive Order 6102 when FDR confiscated all US gold, will the Fed allow such a little "problem" as "sequestering" available cash stand in the way of NIRP dominance? Of course not, especially if the alternative is the complete loss of central bank credibility.

Which, in a nutshell, is what Kocherlakota's negative interest-rate dot unleashed: a world in which the existing cash/ZIRP paradigm becomes blockchain/NIRP (and where the Fed is aware of every single transaction).

And, before you ask, will there be substantial - and violent - opposition to the Fed's mandatory conversion of cash to bitcoin? Of course. But that too certainly not stop the Fed, which fighting for the survival of trillions in legacy "wealth" would simply steamroll over anyone and anything courtesy of the US government's armed backing (which has conclusively proven in recent years its function has metastasized to serve only the wealthiest corporations and Wall Street interests) to preserve such wealth, if only for a little longer.

Comments

[In.Sip.ient]

with 21Million BitCoin, I'd say your

aiming for upwards of $190Million/B-C

!!!

[U4 eee aaa]

Wow,it just clicked for me. Negative interest rates are effectively the shrinking of the currency base. It is debt repudiation at the very slowest rate. So basically, the monetarists are in agreement with the bears that debt repudiation is the solution. The only disagreement is in the size and the rate

[In.Sip.ient]

Debt repudiation...

AND

the end of BANKING as a business and profession...

ON EDIT: and it just occurred to me the death of

the nation state as well... that last one would be a

DOOZY.

[blindman]

banking is a utility, not the supreme
parasite eating your offspring for trace
minerals or readily available amino acids.

[bunnyswanson]

Banking is a service industry.  Like dry cleaning.   That they create $ and charge interest is why the world economy is collapsing.

Nehemiah 5:1-19 ESV / 7 helpful votes    

Now there arose a great outcry of the people and of their wives against their Jewish brothers. For there were those who said, “With our sons and our daughters, we are many. So let us get grain, that we may eat and keep alive.” There were also those who said, “We are mortgaging our fields, our vineyards, and our houses to get grain because of the famine.” And there were those who said, “We have borrowed money for the king's tax on our fields and our vineyards. Now our flesh is as the flesh of our brothers, our children are as their children. Yet we are forcing our sons and our daughters to be slaves, and some of our daughters have already been enslaved, but it is not in our power to help it, for other men have our fields and our vineyards.” ...

[appocean]

I imagine interest only loans would be in great demand.

[scaleindependent]

With NIRP and if and when they get rid of cash and PM's, then there will be a run on all things copper at the Home Depot and Lowe's. Productive property will also go.  ETC, etc

[kelley805]

Here are some signs of a coming recession.

http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record...

http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/

http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/

http://www.zerohedge.com/news/2015-07-27/when-will-we-ever-learn/

Here is how to respond.

http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Here is how to get your mind off this stuff.

http://michaelekelley.com/category/humor/

Good luck!

[BurningBetty]

I guess we are average minds then, since we are here endlessly discussing events.

[BurningBetty]

From the excerpt of Sun Tzus, The Art of War:

"In the operations of war, where there are in the field a thousand swift chariots, as many heavy chariots, and a hundred thousand mail-clad soldiers, with provisions enough to carry them a thousand LI(2,78 modern mile), the expenditure at home and at front, including entertainment of guests, small items such as glue and paint, and sums spent on chariots and armor, will reach the total of thousand ounces of silver per day. Such is the cost of raising an army of 100,000 men."

Now, if we are to add inflational numbers to silver and humanity(increase in population from the time of Sun Tzu), I am pretty sure the ratio of silver wouldn't be much off to the upside, if at all. Given todays population of 7,3 billion, and the total mined silver of some 43,9 billion ounces makes it some 6,01 ounces per human head. This is the all silver ever mined in human history. I mean, it's not exactly a insane number...6 ounces. 

Still, for all of you who do own 1000oz of silver...at some point in history, you could have owned your own armies for that amount! 

[Bernoulli]

Janey Yellen's subsequent non-denial during the press conference did not exactly inspire hope that the Fed was just "joking": I don’t expect that we’re going to be in a path of providing additional accommodation. But if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools. And that would be something that we would evaluate in that kind of context.

So what she is saying is:

- at least one of her "colleagues" clearly expects "the outlook to change" and therefore put his/her dot in the range of 0% to -0.25%

- "most" of the others did not put their dot in negative territory (yet?), but would also look into it, if the economy should be weak (which it is as seen by the types of jobs created and the labor force participation rate!?!) or "needs additional stimulus" (WTF! of course it needs stimulus!).

