October 31, 2014

The Dollar Decline Continues: China Starts Direct Convertibility With Asia's #1 Financial Hub

Earlier this week some of the biggest financial news of the year made huge waves all over Asia.

Yet in the Western press, this hugely important information has barely even been mentioned.

So what’s the news?

The Chinese government announced that the renminbi will become directly convertible with the Singapore dollar... effective immediately.

It’s clear this deal has been in the works for a while, and it’s another major step towards the continued internationalization of the renminbi and unseating of the dollar as the world’s dominant reserve currency.

For decades the renminbi has been a tightly controlled currency. It’s only been in the last few years that the Chinese government started loosening those controls, primarily in response to the obvious need for a dollar competitor.

The entire world is screaming for an alternative to the dollar and the US government.

Since the end of World War II, the US has been in the driver seat. The Fed essentially sets global monetary policy. Foreign banks are forced to rely on the US banking system. Nearly every nation on earth must hold US dollars and buy US government debt just to be able to trade with one another.

These were sacred privileges entrusted to the US government. And they have been abused time and time again.
The US government spies on its allies. It uses its banking system as a weapon to threaten foreign companies. It fines foreign banks billions of dollars for doing business with countries it doesn’t like.

They discredit themselves by continuing to indebt future generations and failing to make tough fiscal decisions.

And the Fed has printed so much money that major foreign institutions are left with no choice but to seek an alternative. Enough is enough.
China is taking the lead in providing the world with another option. And they’re not exactly doing this under cover of darkness. These moves have been widely telegraphed, at least to anyone paying attention.

For the last few years the Chinese government has entered into new ‘swap agreements’ at blazing speed, allowing other nations’ central banks and governments to hold the renminbi in reserve.

They’ve concluded direct trade arrangements (notably with Russia) to settle oil and gas deals in renminbi.

This summer we saw the establishment of a Chinese-led supranational bank intended to compete directly with the IMF.

Just last week the British government issued a new government bond denominated in renminbi.

And now this– direct convertibility between China and the #1 financial center in Asia, making it possible for ANYONE to trade and hold renminbi through Singapore.

It’s so obvious where this train is headed.

But again, this story is hardly covered in the Western press. They’re living in a dream world where King Dollar still reigns and the US is the only superpower in the world.

Nonsense. It’s imperative to stop listening to the propaganda and start paying attention to facts:
The US government has accumulated more debt than any other nation in the history of the world… and is in a position where they must borrow money to pay interest on the money they’ve already borrowed.

The Federal Reserve (which issues the US dollar) continues to erode its balance sheet. According to last Wednesday H.4.1 report, the Fed’s capital base is a minuscule 1.26% of its total assets.

A year ago it was 1.42%. That was bad enough. But on a proportional basis, the Fed has lost another 11.3% of its capital in the last twelve months.

And according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), international bank payments denominated in renminbi have nearly tripled in value in the past two years.
These are all objective facts which point to the same conclusion: this current dollar/debt-based system is on the way out.

It’s not going to happen overnight, but we’re already seeing a slow and orderly exit. And we can see the rest of this trend unfolding years in advance.

Ignoring this could be very hazardous to your financial well-being. And while the Western media might be totally clueless, there are plenty of options for forward-thinking individuals.
  • Consider holding Hong Kong dollars in addition to US dollars. Hong Kong dollars are currently pegged to the US dollar, so the currency risk is minimal. But if the US dollar declines sharply, Hong Kong (controlled by China) could easily de-peg. This mitigates your downside risk.
  • Consider trading paper currency savings for productive REAL assets like farmland and private businesses which capitalize on key growth trends.
There are dozens of other solutions out there. You’ll be able to find some that are just right for your circumstances.

October 30, 2014

From This Day Forward, We Will Watch How The Stock Market Performs Without The Fed’s Monetary Heroin

Mark this day on your calendars.  The Dow is at 16974, the S&P 500 is at 1982 and the NASDAQ is at 4549.  From this day forward, we will be looking to see how the stock market performs without the monetary heroin that the Federal Reserve has been providing to it.  Since November 2008, the Fed has created about 3.5 trillion dollars and pumped it into the financial system.  An excellent chart illustrating this in graphic format can be found right here.  Pretty much everyone agrees that this has been a tremendous boon for the financial markets.  As you will see below, even former Fed chairman Alan Greenspan says that quantitative easing was "a terrific success" as far as boosting stock prices.  But he also says that QE has not been very helpful to the real economy at all.  In essence, the entire quantitative easing program was a massive 3.5 trillion dollar gift to Wall Street.  If that sounds unfair to you, that is because it is unfair.

So why is the Federal Reserve finally ending quantitative easing?

Well, officially the Fed says that it is because there has been so much improvement in the labor market...
The Fed's language, however, did suggest that they were getting more comfortable with the economy's improvement. It cited "solid job gains," citing a "substantial improvement in the outlook for the labor market," as well as pointing out that "underutilization" of labor resources is "gradually diminishing."
But that is not true at all.

The percentage of Americans that are working right now is about the same as it was during the depths of the last recession.  Just check out this chart...

Employment Population Ratio 2014

So there has been no "employment recovery" to speak of at all.
And as I wrote about yesterday, the percentage of Americans that are homeowners has been steadily falling throughout the quantitative easing era...

Homeownership Rate 2014

So let's put the lie that quantitative easing helped the "real economy" to rest.  It did no such thing.

Instead, what QE did do was massively inflate stock prices.

The following is an excerpt from a Wall Street Journal report about a speech that former Fed chairman Alan Greenspan made to the Council on Foreign Relations on Wednesday...
Mr. Greenspan’s comments to the Council on Foreign Relations came as Fed officials were meeting in Washington, D.C., and expected to announce within hours an end to the bond purchases. 
He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy
Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”
Moving forward, what did Greenspan tell the members of the Council on Foreign Relations that they should do with their money?

This might surprise you...
Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.

It almost sounds like Greenspan has been reading the Economic Collapse Blog.

Since November 2008, every time there has been an interruption in the Fed's quantitative easing program, the stock market has gone down substantially.

Will that happen again this time?

Well, the market is certainly primed for it.  We are repeating so many of the very same patterns that we saw just prior to the last two financial crashes.

