What causes hyperinflations? The answer is: Quasi-fiscal deficits (A quasi-fiscal deficit is the deficit of a central bank)! Why have we not seen hyperinflation yet? Because we have not had quasi-fiscal deficits! Essentially, hyperinflation is the ultimate and most expensive bailout of a broken banking system, which every holder of the currency is forced to pay for in a losing proposition, for it inevitably ends in its final destruction. Hyperinflation is the vomit of economic systems: Just like any other vomit, it’s a very good thing, because we can all finally feel better. We have puked the rotten stuff out of the system.
There is now about 48 hours until the rubber hits the road. What happens in the next 2 days: in a somewhat surprising development earlier, the Republicans today managed to turn the tables on the president, and as reported this morning, proposed an alternative "Plan B", one which the president has already said he will not to accept as it extends the current Bush tax cuts on all those making $1 million or less (and thus not nearly punitive enough in the eyes of Obama's electorate). The reason for this strawman is that unless Obama settles on some compromise definition of 'wealthy' between his already adjusted definition which moved from $250,000 to $400,000 earlier, and the $1 million cutoff proposed by the republicans, republicans will take the Plan B proposal to the House on Thursday and pass it, only so it is immediately voted down by the Senate, but have the popular backstop of saying "they gave it their best" just as Ken Langone suggested to Rand Paul earlier today on CNBC. And as Reuters reported, it appears that the drop dead date for House majority leader Cantor is Thursday, at which point he will vote, and pass, Plan B. At that point the Fiscal Cliff debate for 2012 is as good as over, as the resulting animosity that develops in the subsequent days will guarantee no further compromises are achievable for the balance of the year.
The Political Foundation of the status quo in America is based on a Grand Bargain of Complicity between the top 25% who pay approximately 90% of the taxes, and the bottom 50% who draw on the benefits that come from government. James Madison in the "Federalist Papers" outlined this complicity in the "Tyranny of the Majority". What is becoming painfully evident is that the political elite in America have falsely over-promised on the entitlements that can be delivered, which is now surfacing in the political turmoil of the Fiscal Cliff negotiations and has the potential to quickly lead towards a constitutional crisis. The frayng of our social compact or Grand Bargain and much more discussed in this excellent clip.
Any legacy that Obama might have had will have been converted into something like Herbert Hoover’s.
- Two weeks ago here: The Latest Greek "Bailout" In A Nutshell: AAA-Rated Euro Countries To Fund Massive Hedge Fund Profits... and now on Bloomberg: "Hedge Funds Win as Europe Will Pay More for Greek Bonds" (BBG)
- Oracle sends shareholders cash as tax uncertainty looms (Reuters)
- GOP Makes Counteroffer In Cliff Talks (WSJ)
- Iran says captures U.S. drone in its airspace (Reuters)
- IMF drops opposition to capital controls (FT)
- Vogue Editor Wintour Said to Be Possible Appointee as U.K. Envoy (BBG)
- Juncker Stepping Down French Finance Minister to Head Euro Group? (Spiegel)
- Australia cuts rates to three-year low (FT)
- Europe’s banking union ambitions under strain (Reuters)
- EU Nations Eye New ECB Bank Supervisor Amid German Doubts (BBG)
- Frankfurt's Ambitions Get Cut Back (WSJ)
- House Republicans Propose $2.2 Trillion Fiscal-Cliff Plan (BBG)
Quiet session so far, with a notable move higher in the last block of trading in China pushing the SHCOMP for its first gain in 6 days, and off post-2008 lows. What precipitated the buying is irrelevant, although we got a good glimpse into the state of the Chinese economy thanks to Australia prior where the RBA cut rates by 25 bps to a historic low 3.00% (a move that sent the AUD higher), a level last seen during the financial crisis, and confirming that not all is well for the Chinese derivative economy despite loud promises from the Chinese politburo that growth is back. Bypassing the bullish propaganda were Renault Nissan's Chinese car sales for November which fell by 29.8% Y/Y. Some "recovery" there too. In Europe, the status quo continues, with chatter out of Germany's Merkel who begins her 2013 election campaign today, that Germany wants a strong Eurozone (it doesn't), and a strong Euro (it doesn't), but that nobody can predict when the Eurozone crisis will end (not even Hollande or Monti who did just that yesterday?). Otherwise sentiment there is still driven by the formal Spanish re-request of aid (and imminent receipt of €39.5bn in bank recap funds) from the EU by mid-December. As a reminder Spain did this originally in June but the algos were so confused yesterday they thought this was an official sovereign bail out request sending risk soaring only to tumble later (only in the New Normal is admission of sovereign insolvency a "good thing"). Nonetheless, despite the massive overvaluation of European markets (more on that later), the EURUSD continues to the upward momentum (in the process further curbing German exports and assuring the German recession), and was last seen trading up to 1.3075, about 30 pips higher.
There is little detail (more to come) but Boehner's office has just released his rebuttal to Obama's so-called 'un-serious' offer. These numbers do not appear like any change - just as Obama's was no change - so much for compromise. It seems politicians now have zero-beta for the algos - who have given up now the month-end is over...