So is it it just me or did she actually announce that interest rates will go negative maybe already in December 2015?

[Lucky Leprachaun]

The key points beyond the macroeconomic intricacies of the analysis is that we are using low interest rates to pull forward consumption from the future in order to keep the consumption bubble of the run-up to 2008 inflated. This is stealing consumption from the future in the hopes that somehow we will grow into the asset values we have today based on unsustainable demand. In a word, this is madness. 

Another way to illustrate this madness: zero interest rates are a signal of a very sick economy. The signal ZIRP sends is that the time value of money is zero, the risk premium is zero. Essentially this means there is no tomorrow.

[Atomizer]

Al Dunlap (Chainsaw Al). Build, book the sales, and store until physically deliveried philosophy. It was referered to as Theory O.

Theory E – Theory O - Human Viewpoint

[Atomizer]

FOMC nipple (NIRP) to suck in dependent interest rate policy followers.

[buzzsaw99]

if the fed wants to reward the criminal bankers with a license to steal while causing an epic deflationary shit storm zirp will do that. that is why nirp is inevitable, because that is exactly what they want.

[SMASH THE CONTR...]

HERE IS THE REASON .HIGH FREQUENCY TRADING MADE IT ALL POSSIBLE!! IT HAPPENS IN ONE HOUR BABYLON...AMERICA HAS FALLEN IN ONE HOUR!!!!!WHAT THE PROPHETS SAID ABOUT BABYLON 1. Babylon would be an END TIME GREAT NATION (Rev 17,18; Isa 13:6).2. Babylon would have a huge seaport city within its borders (Rev 18:17). 3. The Great City Babylon is the home of a world government attempt (Rev 17:18). 4. The Great City Babylon would be the economic nerve center of the world (Rev 18:3). 5. Babylon would be the center of a one world Luciferian religious movement (Jer 51:44). 6. Babylon would be the center for the move to a global economic order (Rev 13:16).BABYLON THE NATION 1. Babylon would be the youngest and greatest of the end time nations (Jer 50:12). 2. Babylon would the QUEEN AMONG THE NATIONS (Isa 47:5,7; Rev 18:7). 3. Babylon would be the most powerful nation in the world (Isa 47, Jer 50, 51, Rev 18). 4. Babylon would be the HAMMER OF THE WHOLE EARTH (Jer 50:23; Rev 18:23). 5. Babylon is called a lady, and has the symbol of the Lady (Isa 47:7-9). 6. Babylon would be the praise of the WHOLE EARTH (Jer 51:41). 7. Babylon is center of world trade (Jer 51:44; Rev 17:18; 18:19). 8. Babylon would grow to be the richest nation in the world (Rev 18:3, 7, 19, 23). 9. All nations that traded with Babylon would grow rich (Rev 18:3). 10. The merchants of Babylon were the GREAT MEN OF THE EARTH (Rev 18:23). 11. Babylon is a huge nation, with lands, cities, and great wealth (implied throughout). 12. Babylon is nation "peeled", or timbered, a land of open fields (Isa 18:2). 13. Babylon is land quartered by mighty rivers (Isa 18:2). 14. Babylon is a land that is measured out, and populated throughout (Isa 18:2). 15. Babylon destroys her own land, with pollution and waste (Isa 14:20, 18:2, 7). 16. Babylon is a land rich in mineral wealth (Jer 51:13). 17. Babylon is a the leading agricultural nation of the world (Jer 50, 51; Rev 18). 18. Babylon is the leading exporting nation in the world (Jer 51:13; Rev 18). 19. Babylon is the leading importing nation of the entire world.(Jer 50, 51; Rev 18). 20. Babylon is a nation filled with warehouses and granaries (Jer 50:26). 21. Babylon is the leading INDUSTRIAL NATION OF THE WORLD (Isa 13, 47, Jer 50, 51; Rev 18). 22. Babylon is noted for her horses (Jer 50:37). 