For example, there have been three dramatic peaks in margin debt in the last twenty years.
One of those peaks came early in the year 2000 just before the dotcom bubble burst.

The second of those peaks came in the middle of 2007 just before the subprime mortgage meltdown happened.

And the third of those peaks happened earlier this year.

You can view  a chart that shows these peaks very clearly right here.

The Federal Reserve appears to be confident that the stock market will be okay without the monetary heroin that it has been supplying.

We shall see.

But it should be deeply troubling to all Americans that this unelected, unaccountable body of central bankers has far more power over our economy than anyone else does.  During election season, our politicians get up and give speeches about what they will "do for the economy", but the truth is that they are essentially powerless compared to the immense power that the Federal Reserve wields.  Just a few choice words from Janet Yellen can cause the financial markets to rise or fall dramatically.  The same cannot be said of any U.S. Senator.

We are told that monetary policy is "too important" to be exposed to politics.

We are told that the independence of the Federal Reserve is "sacred" and must never be interfered with.

I say that is a bunch of nonsense.

No organization should have the power to print up trillions of dollars out of thin air and give it to their friends.

The Federal Reserve is completely and totally out of control, and Congress needs to start exerting power over it.

The first step is to get in there and do a comprehensive audit of the Fed's books.  This is something that U.S. Senator Ted Cruz called for in a recent editorial for USA Today...
Americans are seeing near-zero interest rates on their savings accounts while median incomes are falling, and millions of people are facing higher gas prices, food prices, electricity prices, health insurance prices. Enough is enough, the Federal Reserve needs to open its books — Americans deserve a sound and stable dollar.
Whether you agree with Ted Cruz on other issues or not, this is one issue that all Americans should be able to agree on.

If you study any of our major economic problems, usually you will find that the Federal Reserve is at the heart of that problem.

So if we ever hope to solve the issues that are plaguing our economy, the Fed is going to need to be dealt with.

Hopefully the American people will start to send more representatives to Washington D.C. that understand this.

October 29, 2014

Total War Over The Petrodollar

The conspiracy theories surrounding the death of Total SA’s chief executive, Christophe de Margerie, started the second the news broke of his death. Under mysterious circumstances in Moscow, his private jet collided with a snowplow just after midnight. De Margerie was the CEO of Total, France’s largest oil company.

He’d just attended a private meeting with Russian Prime Minister Medvedev, at a time when the West’s relationship with Russia is fraught, to say the least.

One has better odds of being struck by lightning at an airport then a snow plow, or any other ground support vehicles hitting a plane and killing all inside the plane, in my opinion. And I say that as someone who’s familiar with airports, having worked at Vancouver International Airport when I was in university; I was the one who would bring the plane into its parking bay.

If it weren’t for those short odds, a snowplow on the runway with an allegedly drunk driver would be the perfect crime. But who would benefit from his death?

De Margerie was one of the few business leaders who spoke out against the isolation of Russia. On this last trip to Moscow, he railed against sanctions and the obstacles to Russian companies obtaining credit.

He was also an outspoken supporter of Russia’s position in natural gas pricing and transportation disputes with Ukraine, telling Reuters in an interview in July that Europe should not cut its dependence on Russian gas but rather focus on making the supplies more secure.

But what could have made de Margerie a total liability is Total’s involvement in plans to build a plant to liquefy natural gas on the Yamal Peninsula of Russia in partnership with Novatek. Its most ambitious project in Russia to date, it would facilitate the shipping of 800 million barrels of oil equivalent of LNG to China via the Arctic.

Compounding this sin, Total had just announced that it’s seeking financing for a gas project in Russia in spite of the current sanctions against Russia. It planned to finance its share in the $27-billion Yamal project using euros, yuan, Russian rubles, and any other currency but US dollars.

Did this direct threat to the petrodollar make this “true friend of Russia”—as Putin called de Margerie—some very powerful and dangerous enemies amongst the power that be, whether in the French government, the EU, or the US?

In my book The Colder War, one chapter deals with “mysterious deaths” and how they are linked to being on the wrong side of the political equation. Whether it’s going against Putin or against the petrodollar, there are many who have fallen on both sides.

If Total doesn’t close the $27 billion financing it needs to move forward with the Yamal LNG project then we’ll know someone stepped in to prevent an attack on the petrodollar.  The CEO of Total, before his death and his CFO were both strong supporters of Total raising the $27 billion in non US dollars and moving the project forward with the Russians.  But, this could all change if the financing does not complete.

How many other Western executives who dare to help Russia bypass sanctions—and turn it into an energy powerhouse—will die under suspicious circumstances?

October 28, 2014

7 Things The Middle-Class Can't Afford Anymore

Though there is some debate over the exact income a middle class household brings in, we do have an idea of who the middle class are — most working class people. Today's bourgeoisie is composed of laborers and skilled workers, white collar and blue collar workers, many of whom face financial challenges. Bill Maher reminded us a few months back that 50 years ago, the largest employer was General Motors, where workers earned an equivalent of $50 per hour (in today's money). Today, the largest employer — Wal-Mart — pays around $8 per hour.

The middle class has certainly changed. We've ranked a list of things the middle class can no longer really afford. We're not talking about lavish luxuries, like private jets and yachts. The items on this list are a bit more basic, and some of them are even necessities. The ranking of this list is based on affordability and necessity. Therefore, items that are necessity ranked higher, as did items that a larger percentage of people have trouble paying for.


A vacation is an extra expense that many middle-earners cannot afford without sacrificing something else. A Statista survey found that this year 54% of people gave up purchasing big ticket items like TVs or electronics so they can go on a vacation. Others made sacrifices like reducing or eliminating their trips to the movies (47%), reducing or eliminating trips out to restaurants (43%), or avoiding purchasing small ticket items like new clothing (43%).

New vehicles

Very few people who earn the median income can afford to buy a new car or truck. Interest.com recently analyzed the prices of new cars and trucks, as well as the median incomes across more than two dozen major cities, and found that new cars and trucks were simply not affordable to most middle-earners.

