It’s the week of April the 13th 2016, a week that could go down as very important in the years ahead, a time when something cracked in the calm corridors of financial power. Consider the following:
There was a secret emergency secret meeting of the Federal Reserve Lat last week. There was then a secret meeting between Obama, his Vice President and the Chairwoman of the Federal Reserve on the 11th April, followed by another emergency secret meeting of the Federal Reserve. This is in a week when the G20 finance ministers were meeting in the same city. This is in a week when the World Bank and the IMF were meeting in the same city!!!
These meetings do not happen unless something is very wrong. The blog From which I am getting this information (Knave Dave) suggested the following possibilities:
1. Defaults in the US energy sector have reached a critical mass and are effecting the solvency of the US banking system. Defaults have already hit 40 this year. Bank profits are forecast to be the lowest in many years for the first quarter, if any profit at all.
2. The Italian government has just called an emergency meeting to figure out how to deal with 350 billion a euro of bad debts in its banking system that have nowhere to go but collapse the banks behind them.
3. The Austrians have just closed a corrupt bank that has cost their government billions. They are now demanding a haircut from depositors, ie large banks who hold most of the loans and bonds to this bank. This is the first depositor haircut under the new European banking rules. This has ramifications for some very big and very distressed European banks, a domino effect could be building. An Austrian bank that collapsed in 1931 pushed the whole world into the depths of the Great Depression.
4. The American economy is sliding very fast into a recession, which would likely deliver the presidency to either Sanders or Trump, an anathema to the establishment.
5. China is a mess, it is now borrowing money at the rate of $trillions a year just to pay the interest on its $30trillion mountain of debt, used to create an artificial boom in construction ( http://www.zerohedge.com/news/2016-04-12/new-middle-kingdom-concrete-and-red-depression-ahead )
Perhaps it is all five? Anyway, something big is going on in the big end of town and we are going to feel its effects very soon.
is this another reason why gold has taken off this year?
you can see the entire fascinating article from “Knave Dave” below
“History shows that once an enormous debt has been incurred by a nation, there are only two ways to solve it: one is simply declare bankruptcy, the other is to inflate the currency and thus destroy the wealth of ordinary citizens.” –Adam Smith
Today I read a great post on the future of Japan’s unorthodox monetary policies. It is so bad that the former chief economist of the IMF, professor Oliver Blanchard is now saying it will end in hyper-inflation. Here is the link if you want to read the whole article, but I will summarise below:
Basically the situation is as follows
1. Japan is spending more than it is earning as its aging demographics timebomb destroying its tax base, but it wants to pretend it is not getting poorer (saving face). It now has the highest government debt to GDP ratio in the world
2. The central government has tapped out all domestic sources of cheap credit such as the insurance funds and banks.
3. The central bank has stepped in and started buying up all new government bonds being issued, but indirectly through banks and insurance companies as this is the law in most developed countries. So at least there has been a buyer of last resort at a low interest rate to keep the government afloat. They have in fact driven interest rates into negative terrirtory recently.
4. Since 2014, when a new and massive round of QE was launched, the central bank has also been buying large amounts of already existing government debt that was on the books of the banks and insurance companies. This was designed to flood the markets with yen and drive down the currency so the country could remain economically competitive.
5. However, sometime soon they will run out of existing debt to buy (soak up) from commercial banks and insurance companies. The more they buy the less willing banks will be to sell what’s left due to their need for reserves as required by law.This will result in a further rise in interest rates an a retreat from the massive QE the central bank has been been injecting into the economy. There will be a financial drought for the government. It will also mean further rising interest rates as the government will have to tap overseas debt providers at a higher rate.
6. But they can’t tap foreign debt as it will bankrupt the government almost immediately due to its massive debt load, which cannot be carried at normal interest rates. This will be admitting the country is bankrupt, risking a huge economic catastrophe such as befell Argentina and Greece
6. At that point The only way to keep the show on the road and avoid this national and global catastrophe will be for the Japanese central bank to directly supply yen to its government in ever-increasing amounts, yen created out of thin air and added to an already bloated money supply. This will be a massive inflationary jolt to the economy. This is the Zimbabue, Venezuela and Weimar Germany option. No major economic power has ever done this in the modern era.