23. Babylon is noted for her cattle, sheep and other livestock (Jer 50:26, 27; Rev 18:13). 24. Babylon is noted for her fine flour and mill operations (Rev 18:13). 25. Babylon is a nation of farmers and harvests huge crops (Jer 50:16, 26, 27). 26. Babylon is a huge exporter of MUSIC (Rev 18:22). 27. Babylon's musicians are known around the world (Rev 18:22) 28. Babylon has a huge aviation program (Isa 14:13-14; Jer 51:53; Hab 1:6-10). 29. Babylon's skies are filled with the whisper of aircraft wings (Isa 18:1; Jer 51:53). 30. Babylon has a huge space industry, has "mounted up to the heavens" (Jer 51:53). 31. Babylon fortifies her skies with a huge military aviation program (Jer 51:53). 32. Babylon is portrayed as a leading in high tech weapons and abilities (Jer 51:53; Hab 1:6-10; implied throughout). 33. Babylon is a nation filled with warm water seaports (Rev 18:17-19). 34. Babylon is a coastal nation and sits upon MANY WATERS (Jer 51:13). 35. Babylon trades with all who have ships in the sea year round (Rev 18:17-18). 36. Babylon is nation filled with a "mingled" people (Jer 50:37). 37. Babylon is a SINGULAR NATION founded upon OUT OF MANY, ONE (Isa 13, 47, Jer 50, 51, Hab 1). 38. Babylon is a REPUBLIC or a DEMOCRACY, it is ruled by many counsels (Isa 47:13). 39. Babylon's governmental system breaks down (Isa 47:13). 40. Babylon is bogged down with deliberations and cannot govern properly (Isa 47:13). 41. Babylon's leaders use astrology, seers and mystics for guidance (Isa 47:13; Rev 18:2). 42. Babylon labored in the occult from her very inception (Isa 47:12). 43. Babylon falls to the occult just before her end by nuclear fire (Rev 18:2) 44. Babylon was born as a CHRISTIAN NATION (Jer 50:12). 45. Babylon turns upon its heritage and destroys it all in the end (Jer 50:11). 46. Babylon's Christian leaders lead their flock astray in prophecy and salvation (Jer 50:6; implied Rev 18:2). 47. Babylon's Christian leaders are "strangers" in the Lord Houses of Worship (Jer 51:51). 48. The people of Babylon are deep into astrology and spiritism (Isa 47:12; Rev 18:2). 49. Babylon becomes the home of all antichrist religions in the world (Rev 18:2). 50. Babylon is a nation of religious confusion (Isa 47:12-13). 51. Babylon turns upon its own people and imprisons and slays them by millions (Jer 50:7,33; 51:35; 39; Dan 7:25; Rev 13:7; 17:6; 18:24). 52. Babylon sets of detention centers for Jews and Christians and rounds them up for extermination (Jer 50:7, 33; 51:35, 49; Rev 17:6; 18:24). 53. Babylon has a mother nation that remains in existence from her birth to death (Jer 50: 12). 54. The mother of Babylon has the symbol of the LION (Dan7:4; Eze 38:13; Jer 51:38; Psalms 17:12). 55. The mother of Babylon will rule over her daughter her entire life (Dan 7:4; Jer 50:12). 56. The mother of Babylon will be a state of major decline as the end nears (Jer 50:12). 57. Babylon is considered to be a lion's whelp (Eze 38:13; Jer 51:38). 58. Babylon will have the symbol of the EAGLE and builds her nest in the stars (Dan 7:4 EAGLE WINGS; Isa 14:13-14; Jer 51:53). 59. Babylon turns totally antichrist and is the leading antichrist power at the end (Rev 18:2; Isa 14:4-6). 60. THE KING OF BABYLON is called LUCIFER, the ANTICHRIST (Isa 14:4-6). 61. The King of Babylon will rule from THE GREAT CITY BABYLON (Isa 14:4-6; Rev 17: 18). 62. A world government entity will rise up to rule the world from BABYLON THE CITY (Isa 14; Hab 2, Rev 13, 17, 18). 63. This world entity will be a diverse entity, different than all other ruling bodies of the world (Dan 7:7, 23). 