"Median-income families in only one major city [Washington DC] can afford the average price Americans are paying for new cars and trucks nowadays." As of 2013, new cars are priced at $32,086, according to the study. Mike Sante, Interest.com's managing editor reminds us, "just because you can manage the monthly payment doesn't mean you should let a $30,000 or $40,000 ride gobble up all such a huge share of your paycheck."

To pay off debt

These debt statistics come from Debt.org: "More than 160 million Americans have credit cards." "The average credit card holder has at least three cards." "On average, each household with a credit card carries more than $15,000 in credit card debt."

Not only do we have large amounts of credit card debt, we also have student loans, mortgages, cars, and medical debts. Our debt is growing faster than our income, and many middle class workers have trouble staying afloat. Money-Zine evaluated debt growth and income growth over the past few decades and found that "back in 1980, the consumer credit per person was $1,540, which was 7.3% of the average household income of $21,100. In 2013, consumer debt was $9,800 per person, which was 13.4% of the average household income of $72,600. This means debt increased 70% faster than income from 1980 through 2013."

Emergency savings

To provide ourselves with a degree of financial security, we are supposed to have emergency savings to protect ourselves in the event of job loss, illness, or some other catastrophe. Most members of the middle class don't have at least six months of emergency savings, however, and some working people have no such savings.

A Bankrate survey found that only around one out of four households have six months of emergency money saved, and many of them are in the higher income groups. Another one-fourth have no emergency savings at all, and the remaining household have a small to moderate amount of savings, but not enough to cover six months of expenses.

Retirement savings

If you reach the retirement age with little or no money saved, Social Security is probably not going to be enough to cover your basic needs. Even if you want to work for your entire life, you have no way of knowing whether or not you will be physically capable of doing so.

Although having a lack of a retirement savings is a risky move, so many people bet on double zero, just hoping that things will work out in their favor. While some members of the middle class neglect this aspect of financial planning because they are procrastinating, there are also some workers who cannot afford to set this money aside. Nearly half of those who don't save for retirement say it's because they simply don't have the money.

As of late, around 20% of people near 65 have not saved anything for retirement at all, and the majority of people — 59% — worry that they don't have enough money saved for retirement, according to a Gallup Poll.

Medical care

Medical care is a basic necessity and something we'd think would be affordable for someone earning a middle income. A Forbes article published data indicating that workers in large companies — many of whom are members of the middle class — "face nearly $5,000 in premiums, co-payments, deductibles and other forms of co-insurance."

During the past few years, these costs have had a large impact on working Americans. A report by Feeding America found that a shocking 66% of households say they've had to choose between paying for food and paying for medical care — 31% say they have to make that choice each and every month.

Dental work

According to the U.S. Department of Health and Human Services, "the U.S. spends about $64 billion each year on oral health care — just 4% is paid by Government programs." About 108 million people in the U.S. have no dental coverage and even those who are covered may have trouble getting the care they need, the department reports.

Oftentimes, people will purchase medical coverage and forgo dental because it's so expensive. Plus, dental insurance may cover only 50% of the more expensive procedures, like crowns and bridges. This leaves those who have insurance with large co-payments.

In many cases, middle-earners will delay or even forego some of these procedures in efforts to save on costs. According to the CDC, nearly one in four adults between the ages of 20 and 64 have untreated dental caries (like cavities or infections).

October 27, 2014

Will US Browbeating of Japan Revive the Zombified TransPacific Partnership?

As readers may recall, we declared the toxic, national-sovereignty-gutting, misnamed “trade” deal called the TransPacific Partnership to be dead based on America’s colossal mishandling of Japan (not that it has handled the other prospective signatories any better, mind you). The pact was designed to be an “everybody but China” grouping, a centerpiece of Obama’s pivot to Asia. Japan’s participation is essential to meeting that objective, as well as to another critical objective: that of getting major nations to sign up to agreements that subordinated national regulations to the profit-making rights of foreign investors, who could sue governments over any incursions in secretive, conflicted arbitration panels.

Nevertheless, meetings on the TransPacific Partnership continue, with the latest round in Sydney last week. The US press is depicting the Japanese as bad guys who can be browbeaten into giving up protecting their beef and rice farmers, among others. From a Wall Street Journal article titled Japan Market Access Still Hurdle at Trans-Pacific Partnership Talks:
Japan will come under renewed pressure to further open up its automotive and agriculture industries to global trade during Trans-Pacific Partnership talks here over coming days, amid heightened calls for Tokyo to ensure increased market access remains a key plank of its structural reform agenda under Prime Minister Shinzo Abe. 
The issue of market access in Japan is critical to the success of the TPP, as it will help determine the full benefits of the pact that will flow to its 12 nation participants, which jointly account for 40% of the global economy… 
“Going into this weekend, we’re enjoying a great deal of momentum and focus across the board,” said U.S. trade representative Michael Froman in the opening remarks to the meeting. 
“The issues left at the end are often times the most challenging but now is the time to start working through those and finding solutions,” he said, adding talks in recent months had been productive.
Yves here. This reads as if it comes from a parallel universe. “[F]ull benefits of the pact that will flow to the 12 nation participants”? No, the benefits are intended for effectively stateless multinationals that are smart enough to be big US campaign donors, such as the financial services industry, Big Pharma, and tech companies. And as for the “great deal of momentum,” if anything, it has all been in reverse.

But we thought it was possible that we might be missing something, so we checked in with Naked Capitalism’s de facto Japan stringer, commentariat member Clive. His report:
My usual Japanese press diet has downplayed the indications in the WSJ article of the kind of focus on Japanese market access at the current round of TPP negotiations and ministerial meetings between Japan and the US. After reading the WSJ, you’re left with the distinct impression that the U.S. has firmly placed Japan on the naughty step. But after reading Japanese media coverage, I started to wonder if they were reporting the same event. The usually reliable Yomiuri Shimbun has this article from yesterday afternoon, which is short enough to translate easily in full:
(all participating) TPP (countries) Ministerial Meeting Kicks Off … Japan and the United States also Hold (separate) Bilateral Talks 
From Miyuki Yoshioka in Sydney 
The ministerial meeting negotiations for the Trans-Pacific Economic Partnership Agreement (TPP) kicked off in Sydney on the 25th (of October 2014). 
The focus (of the negotiations) will be on the progression of compromises in areas of difficulties such as “the reform of state-owned enterprises” (SOEs) where developed countries and emerging countries are in conflict. 
The ministerial talks will take place for three days, lasting until the 27th (of October 2014). Japan’s Minister (for Economic Revitalisation) Amari told reporters prior to the meeting on the morning of the 25th “Because the consultations between Japan and the United States are proceeding vigorously, the other participating countries will be encouraged that they can accelerate their (negotiating) work”. Australia’s (Minister for Trade and Investment Andrew) Robb also announced at the opening (of the talks) “Each (TPP participating country) is heading in the same direction towards a political conclusion, aiming for agreeing the basic elements, with some vigorous negotiating expected between ministerial representatives”.
Clive again… so that’s all, err, very, vigorous then. I’m not sure what the Japanese is for “bun fight” is (I think it’s a Britishism and maybe it doesn’t have an American equivalent !), but that about covers it as a description of the meeting for me. Compare and contrast the Japanese media’s coverage to the WSJ’s. There’s nothing about Japan being taken off to a dark corner of the playground to be given a good kicking by the U.S. apart from a brief reference in the title of the piece that there’s separate U.S./Japan-only talks going on too. 
There is the usual (from the Japanese perspective) references to other TPP countries’ areas of discord, especially SOEs. And the Japanese press drags Australia into the fray, quoting Trade Minister Robb as saying essentially that everyone is lobbying for their own pet interests but there’s a will to reach a political (and that’s an interesting term to use isn’t it? Politics NOT economics will be the basis for any agreement) deal but everyone will have to do some give-and-take with regards to their political baggage. 
It’s hard to say if the WSJ’s piece is coming, sock-puppet like, from official Washington sources. The fact that this is in the WSJ makes me a tad suspicious, but suspicion isn’t proof. If this is coming from Froman’s camp, then the US Trade Representative’s team really hasn’t learned a single thing from the (now years of) negotiations with Japan. Singling out, in public, the Japanese and trying to foist the blame for stalled negotiations onto them is just about the most counterproductive thing they could possibly do. The Japanese will go into face-saving mode, as in the Yomiuri’s feature, pointing the finger at everyone else and trotting out their well-honed cover story that “it’s all the other guys’ faults”. It could also be an acknowledgement of the reality that, without. Japan, there’s really little point in the TPP. Hence the pressure being heaped on the Japanese. They really are a special case as far as he TPP goes. 
But again, the U.S. negotiating team seems unable to read the clearly signalled Japanese position. If they were going to cave on the substantive issues still in play, they’d have done it by now. It’s highly unlikely that Japan’s Prime Minister Abe has any domestic political room to manoeuvre — and the U.S. can’t or won’t throw him any sweeteners. A failed TPP deal will look bad for Abe (he has invested and continues to invest political capital in it), but as Amari’s comments at the start of the Sydney negotiating round show, if the negotiations do fail, there’s no shortage of handy scapegoats which the Japanese can use.
An article in the Nikkei Asian Review, on Obama’s lame duck status and how Republican hopefuls jockeying for position makes the prospects for seeing any legislation get done in the next two years even worse, discusses the TransPacific Partnership in passing. It points out another obstacle we’ve cited: Obama’s decision to be extremely secretive about the TransPacific Partnership text (literally only Congresscritters on the right committees can go and read the text; they can’t take copies and have their staffers study them) has produced a revolt over his abuse of the already-way-too-generous fast track authorization, which limits Congress to a yes or no vote on an entire deal once it has been cooked up by the Administration. Democrats are most upset about it, but they have a fair bit of Republican company. But as the article points out, even if the Republicans gain ground in November, it is unlikely to help any of the stalled trade deals:
Obama said earlier this year that he hoped to have a framework agreement on the Trans Pacific Partnership — the vast, 12-nation trading bloc — by the time of the East Asia Summit in Myanmar on Nov. 13-14. The TPP is the economic cornerstone of Obama’s Asian pivot. But a TPP deal has always been contingent upon congressional agreement to grant Obama “fast track” authority on trade pacts, so allies can be certain Congress will not tinker once decisions have been made. 
There is a school of thought that a Republican-led Congress would be more business-friendly than Obama’s labor-allied Democrats, and the GOP might be more willing to grant the president the trade authority he needs. But that optimistic view ignores the 2016 electoral calendar, and Republican hardliners’ unwillingness to be seen giving this president anything that smacks of a victory. 
As evidence of that obstructionist mindset, look no further than the number of empty posts at U.S. embassies around the world. At least 33 countries are currently without an American ambassador because Republican senators are holding up the normal process of approving nominations. Among those vacant posts are Vietnam, which has lacked an ambassador since August, at a crucial time when the U.S. is stepping up military aid to Hanoi in response to China’s increasing assertiveness. Thailand will soon be another, as Ambassador Kristie Kenney has announced she is returning to Washington without a replacement in position.
In other words, the Administration effort to pretend that the TransPacific Partnership is moving forward is fooling no one that counts. And the US negotiators have waited way too long to have made the sort of concession that might have enabled it to go forward. While miracles are in theory possible, that’s about what it would take at this stage to bring this deal back from the dead.

October 24, 2014

AIG Redux – How the Fed Usurped Congress

The AIG bailout is in the news again. At the time of the bailout, I argued that while it was necessary, the Fed should not have played the role in the bailout that it did. Some of the testimony at the current trial suggests that a reassessment of the reasons for those positions is in order. However, nothing revealed at the trial to date has changed my mind about three crucial points:
• The AIG family of companies was experiencing a liquidity crisis and a number of its subsidiaries were insolvent.
• A default by any of the subsidiaries would have had systemic repercussions.
• The bailout as structured was profoundly anti-democratic. The Fed took actions that, at a minimum badly bent both the law and its legal mandate and should be reserved for the Judicial, Legislative and Executive branches of government.
These points are fleshed out below and an alternative course of action that would have avoided some of the bailout’s shortcomings is offered.
AIG was in financial difficulty and not simply because of the CDS positions at the AIG Financial Products subsidiary, but also because of losses at insurance subsidiaries. Numerous insurance subsidiaries of AIG had borrowed money using assets as collateral. They then used the borrowed money to buy MBS. In short, they had leveraged up and purchased real estate-based assets in order to enhance their returns. However, the prices for MBSs started to decline in earnest with the problems at Bear Sterns, and losses ensued. As part of the bailout, the Fed ultimately had to loan AIG approximately $185 billion against collateral (MBSs). The face value of the collateral was well in excess of the $185 billion. This occurred when there was virtually no market for those securities and AIG’s market capitalization was less than $20 billion. Some of the insurance subsidiaries also received necessary direct capital infusions as part of the bailout.