The illusion of normality was only going to last until the mainstream media caught on to the danger, and today England’s Daily Telegraph finally caught on…
It is now only a matter of time before the Japanese debt bomb explodes, destroying the global illusion of eternal debt fuelled prosperity and destroying the global economy with it.
Thus we come to gold, the ultimate inflation hedge. Can it be that the professionals are now eyeing a global inflationary disaster and positioning themselves appropriately? Holdings of gold in the worlds largest gold ETF have jumped over 20% in the last three months, an unprecedented rise after a four year bear market. Gold is up 16% for the year and is the worlds best performing asset this year. Something big has changed. Something big is coming.
From Maulden Economics I found this little gem…
“Next year, the US national debt will top $20 trillion. The deficit is running close to $500 billion, and the Congressional Budget Office projects that figure to rise.
Add another $3 trillion or so in state and local debt. As you may imagine, the interest on that debt is beginning to add up, even at the extraordinarily low rates we have today.
Sometime in 2019, entitlement spending, defense, and interest will consume all the tax revenues collected by the US government. That means all spending for everything else will have to be borrowed.
The CBO projects the deficit will rise to over $1 trillion by 2023. By that point, entitlement spending and net interest will be consuming almost all tax revenues, and we will be borrowing to pay for our defense.”
There are three ways this intractable debt bomb will be diffused:
1. Taxes will be raised to the sky…not going to happen because they already have.
2. Government will slash welfare and defence…not going to happen, ever!
3. Inflation, like America has never seen before will be unleashed to shrink the debt with an avalanche of new money…I’ll bet my house on this outcome.
The Chinese stock market is crashing and has sent world stocks tumbling to their worst first week of the year in many decades…but why? It seems like it is out of the blue but it is not.
In in the aftermath of the global financial crisis China added $15 trillion in stimulus finance compared to Americas roughly $3 trillion in QE. This went into many unwise and unproductive projects, such as the famous ghost cities.
thiat mal-investment is now unwinding as the economy slows and bad loans surface to be dealt with. The link below takes you to a very insightful article from Zero Hedge on exactly what is happening in China. It makes for sobering reading.
I have just read an excellent article by Adam Hamilton that analyses fifty years of US FEderal Reserve data against gold prices to see if the current mantra that rising rates are bad for the gold price is true or not.
the quick summary is that in all 11 rate rise cycles (3 or more interest rate hikes in a row) gold gained an average of 27%. In the six cycles where thr Fed raised rates slowly gold gained 60% and in the five where they panicked and raised every meeting quickly gold dropped 13%.
This shows once and for all that rising rates are GOOD for gold, especially if the rising rate cycle begins when gold is coming off a low. Enjoy the read here:
I have just read a very interesting article whose hypothesis is that energy prices, specifically oil, is the fundamental driver of gold prices. Proof comes from the two great waves of gold price rises in the seventies and the last decade, driven it seems by two great waves of oil price rises. I think there is some merit in this arguement. If correct it would mean we will not see a new bull market in gold until the American shale oil boom collapses and global oil production retreats. The former has just begun, the latter is struggling.
A fascinating Take on the rise and rise of Islamic terrorism from Dan Sanchez of antiwar.com…
For they have sown the wind, and they shall reap the whirlwind Hosea 8:7
It may be surprising to hear, but it is a plain historical fact that modern international jihad originated as an instrument of US foreign policy. The “great menace of our era” was built up by the CIA to wage a proxy war against the Soviets.
A 1973 coup in Afghanistan installed a new secular government that, while not fully communist, was Soviet-leaning. That was a capital ofense from the perspective of America’s Cold War national security state, at the time headed by Henry Kissinger.