64. This entity will be a TREATY POWER ENTITY (Dan 7:7, 23 DIVERSE). 65. This entity will rise up and use the military power of Babylon the nation to RULE THE WORLD (Isa 14:4-6; Hab 1 & 2, Rev 13, 17). 66. Babylon is a huge producer and exporter of automobiles (Jer 50:37; Rev 18:13). 67. Babylon is a nation of CRAFTSMEN, experts in their trade (Jer 50, 51, Rev 18:22). 68. Babylon is noted for her jewelry of gold and silver (Rev 18:22). 69. Babylon is a huge importer and exporter of spices (Rev 18:13). 70. Babylon is a huge exporter of fine marble products (Rev 18:22). 71. Babylon is noted for her iron and steel production (Rev 18:12). 72. Babylon has huge corporations that have bases around the world (Rev 18:23, implied throughout) 73. Babylon is a nation of higher education and learning (Isa 47:10, implied throughout). 74. Babylon is a nation with a GREAT VOICE in world affairs (Jer 51:55) 75. Babylon is a VIRGIN NATION, untouched by major war (Isa 47:1). 76. Babylon has a vast military machine (Jer 50:36; 51:30; Hab 1 & 2, Rev 13:4). 77. Babylon will be instrumental in the setting up of Israel in the Middle East, and is the home of God's people (Jer 50:47; 51:45). 78. Babylon will have a major enemy to her north (Jer 50:3, 9, 41). 79. Babylon's enemy will lie on the opposite side of the world, over the poles (Isa 13:5) 80. The enemy of Babylon will be a FEDERAL OF NATIONS (Jer 50:9). 81. The enemy of Babylon will be largely Moslem in make-up (Jer 50:17; Rev 17:16; Psalms 83:5-12). 82. The enemy of Babylon will have nuclear missiles capable of reaching Babylon (Jer 50:9, 14,; Rev 18:8, 18). 83. The enemy of Babylon will be noted for her cruelty (Isa 13, 14, Jer 50, 51, Rev 17, 18). 84. The enemy of Babylon will also have a huge aviation military machine (Jer 50:9, 14, Rev 18:8, 18 implied throughout). 85. The enemy of Babylon will come into Babylon unnoticed (Isa 47:11, Jer 50:24; 51:2, 14). 86. Babylon will be filled with her enemies brought in under the guise of peace (Dan 11:21). 87. Babylon will have all of her borders cut off, and there will be no way of escape (Jer 50:28; 51:32). 88. Babylon will be destroyed by nuclear fire (Implied throughout) 89. Babylon is land vast land with huge cities, towns and villages throughout (Implied throughout). 90. Babylon will have been a huge missionary nation for Jesus Christ (Jer 50:11; 51:7). 91. Babylon would be a home to multitudes of Jews who leave (Jer 50:4-6, 8; 51:6, 45) 92. The people of Babylon would not know their true identity (Jer 50:6, implied throughout). 93. The people of Babylon would think they are God's elect and eternal (Isa 47:7-8, Rev 18:7). 94. The people of Babylon would enjoy the highest standard of living in the world (Rev 18:7). 95. The people of Babylon would grow mad upon their idols (Jer 50:2, 38; Hab 2:18). 96. The people of Babylon would go into deep sins of all kinds (Rev 18:5). 97. The nation Babylon dwells carelessly before the Lord (Isa 47:8). 98. Babylon becomes proud, haughty, and does not consider her end (Isa 47:7-8). 99. Babylon deals in the occult, in sorceries and drugs (Isa 47:9, 12; Rev 18:23)These are but a few of the many parameters listed to help us identify this last great nation that the Lord calls BABYLON THE GREAT. America does now, or is in the process of fulfilling each and every one of them. No other nation upon the face of the earth can fulfill these parameters. AMERICA IS BABYLON THE GREAT. There would likewise be a series of SIGNS that would would begin to emerge that would give BIRTH TO, and WATCH THE RISE OF, as well as THE FALL OF AMERICA-BABYLON.

[dexter_morgan]

GOY LIVES MATTER!

[q99x2]

Bitcoin has proved more stable this year than certain nation's bankster fiat. Last price $234.19

[polo007]

According to Bank of America Merrill Lynch:

https://app.box.com/s/2x1jqc1901tv8v00mbqnqjfbu8rrqzzp

The HY Note

Global growth concerns spread from us to Fed

A slow moving train wreck

Today’s Fed decision was the second worst outcome for risk markets, in our view. We have written on numerous occasions that if the Fed didn’t hike rates today initially markets would rally modestly before selling off. The realization that global growth concerns are not only real, but very dangerous right now should cause a risk off environment. And with no room to cut rates, we question the Fed’s ability to manage any further slowdown through what would have to be QE4. However, we can’t see how additional quantitative easing will help, as the goals of QE have already played out: the banking system has recovered, rates are low, investors have driven debt issuance and asset prices to uncomfortable levels, and the housing market has recovered enough to not be a concern.

Furthermore, lower rates don’t help high yield at this point. Whether the 10y is at 2.20% or 2.0%, does the asset class really look all that more compelling? Not in the slightest. In fact, outside of hiking while sounding very hawkish, not hiking and sounding very dovish while expressing concern about the global economy may be the worst thing that could have happened today.

We have been saying for months that the global economy is weak and the Fed’s dovish disposition today only bolsters our view. Europe is about to enter QE2 as inflation and growth remains poor. Japan and Brazil were just downgraded. Commodities remain   under pressure and we think, at some point, the narrative could turn from a supply driven story to a demand driven one. Domestically it becomes harder to argue that a strong dollar and the lack of inflation can be viewed as transitory and this headwind is continuing to hurt high yield corporates. Manufacturing is uneven, consumer spending hasn’t improved in a year, and 2014 real median income was down 6.5% versus 8 years ago (and down 7.2% from the 1999 level). Although auto sales remain strong, we would expect as much given low gas prices, an aging fleet and the fact that auto loans are one of the few places in the economy where it’s easy to obtain credit.

Additionally, high yield corporate earnings remain incredibly weak, with yoy earnings growth negative for the first time since the recession (even ex: commodities EBITDA growth is only slightly positive). Leverage is at all-time highs (again, even ex- commodities) and the High Yield index is more globally exposed than it has ever been (35% of the market generates 45% of its revenue from outside of the United States, and that doesn’t include Energy, which is globally exposed despite not realizing significant direct sales abroad).

Not only are earnings weak, but there has been next to no capex investment, debt issuance has been massive, and buybacks and dividends have driven equity valuations as CEOs and CFOs, afraid to invest in organic growth, have chosen to buy growth instead. And as a result, recovery rates are 10-15ppt below historical norms and defaults and downgrades are creeping into the market. Although we understand many will say its just commodities, is it really? What started as coal weakness 18 months ago became coal and energy weakness. But it wasn’t really just the commodity sectors, as retail was also already weak. Now it’s the commodity sectors, retail and wireline (but definitely not all of telecom). The situation almost seems unbelieveable, as everything that seems to go wrong is explained as being isolated (AMD, well, of course semiconductors are in a secular decline) and treated as a surprise (Sprint).

In our view, the makings are there for a risk off environment for some time to come. For non-commodity spreads to be 400bp tighter than in 2011 makes little sense to us. Replace Greece for a much bigger problem: China. Replace Washington dysfunction and debt downgrade with uncertainty about monetary policy and EM weakness (though we may see Washington dysfunction very soon between this fall’s budget talks and the presidential race looming). Replace US QE with European QE. Additionally, replace   strong earnings growth and margin expansion in 2011 with no earnings growth, a stronger dollar, and higher leverage today. Replace decent liquidity back then with poor liquidity now. And replace the fears of a double dip recession with the potential for fears of a global recession. Though this last point has yet to play out, we think it’s only a matter of time before investors begin to feel as bearish as we do.

The Fed had an opportunity today to hike rates and begin to build a cushion should the global slowdown be so severe it can’t be ignored. Instead, they chose to wait. In our view, this has left them in a predicament as now the rumbles of never being able to increase rates will become even more exaggerated, and when they ultimately do, we think it will be more painful than if they had gone today. We expect as a consequence for there to be more market volatility, more uncertainty around the Fed’s motives and belief in the economy, and therefore more downside risk. Most importantly, however, the acknowledgment of weakness only bolsters our view that we are in the midst of the beginning of the end of this credit cycle, and we warn investors to tread carefully not try to be a hero into year end.

Now is the time that investors need to be managing risk rather than looking for alpha. 1 or 2 names will destroy the performance for what has otherwise been a good set of holdings. Remember what many have forgotten over the last 7 years, credit returns are skewed to the downside. The best case scenario is to earn coupon and the ultimate payment of principle. The worst case scenario is 40, 50, 60 or more points of loss.

We’re in the midst of watching a slow-moving train wreck, and in our view the Fed confirmed as much today.

[much obliged]

Quote: ....even more important, is the blockchain basis of bitcoin, which is precisely why the Fed is so fascinated by it. With a perpetual and current ledger of every single transaction in the monetary domain, a digital currency such as bitcoin provides the Fed something cash never would - a constant database (or ledger) of every single transaction everywhere and any given moment.

After reading that article I feel that I'm indoctrinated for a cashless society. More than that, if I speak to anyone beyond the posters in this forum about the content of this article that I'd be indoctrinating them too. Can't help but think that the more that anyone pushes for and finds reasons for restoration of free markets and adopting free market interest rates that the more that the powers-that-be will push back with cashless transactions. With an army of indoctrinated bureaucrats (i.e. well paid employees who could see their livihoods evaporate without taking advantage of opportunities to interpret in a new-found timely manner and intervene in instantly available price trends that a cashless society would offer, if something as simple as genuine free trading based on supply & demand came back) at their behest, free market price discovery looks increasingly in peril.