Losses at AIG subsidiaries had implications not only for policyholders, but for other counterparties, including numerous pension and employer-sponsored savings plans that had invested in AIG-sponsored GICs (guaranteed investment contracts), as well as investment banks and other financial institutions.

The financial problems were compounded by contractual arrangements. As standard practice, many financial contracts contained cross default clauses. Cross default clauses imply that if a firm defaulted with one counterparty, all the firm’s other counterparties had the right to act as if the firm had defaulted on them. In short, if one AIG subsidiary defaulted with a counterparty, the other counterparties would have acted to seize collateral, suspend payments, and initiate legal actions before other counterparties had. Further complicating matters, numerous AIG subsidiaries had guaranteed each other. Consequently, insolvency or illiquidity at one subsidiary implied problems for the other subsidiaries that had guaranteed its liabilities. When a single default could have generated cascading market wide uncertainty, there would have likely been numerous defaults. This would have been in addition to the shock of the failure of a large financial institution that had been rated AAA just days before.

At the trial, it has been asserted that there were viable private bids for AIG. While it is possible that numerous parties had an interest in AIG or parts thereof, given the disagreement about the size of the losses at AIG (estimates ranged from $40 billion to almost $100 billion) as well as the complicated corporate structure and the cross guarantees, I cannot see a responsible entity making a firm non-contingent bid in anything like the time frame required-especially without some sort of a US government guarantee.

In short, a public sector-financed bailout was required because of the uncertainty and the market disruptions that defaults by AIG would have caused.

The financial crisis also precipitated a number of other non-bank bailouts. The structures of the bailouts of GM, Chrysler and both Fannie and Freddie are of relevance in assessing the AIG bailout. The structure of the bailouts of the automobile companies and the two GSEs were specified in legislation. The Fed played no role in the GM and Chrysler bailouts, and only a minor role in the Fannie and Freddie bailouts.

In the case of AIG, public money supplied by the Fed was used, but Congress played no role in setting the terms and conditions. Furthermore, Paulson has testified that he (and presumably Treasury) played no role in setting the terms of the bailout.

Given the Congressional involvement in the other bailouts, the use of public monies and de facto nationalization of a private company in the case of AIG, the absence of any Congressional role in setting the terms and conditions of the bailout raises red flags. Defenders of the Fed’s role in the AIG bailout have argued that the risk to the economy was too high and that Congress could not have acted quickly enough, however Congress was able to pass the legislation establishing the conservatorship for Fannie and Freddie in an expedited fashion.

What explains the difference between the GSE bailouts on the one hand and the AIG bailout on the other? While people will disagree, the most logical explanation is that it was politically advantageous for sitting Congressmen to enact bailouts for the GSEs (and the auto companies), while it would have been a political negative to support a bailout for AIG despite the probable systemic repercussions.
Hence the argument for the Fed’s involvement in the AIG bailout is based on the premise that Congress would be its dysfunctional self. While these defenders of the bailout hail the Fed for stepping in when the Congress would not have able to act, the bailout implicitly required the Fed to engage in activities previously exercised by Congress and the Executive branch.

In assuming a power previously exercised via the legislative process, the Fed acted as an enabler, allowing the Congress to avoid its responsibilities. The enabler role was not new to the Fed. The Fed, by asserting that monetary policy alone could guarantee full employment and price stability, also allowed the Congress and the Executive branch to avoid the responsibility for designing and implementing sensible fiscal, Dollar and trade policies, as well as maintaining a robust financial regulatory regime.

The bailout also involved the Fed taking actions well beyond its historical role. It had never closed down a bank or taken responsibility for managing or restructuring any firm. The FDIC has had the responsibility for managing failed banks. Furthermore, many observers wanted the Fed to act as bankruptcy judge in haircutting the claims of selected classes of creditors. However, it is not the role of a central bank to act as bankruptcy judge: picking winners and losers among claimants to assets of insolvent banks or financial institutions.

Paulson, the then Secretary of the Treasury, also asserted in testimony that the terms of the bailout were punitive and were set by the Fed. This position was supported by Geithner in his testimony. If, on the one hand, it was clear that AIG, including insurance subsidiaries, was about to fail a market test and go into bankruptcy, then how was allowing the then current owners to own retain 20% ownership of an ongoing firm punitive? On the other hand, if AIG was viable, what justified taking an 80% ownership interest in it?

More importantly, it is not proper for the Fed, or any governmental agency, to in effect try, convict and decide on the punishment for acts that were not prohibited by law or regulation. Some argued that punishment was deserved and served a social goal, i.e., reducing moral hazard. However, national security is a social goal, but it would be inappropriate for the NSA to make decisions about steps to promote national security, e.g., widespread wiretapping, if not permissible under the law and without oversight from the Congress or the courts.

The bailout could have proceeded in a more transparent and democratic fashion. The Fed could have had required a letter of agreement from Treasury (and/or from the Congressional leadership) stating that the Fed was proceeding with provided liquidity against appropriately hair-cutted-collateral, while Congress and the Executive branch specified terms of the bailout or conservatorship. This would have allowed the bailout to go forward and would have provided any interested parties with avenues of appeal via the legislative process. It would also have placed the ultimate responsibility for the terms of the bailout where they belong: in the political sphere.

During crises, decisions have to be made quickly and with incomplete and flawed information. The bursting of financial bubbles will, by their very nature, give rise to crises and decisions that will in hindsight appear less than optimal, even foolish.

Avoiding or preventing the next bubble is more important than ex post analyzing the failures in the response to the prior bubbles. The post-crisis second-guessing of decisions made during the crisis has drowned out a more import discussion. The Fed and the other regulators learned a lesson at great expense during the 1980s. The lesson was that it is better to avoid bank failures and crises than clean up after them. A more productive discussion would focus on how they forgot that lesson. 