- *BOEHNER DESCRIBES WHITE HOUSE PLAN LAST WEEK AS `LA-LA LAND'
- *BOEHNER SAYS HE'S OFFERING `CREDIBLE PLAN' ON FISCAL CLIFF
- *BOEHNER SAYS PLAN DESERVES `SERIOUS CONSIDERATION' BY OBAMA
- *HOUSE REPUBLICANS PROPOSE $1.4 TRILLION IN SPENDING CUTS
- *REPUBLICAN PLAN INCLUDES $800 BILLION IN NEW REVENUE
Full letter below
The natural reaction from policy makers, so far, has not surprised us. Rather than addressing the source of the problem, they have and continue to attack the symptoms. The problem, simply, is that governments have coerced financial institutions and pension plans to hold sovereign debt at a zero risk-weight, assuming it is risk-free... and just like since the beginning of the 17th century almost every serious intellectual advance had to begin with an attack on some Aristotelian doctrine, I fear that in the 21st century, we too will have to begin attacking anything supporting the belief that the issuer of the world’s reserve currency cannot default, if we are ever to free ourselves from this sad state of affairs. This problem truly brings western civilization back to the time of Plato, when there was nothing “…worthy to be called knowledge that could be derived from the senses…” and when “…the only real knowledge had to do with concepts…”. Policy makers then believe in recapitalization and coercive smooth unwinds. With regards to recapitalization, I will just say that we are not facing a “stock”, but a “flow” problem. With regards to smooth unwinds, I think it is obvious by now that the unwind of a levered position cannot be anything but violent, like any other lie that is exposed by truth. Establishing restrictions to delay the unmasking would only make the unwinds even more violent and self-fulfilling. But these considerations, again, are foreign the metaphysics of policy making in the 21st century.
Regardless if the Fiscal Cliff is resolved tomorrow (impossible), on December 31 (unlikely), or in tandem with the debt ceiling hike some time in March 2013, after all the government fund buffers have been soaked dry as they were back in August 2011 (most likely), one thing is certain: America's wealthiest are about to see their taxes soar - that's more or less a given. The question is what happens then. Will, the wealthiest - those who have access to and can buy banking, incorporation, citizenship and legal services in any global jurisdiction in a world that has never been this decentralized and this , take it all quietly up until that point on the Laffer curve says they will commit mass suicide, or maybe, just maybe, because they don't feel like being force to pay uncle Sam even more than they currently do with the proceeds not used for something constructive like paying down debt, but instead to fund government corruption and inefficiency, they will pick up and leave without saying goodbye or even looking back, and in the process crush future US government tax revenues even more and send the deficit soaring more. "No risk in that", many will say - after all where can they go? Well, apparently many places. Because if the UK, where as the Telegraph reports a stunning two-thirds of domestic millionaires opted to leave the country than pay a "punitive" 50% tax, is any indication it is possible that the imminent tax hike on America's wealthiest is going to be one of the most destructive things that can happen to America's already unsustainable budget deficit.
We are all now members of the Permanent No-growth Club. And the United States has just re-elected a president who seems determined to sign up too. No government in what used to be called “the free world” seems prepared to take the steps that can stop this inexorable decline. They are all busily telling their electorates that austerity is for other people (France), or that the piddling attempts they have made at it will solve the problem (Britain), or that taxing “the rich” will make it unnecessary for government to cut back its own spending (America). So here we all are. Like us, the member nations of the European single currency have embarked on their very own double (or is it triple?) dip recession. This is the future: the long, meandering “zig-zag” recovery to which the politicians and heads of central banks allude is just a euphemism for the end of economic life as we have known it. Democratic socialism with its “soft redistribution” and exponential growth of government spending will have paved the way for the hard redistribution of diminished resources under economic dictatorship.
The JPY dropped 1.3% against the USD this week for a greater-than-6% drop since its late-September highs as it appears the market is content pricing Abe's dream of a higher inflation-expectation through the currency devaluation route (and not - for now - through nominal bond yields - implicitly signaling 'real' deflationary expectations). In a 'normal' environment, Barclays quantified the impact of a 1ppt shift in inflation expectations from 1% to 2% will create a 'permanent inflation tax' of around 18% (which will be shared between JPY and JGB channels). However, as we discussed in detail in March (and Kyle Bass confirmed and extended recently), the current 'Rubicon-crossing' nature of Japan's trade balance and debt-load (interest-expense-constraint) mean things could become highly unstable and contagious in a hurry. When the upside of your policy plans is an 18% loss of global purchasing power, we hope Abe knows what he is doing (but suspect not).
You don’t have to be an economic genius to understand that the perpetual uncertainty over the Eurozone’s future has led to a widespread freeze on industrial investment and development. Industrial production is collapsing at an accelerating rate, falling 7% year-on-year in Spain and Greece, 4.8% in Italy, and 2.1% in France. Since the answer to the question of Who will ultimately pick up the tab? when a Eurozone member defaults or leaves is not at all clear, every player there is eyeing the others suspiciously. In fact, the "stability" of Europe right now hinges completely on no one making a move. What odds do you give that Mexican standoff of lasting? Time is working against all countries in the Eurozone because the good are being dragged down by the bad.
In 1936, the US government began circulating a series of pamphlets to explain its brand new Social Security program, plus the associated taxes. Initially, the Social Security tax was set at 2%. The government promised it would rise to 3% in 1949, with no additional increases EVER: "[F]inally, beginning in 1949. . . you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay." In 1949, the tax rose to 3% as scheduled. But it only took five years for the government to break its promise. Politicians routinely make bold promises about tax policy... and they almost always end up being lies. Perhaps most dangerously, politicians fail to understand that raising tax rates does NOT actually increase government tax revenue.
Kyle Bass: Fallacies Such As MMT Are "Leading The Sheep To Slaughter" And "We Believe War Is Inevitable"Submitted by Tyler Durden on 11/17/2012 14:58 -0400
"Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation."