Cantillon

"If you can convince us that any mortal can hold such a complex tangle of possible outcomes within their comprehension, we will allow that our monetary heretics may be right to do away with the combined practical experience and theoretical understanding of all those who have gone before them over the ages. Until you do, we shall be forced to withhold my endorsement and to mutter darkly about the unexpiable sin of hubris instead."

Obama has always claimed to want to spread the wealth around. Yet, as I stressed this June (and in my first ever blog post way back in July 2011!) that’s the exact opposite of what he has achieved. And it’s getting worse, not better. The truth of Obama’s policies (and successive administrations prior to Obama) is more concentrated wealth within the financial elites and Wall Street. Banks get bailed out. Campaign donors get stimulus money. And the middle class and future generations pay for it in taxation and the Cantillon Effect. The Obama reinflation is a rotten bubble built on rotten foundations. And the growing gap between the rich and the poor is steadily beginning to resemble neofeudalism.

The empirical data is in. And it turns out that as we have been suggesting for a very long time — yes, shock horror — helicopter dropping cash onto the financial sector does disproportionately favour the rich. Here are four simple questions to the venerable Bank of England (just as applicable to any and every Central Banker); and sadly, we expect to see the announcement of more quantitative easing to the financial sector long before we expect to see answers to any of these questions.

The deleveraging trap is a catch-22; while debt remains excessive, economic activity remains subdued, and while economic activity remains subdued, generating more production than consumption to pay down debt is extremely difficult. As we have seen in Japan — where the total debt load remains above where it was 1991 — fundamentals can remain depressed for years or even generations. Certainly, the modern debt jubilee isn’t going to cure the culture that led to the excessive debt. Certainly, it won’t wash away the vampiristic TBTF megabanks who caused the GFC and live today on bailouts and ZIRP. Certainly, it won’t fix our broken political or financial systems where whistleblowers like Assange are locked away and fraudsters like Corzine roam free to start hedge funds. And certainly it won’t wash away the huge mountain of derivatives or shadow intermediation that interconnect the economy in a way that amplifies small shocks into greater crises.

It is important to consider how beneficial a debt reset — so long as society comes out of it in one piece — will be in the long run. As both Friedrich Hayek and Hyman Minsky saw it, with the weight of excessive debt and the costs of deleveraging either reduced or removed, long-depressed-economies would be able to grow organically again. This is obviously not ideal, but it is surely better than remaining in a Japanese-style deleveraging trap. Yet while most of the economic establishment remain convinced that the real problem is one of aggregate demand, and not excessive total debt, such a prospect still remains distant. The most likely pathway continues to be one of stagnation, with central banks printing just enough money to keep the debt serviceable (and handing it to the financial sector, which will surely continue to enrich itself at the expense of everyone else). This is a painful and unsustainable status quo and the debt reset — and without an economic miracle, it will eventually arrive — will in the long run likely prove a welcome development for the vast majority of people and businesses.

The easing of credit conditions (in other words, the enhancement of banks’ ability to create credit and thus enhance their own purchasing power) following the breakdown of Bretton Woods — as opposed to monetary base expansion — seems to have driven the growth in credit and financialisation. It has not (at least previous to 2008) been a case of central banks printing money and handing it to the financial sector; it has been a case of the financial sector being set free from credit constraints. Monetary policy in the post-Bretton Woods era has taken a number of forms; interest rate policy, monetary base policy, and regulatory policy. The association between growth in the financial sector, credit growth and interest rate policy shows that monetary growth (whether that is in the form of base money, credit or nontraditional credit instruments) enriches the recipients of new money as anticipated by Cantillon. This underscores the need for a monetary and credit system that distributes money in a way that does not favour any particular sector — especially not the endemically corrupt financial sector.

Expansionary monetary policy constitutes a transfer of purchasing power away from those who hold old money to whoever gets new money. This is known as the Cantillon Effect, after 18th Century economist Richard Cantillon who first proposed it. In the immediate term, as more dollars are created, each one translates to a smaller slice of all goods and services produced. How we measure this phenomenon and its size depends how we define money....  What is clear is that the dramatic expansion of the monetary base that we saw after 2008 is merely catching up with the more gradual growth of debt that took place in the 90s and 00s. While it is my hunch that overblown credit bubbles are better liquidated than reflated (not least because the reflation of a corrupt and dysfunctional financial sector entails huge moral hazard), it is true the Fed’s efforts to inflate the money supply have so far prevented a default cascade. We should expect that such initiatives will continue, not least because Bernanke has a deep intellectual investment in reflationism.

Today, BusinessWeek's Michael Serrill and Jonathan Neumann have released a blockbuster report based on a FOIA response by the Treasury, which proves that in America rules are only for little people, that this country has been a banana republic for years, that Animal Farm was spot on, and gives excruciating detail of how Hank Paulson tipped off a select group of Goldman diaspora hedge fund managers about the eventual failure of Fannie and Freddie 7 weeks ahead of this information becoming public knowledge. The report basically is a summary of a meeting that took place at the offices of Eton Mindich's Eton Park headquarters on July 21, 2008, 7 days after his famous '“If you have a bazooka, and people know you have it, you're not likely to take it out," speech and 7 weeks before both GSEs effectively filed for bankruptcy and were put into conservatorship. Now if it only ended there it would have been fine - a case of potential criminal collusion between the government (although nothing specific against Paulson as he didn't actually trade: he just made sure his former Goldman colleagues made money), and the 0.00001% in the face of a few multi-billionaires who most certainly did trade on material non-public information sourced by Hank. Where it however gets worse is when one considers the actual role of one Eric Mindich in the hierarchy of the Asset Managers' committee of the President's Working Group on Capital Markets, better known of course as the PPT: a topic we discussed first back in September 2009 when we asked "What Is Goldman Alum Eric Mindich's Role As Chair Of The Asset Managers' Committee Of The President's Working Group?" Back then we did not get an answer. Luckily, courtesy of a few answered FOIA requests, some real investigative journalism, and not reporting for the sake of brown-nosing just so one can get soundbites for their next name dropping "blockbuster" and straight to HBO movie, we are starting to get the full picture of just how high in US government the Goldman Sachs controlled "crony capitalist" adminsitration truly runs.

Hedge fund numbers though just before the last week of June when everything ripped. Looking at these it is not difficult to see why stocks were in dire need of a vapor volume ramp: Millennium: +0.16; Tewksbury: -0.40%; Cantillon: -3.99%; Silverpoint: -0.20%; Davidson Kempner: -0.56%; King Street: -1.07%; Owl Creek: -4.8%; Perry: -3.72%; Pershing Square: -3.7%; York Capital: -3.47%, Avenue: -1.9%; Bluemountain: -0.67%; SABA (aka negative basis implosion-in-waiting): 0.46%; Viking Global: -1.09%; Maverick: -4.25%; Highbridge Long/Short: -6.37% (oops), REIF B: -0.75%; Cobalt: -0.88%; Tudor: -2.83%; Moore Global: -2.35%; Moore Macro: -0.64%; Hutchin Hill: -0.30%; and so on.

Recently, some have started to ask a very pertinent question when it comes to the global Current Account: with every developed and developing country supposedly seeing a surge in exports, just who is it that is doing all the importing? Sean Corrigan from Diapason takes this question, and flips it on its head, as regards the printing of money and the "trade balance" of inflation: if every central bank continues to excuse itself from taking responsibility from what is now a global money printing pandemic, claiming it is merely importing inflation... then who is doing all the inflation exporting? Read on for some brilliant observations...

A few weeks ago, Hinde Capital's Ben Davies delivered a terrific speech to the The Committee for Monetary Research & Education in which the asset manager presented his insight on not only the futility of linear forecasting, on the flawed assumptions of economists, and on the very errors in the current monetary system, but went on to suggest several "Variant Themes" which put him at odds with the consensus, chief among them being of course his views on the monetary system and gold (both discussed repeatedly before on Zero Hedge), but also on specific socio-political and economic catalysts when looking at the future. Among these are : 1) "Japanese stocks are the most unloved in the world. Small-cap stocks in Japan will skyrocket in years to come, but then they would, as I see hyperinflation there in the next five years", 2) "The Swiss Franc as a bastion of safety is a fallacy. They too are debasing their currency", 3) "Turkey: the Ottoman Empire will return. Great enduring demographics and entrepreneurial spirit", and 4) "Mongolia will surpass Japan in GDP on a PPP basis." Aside from his recommendations, which may well be right or wrong, the epistemological basis of Davies view is a must read for any participant in what is becoming an increasingly chaotic, full of noise and reflexive market, in order to get a grasp of what may truly be relevant for creating, and influencing, correct opinions.

This is the fourth and final part of my major four part series dealing with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics. For those of you who have stuck with me for this series, thanks!

The fallout from the recent investigations by the Attorney General into the New York Pension Fund system will be the likely topic of numerous analyses for months to come as details of more impropriety are uncovered. In the meantime, we would like to highlight to our readers some of the more recent recipients of New York State's generosity, which in acting as a Fund of Funds for New Yorkers, continues investing capital in numerous Private Equity and Hedge Fund firms, as well as directing real estate investments.

On September 25, 2007, the President's Working Group on Financial Markets, better known as the Plunge Protection Team, announced the formation of two private sector committees, one comprising of Asset Managers and the other, of Investors. It is the first one that is more interesting, as the committee is chaired by one Eric Mindich, best known for his Goldman Sachs wunderkind status, who at 27, was the youngest Goldmanite ever to be promoted to partner. In 2004, Eric split off from Goldman, nonetheless maintaining a favorable relationship with the mothership through its "Fund of Funds" division (we jest), and its various Prime Brokerage client platforms, by starting Eton Park, which with its starting capital of $3 billion, is still likely a record of highest AUM at a fund's inception.

WSJ reporting that William von Mueffling's (who in 2007 allegedly made about $300 million) Cantillon Capital Management is shutting down.