October 23, 2014

How The Federal Reserve Is Purposely Attacking Savers

There's something we 'regular' citizens wrestle with that the elites never seem to: a sense of moral duty.

For example, following the collapse of the housing bubble, many people struggled with mortgages they could no longer afford to pay, fearing the shame of default. Many believed defaulting was wrong somehow; that it was their moral obligation to pay their mortgages, no matter how dire their personal situation. And of course, the mortgages lenders did their utmost to reinforce this perception.

In a perfect world, we would honor our debts and obligations, every one of us. But the world is an imperfect place ,and moral obligation is something that almost never enters into the decision matrix of our society's richest. Or the banking industry.

For them, the number one (and two, and three...) rule is that whatever is expedient and makes the most money is the right thing to do.

For the bottom 99%, it’s like playing with a stricter set of rules than your opponent: you’re not allowed to hit below the belt, and they’ve brought a baseball bat into the ring.

Note how this guy had to fight through his middle class conditioning before coming to a sense of peace over his decision to enter into a short sale on his house:
Sep 29, 2014

The closest I ever came to acting like a rich person was two years ago when I short-sold my primary residence. I might have been able to keep it but strategic default made life easier. I owed about $400,000 on a house that short-sold for $150K. The bank lost more than a quarter of a million dollars, and I lost at least $80K in down payment and property improvements.

I was taught growing up to “keep my word” and that your handshake “meant something.” Yet businessmen and individual wealthy people make decisions that are far less moral than a short sale. People “incorporate” so they can avoid legal responsibility for individual actions.

It works great. You can stiff creditors, declare bankruptcy, pollute daily and raid pensions to enrich individual executives. If it all goes wrong, like it has so often for Donald Trump, you can keep your mansions and individual fortunes.

I entered the shark-infested waters of high finance with a short sale. It was the worst ethical decision, but the finest, most profitable business moment, of my adult life. It was an informative, even transformative, experience.

This poor guy has a very bad case of ‘middle class morality’. It's a very real phenomenon. All our lives, we are all taught (programmed?) to stay within the true and narrow groove of middle class life, pay our bills, and be on the hook should things go awry.

Not everybody holds that view, however. As he continues in the piece, the author discovers something important along the way:
I always knew business was getting over on me, but I had no idea the extent until I started looking to short-sell. I first learned all I could aboutprivatehome financing. I called up some shady investment groups around town and questioned them at length. I didn’t end up using them, but they were frank, informative and unashamed.

“Who would pay 11 percent on a home loan?” I asked.

“Rich people,” said “Bill” from the legal loan-sharking company. “The rich have terrible credit.”

Rich people = bad credit: Just let that sink in.

Bill told me in roundabout ways that rich people never pay a bill if there is any way around it. If something goes wrong in an investment or a business, they always preserve their own assets first.
Rich people have terrible credit. They know that there’s a system and it has rules. And, for them, these rules can (and should) be optimized for their own benefit. So they do anything and everything that works to their advantage.

There’s a reason and a logic to that which I can appreciate, but it makes me wonder where the rest of us obtained our deep-seeded beliefs about duty and responsibility towards debts.

Similar to rich people, banks do not have any entangling moral restrictions on their behaviors. That absence allows them to get away with extraordinary misdeeds, none more obvious and damaging than those that the Federal Reserve has perpetrated on the nation, specifically, and the world, more broadly.

To understand why, we first have to discuss something called Financial Repression.

Financial Repression

In my recent interview with Daniel Amerman, to whom I will credit much of the concise thinking and for unearthing the sources that I will weave throughout the remainder of this piece (please read his excellent article on Financial Repression here), the truly immoral intent of the Fed's policies really sank in.

In response to the Fuzzy Numbers chapter (18) of the Crash Course, reader JBarney pondered the following:
Thanks for putting this update together. I think one of the problems is there are so many moving parts, so many manipulated numbers it is difficult to get a clear picture. The way it is organized here is helpful.

However,I can't help but wonder about all of the implications of these numbers for the real economy and people's lives. One of the sections which really hits home was the impact inflation has on all of this. If these are the numbers now, what will it be like when things really start to change?
The answer is that while inflation always steals from savers, it really does its dirty work when the central bank and government conspire to create a condition of pervasive and unavoidable negative real interest rates.

This is the heart of Financial Repression: an environment in which you literally cannot save money without paying a penalty.

The main takeaway of Chapter 18 on Fuzzy Numbers is not that the government fibs a little now and then (okay,all the time) merely because that's politically expedient, but it does so in service to a larger and more pernicious aim: forcing people to accept an inflation rate that is higher than either their income growth and/or the market's safe rate of return.

As soon as you are locked into a negative interest rate regime, your capital is losing purchasing power. But simple accounting rules dictate that loss of wealth had to go somewhere. So where did it go? To somebody else.

Negative real interest rates transfer money from every saver to every over-extended borrower. This is especially true with the government (largely because of its special revolving door relationship with the Fed, which both issues the money out of thin air and then buys government debt forcing rates into negative territory).

It's really that simple. The Fed has openly and actively suppressed rates -- not to help the credit markets, as they claim, but to engineer a condition of Financial Repression. Because that's what the government needs to stealthily take your wealth to pay down the prior debts it accumulated.

Thus 'negative real rates' are the essential component of transferring wealth from the many to the few, with the 'few' being defined as the government, Wall Street, and others who exploit leverage and liabilities at sufficient scale to be on the right side of that wealth transfer.

This well-known phenomenon is a thoroughly accepted and well-described practice of governments and central banks everywhere. One of the better descriptions of it comes to us courtesy of the BIS in this working paper published in 2011.
From the abstract:
Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts.

A subtle type of debt restructuring takes the form of “financial repression.”

Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.

In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s.

Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. 
Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation.

Inflation need not take market participants entirely by surprise and, in effect,it need not be very high(by historic standards).

For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 2 to 3 percent of GDP a year.
Let me decode that.
  • Step 1: Governments get into trouble by borrowing too much.
  • Step 2: Rather than pay this down honestly via cutting spending (unpopular) or by defaulting (even more unpopular), the government conspires with the central bank to slowly liquidate the stack of obligations by forcing negative real interest rates on everyone.
  • Step2bHang on one second...it wouldn’t work if people could dodge the Financial Repression, so a ring fence has to be built out of capital controls and explicit rate caps on and across the whole spectrum of interest-bearing securities.
  • Step 3: Sit back and wait for everyone with savings to contribute their purchasing power to those who issued the debts, be those public or private entities.
And this is exactly what has happened. All of the talk about the Fed focusing on unemployment or inflation or whatever are red herrings. What the Fed is really trying to do is to create a set of macro conditions that will allow the federal government to slowly crawl out from under a pile of debt and entitlement obligations that it literally can not pay by honest, above board means.

I guess if we were to imagine a "Step 4" in the above process, it would be to wait for the head of the central bank to come out and deliver a speech in which she expresses a grandmotherly concern for the wealth gap that naturally results from all this, but to deflect attention away from this being a direct and understood consequence of the Fed's intentional goal of financial repression and towards some failure on the part of those who have been targeted to donate to the cause of bailing out the profligate and rewarding the borrowers.

Oh, wait. That did just happen. Here it is, Step 4, courtesy of Janet Yellen last week:

Federal Reserve Chair Janet Yellen on Friday expressed deep concern over widening economic inequality in the country and called for tackling issues such as early childhood education and encouraging entrepreneurship to help narrow the gap.

[Comment:Oh boy...must contain my emotions...did she really just deflect the consequences of the Fed's policy of financial repression towards 'early childhood education? Yep. That's like a burglar saying that we need to invest in better metallurgical processes as the means of preventing doors from being kicked in so easily.]

In a speech at the Federal Reserve Bank of Boston, Yellen said steady growth in inequality over the past several decades represents the most sustained rise since the19thcentury.Living standards for most Americans have been “stagnant,” while those at the very top have enjoyed significant wealth and income gains, she said.

[Comment: Glad the Fed finally noticed that those at the very top have been making out like bandits! This was something I said explicitly would happen as a consequence of future Fed printing back in 2008 in the Crash Course, before the printing even started. How is it that I knew that this would happen back in 2008 and the Fed is just now noticing this observationally? Is my research department better than theirs? In fact this is a very well known and easy to understand process. That the Fed is feigning ignorance speaks volumes about how ignorant they believe we all are. This is a sure sign that we are trapped in a dysfunctional relationship with an abusive partner.]

“I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history,among them the high value Americans have traditionally placed on equality of opportunity,” Yellen said in prepared remarks.

[Comment: Once we accept that the Fed is openly and specifically creating the wealth gap as a matter of active and ongoing policy, which it is, then it's actually more appropriate to ask if the Federal Reserve is compatible with values rooted in our nation's history. The answer, obviously, is "no."]

The problem of inequality is an unusual topic for the leader of the Fed, if only because the central bank’s ability to address the issue is limited.

[Comment: Stop right there Washington Post! You've just inserted an assertion that might as well have come straight from a PR press release from the Fed. I, for one, refuse that claim and reject it completely right here and on grounds that hardly have to be substantiated, but I will just for fun. When the Fed buys 'assets' (really debt instruments) from major financial firms using freshly printed money they are,by definition, buying those assets at steadily increasing prices which means that those who hold the largest amounts of these assets get the richest. When the Fed secondarily targets the stock market as something to 'go up' and the top 5% own 82% of all stocks, then the Fed's role is anything but 'limited.' It is direct and proportional and they are 100% responsible for any and all gains that accrue to the top via the 'miracle' of asset inflation. Period. End of story. See also any of the innumerable charts plotting the S&P 500's rise along with the growth in the Fed balance sheet for further confirmation. Sorry Washington post, assertion denied!!]

Yellen listed four factors that can influence economic opportunity: investing in education for young children, making college more affordable, encouraging entrepreneurship and building inheritance.

[Comment:OMG. She just blamed the victims and did it in a very let them eat cake kind of way. How aggravating(!). According to Yellen, if people are finding themselves getting poorer what they need to do is stop scrimping on their kids, become an entrepreneur and then somehow go back in time and have rich parents. This statement of hers calls for pitchforks and torches. Literally. Without a shred of decency, she has shifted all blame from the Fed to the victims. How corrupt or morally adrift does someone have to be to blame their victims? In a criminal case this would be used as evidence of sociopathic if not psychopathic behavior and used by a prosecutor to call for a maximum sentence to prevent a dangerous individual from running loose in society. And rightly so. Such individuals are poor prospects for rehabilitation.]

Yellen did not address in her prepared text whether the Fed has contributed to inequality.

[Comment:No surprise there. Ted Bundy never acknowledged the harm he caused either.]
At this point, based on Yellen's testimony, I think it's time to say what everybody is already thinking: the Fed Chairwoman is literally displaying psychopathic tendencies by blaming her victims. I'm serious: if the Fed were an individual, we’d have no problem identifying its behaviors in psychologically pathological terms.

I understand that some, or perhaps many, will excuse this last point by saying that the Fed cannot possibly state the truth because doing so would create loss of confidence or public anger. But I submit that the so-called "white lie" defense is utter nonsense.

A greater harm is done by lying than by telling the truth. You can get away with small lies for a while, but they never actually go away, they just sit there corrosively undermining the very foundation of trust upon which civilized society rests. Large lies just do more damage over a shorter period of time, and that’s exactly where we are today. This explains much in terms of people’s general sense of unease despite an apparently reasonable economy and awesome living standards (by any historical measure).

Here's what truth would sound like if I were to re-write Yellen's speech:
My fellow Americans. Decades of poor fiscal restraint and accommodative monetary polices have brought us to an uncomfortable juncture.

My intention today is not to cast blame – there will be plenty of time for that later – but to take stock of where we are so that we can all decide on the best course forward, openly and honestly, as should be the case in a democracy.

There are no easy choices at this point, only a rather poor range of options spanning from somewhat unpleasant to potentially catastrophic.

The heart of the matter is simply this: the US government has built up an extraordinary amount of public debt, and an even larger pile of unfunded liabilities.

There’s simply no way for those to all be paid back under current terms. And given recent trajectories in play with respect to economic growth and deficit spending patterns, those debts and liabilities are only growing larger with time.

Quite simply our choices are these:
  1. Pay down the debt by taking in more revenue than expenses. This is also known as austerity and given the size of the debts and other obligations, several decades of severe belt tightening would be required. This program would be extremely painful for nearly everybody and would require massive tax hikes coupled to major spending cuts.
  2. Default on the debts and obligations. This simply means not paying people, investors, institutions and countries what we have promised to pay. Down this path lies the potential for massive destruction of our financial and political systems, so we have chosen to not entertain this path any further than to mention it exists.
  3. Do nothing and wait for a fiscal and monetary accident to happen. This is a guaranteed disaster that could result in the sudden and permanent decline of opportunity in this country that would be so painful we cannot even predict the possible outcomes.
  4. Engineer conditions where negative real rates of interest slowly allow the government’s obligations to fall relative to inflation. Over the span of decades this is the least painful route and our country has been down this path before.
We’ve selected path #4 as the least bad option. Since 2009 our policies have been geared towards #4 and we see no alternative besides staying on that path for as long as necessary. The alternative is the literal bankruptcy of our nation and we cannot and will not allow that to happen. Not on our watch.

While path #4 is the least objectionable of them all, it comes with its own share of unfortunate consequences and injustices. At its heart, negative real interest rates are an effective tax on savers and those whose incomes fail to keep pace with the inflation we are creating as an overt act of policy. This generalized and widespread loss of purchasing power takes a little bit from everyone, rather than a lot from a few systemically important institutions such as your federal government, which spreads the pain widely, and therefore causes the least disruptions to our daily lives.

Path #4 has a name: Financial Repression. This policy combines negative real interest rates with various forms of capital controls and tax policy to assure that nobody can evade it.

Obviously this is not fair, nor is it in alignment with our national narrative of prudence and hard work being rewarded because, truth be told, it rewards the profligate and those who produce nothing of real value but can play the game of high finance well. Yet here we are without any better options before us, and so we reluctantly chose Financial Repression.

One other distasteful ‘feature’ of the program of financial repression we’ve been putting you all through is that the rich get richer. Until or unless there is a massive change to the taxation and wealth re-distribution programs of the federal government, the Federal Reserve’s program of Financial Repression will continue to deliver an ever-larger gap between the wealthy and everyone else.

Such is the nature of the compounding function combined with the inequity of who gets first access to the newly created funds we make available in order to drive the interest rate curve into negative territory.

Are there any risks to this program? Well, the largest of them really needs to be discussed. Financial Repression has worked in the past, but it has only worked because we experienced both inflation and economic growth in equal measures.

Today, for reasons that we are still studying, neither the wage growth necessary to incite the sort of inflation we need nor economic growth have arrived as we thought they would.

If economic growth does not return, then the entire program of financial repression could well fail, and fail spectacularly. Everything depends on a return of economic growth sufficient to service the vast increases in debts that will result from the program.

But if that growth does not materialize? If the world is now stuck in a ‘New Mediocre’ of low growth then one risk is the possibility of a crisis that will be rooted in a permanent loss of confidence in debts of all forms, but government debt specifically. Down that road lie currency crises, and a wide variety of related financial upheavals the final result of which is what most will experience as a massive destruction of wealth.

We are working hard to assure that these risks are well contained, but you should be aware that they exist

After all, this is all of our futures that we are experimenting with and we do not have a playbook that we can follow here in 2014. We are in wholly uncharted territory. The exact arrangement of conditions we see across the global landscape is brand new.

We’re sorry to have to be in the position of engineering Financial Repression, but we felt there were no other options before us and we hope that you agree that a slight yearly discomfort to almost everyone is preferable to a major disruption to our way of life, our political system, and the possibility of worse things.

Is this fair? No. Was it avoidable? Yes. Is there anything we can be doing differently today? Not that we are aware of. The choices are between bad, worse and utterly terrible. We're choosing the bad path, and we hope you’ll agree that this is the best we can do at this point.

But you deserve the truth because it’s already completely obvious and available for anybody with access to a computer. Since we are all in this together and we’re all being asked to sacrifice in some way, it's much better that we all agree on the treatment plan.

It’s not a perfect plan, far from it. But considering the alternatives, this is the best one on the table.

If you want to make it more fair, more equitable, and with an eye towards building to a future in which we can all share some hope, you’ll need to turn to your policy makers and ask them to work from the fiscal side to correct what they can. Without a profound realignment of priorities, we’ll just get more of the same and, truth be told, eventually more of the same turns into a fiscal and monetary disaster about which nothing can be done except absorb the pain and loss that it will bring.


Context is everything. The growing gap between the very wealthy and everyone else is a consequence of Fed policy.

Whether you decide to be shocked, angry, or scared by Janet Yellen’s recent speech is up to you. Personally, I'm pissed off at being lectured to that falling further behind the super wealthy is my fault for not investing enough in my kids, not being entrepreneurial enough, and not having wealthy parents.

That level of ‘blame the victim’ is psychopathic, utterly appalling, and I reject it on every level. Worse, the level of trust destruction that happens with such a tone-deaf speech stains our entire national leadership. It is the modern version of Let them eat cake.

Once an institution, be it royalty of old or the Fed today, gets so far off the rails that they cannot locate their own role in the misery they see around them, it’s a sign of a huge problem for that society.

Ms. Yellen should not be allowed by anyone to get away with such a patently and provably false set of arguments. She should have been soundly booed off the stage and the President should be asking for her resignation immediately.

But we’re so far down the rabbit hole that almost nobody blinked an eye at the speech, and thought it perfectly normal.

For you personally, you need to be aware that the debts, deficits and liabilities across the entire OECD world are continuing to grow at a far faster pace than GDP, and far faster than oil production and discoveries of low-cost oil reservoirs (those schooled in net energy understand this to be the real issue), and that the most likely outcome, someday, will be an extraordinary financial accident.

It will be called something else -- a period of wealth destruction -- but for those who can see it coming, it will actually be period of massive wealth transfer.

And we'll keep up our efforts on how to see clearly amidst the intentional obfuscation, to help those aware to the situation avoid ending up on the wrong side of that transfer.