Conveniently for Kissinger, the dirt poor country was sandwiched between two US client states: Pakistan to the east and Iran (then still ruled by the CIA-installed Shah) to the west. Immediately after the coup, the CIA and the clandestine security agencies of Pakistan (ISI) and Iran (SAVAK) began regime change operations in Afghanistan, orchestrating and sponsoring Islamic fundamentalist insurrections and coup attempts.
Due to these efforts, as well as the government’s own oppressiveness, a widespread rebellion broke out in Afghanistan in 1978. In July 1979, US President Jimmy Carter, on the advice of National Security Adviser Zbigniew Brzezinski, officially authorized aid to the puritanical Mujahideen rebels, to be delivered through the CIA’s “Operation Cyclone.” This was on top of the unofficial aid that the CIA had already been funnelling to Afghan Islamist insurgents for years through Pakistan and Iran.
In a 1998 interview, Brzezinski openly admitted that he and Carter thus “knowingly increased the probability” that the Soviets would militarily intervene. And indeed Russia did invade in December 1979, beginning the decade-long Soviet-Afghan War. In the same 1998 interview, Brzezinski boasted:
“The day that the Soviets officially crossed the border, I wrote to President Carter: We now have the opportunity of giving to the USSR its Vietnam war.”
Shortly thereafter, the highest cleric of Saudi Arabia (another US client) endorsed a fatwa proclaiming jihad against the atheist Soviets in Afghanistan as an obligation for all Muslims throughout the world. It should be noted that the Saudis have a narrow definition of a true “Muslim,” as they follow Wahhabism, one of the most extreme and intolerant strands of Islam, highly similar to ISIS’s own. Throughout the 1980’s, Saudi Arabia also provided the Afghan Jihad with hundreds of millions of petrodollars in aid and tens of thousands of madrassa-indoctrinated volunteer fighters.
The CIA also heavily participated in recruitment for the increasingly international jihad. And this is where Osama bin Laden enters the picture. As political scientist and terrorism expert Eqbal Ahmad said in a 1998 speech:
“Money started pouring in. CIA agents starting going all over the Muslim world recruiting people to fight in the great jihad. Bin Laden was one of the early prize recruits. He was not only an Arab. He was also a Saudi. He was not only a Saudi. He was also a multimillionaire, willing to put his own money into the matter. Bin Laden went around recruiting people for the jihad against communism.
I first met him in 1986. He was recommended to me by an American official of whom I do not know whether he was or was not an agent. I was talking to him and said, ‘Who are the Arabs here who would be very interesting?’ By here I meant in Afghanistan and Pakistan. He said, ‘You must meet Osama.’ I went to see Osama. There he was, rich, bringing in recruits from Algeria, from Sudan, from Egypt, just like Sheikh Abdul Rahman.”
The US publicly lionized the anti-Soviet jihadis. In 1983, President Ronald Reagan, who continued Carter’s Afghan policy, met with Mujahideen leaders in the Oval Office for a photo op, and released a statement which said:
“To watch the courageous Afghan freedom fighters battle modern arsenals with simple hand-held weapons is an inspiration to those who love freedom.”
The glorification even extended to popular culture. In the climactic battle scene of 1988’s Rambo III, the heroic John Rambo is about to be overrun by Soviet forces when he is saved by a Mujahideen cavalry charge. The movie closed with onscreen text that read, “THIS FILM IS DEDICATED TO THE BRAVE MUJAHIDEEN FIGHTERS OF AFGHANISTAN.” After the US went to war with the Mujahideen’s successors in 2001, the dedication was changed to, “THE GALLANT PEOPLE OF AFGHANISTAN.”
The film even has Rambo’s mentor echoing Brzezinski when he screams at his Russian captor, “We already had our Vietnam! Now you’re gonna have yours!”
After a decade of bloody war, the Soviets withdrew from Afghanistan in February 1989. Later that year, the Berlin Wall fell and Romania left the Soviet-led Warsaw Pact. The year after, Poland and East Germany followed. And in 1991, the Warsaw Pact and then the Soviet Union itself both dissolved completely.
Brzezinski arrogantly took credit for this, claiming that his strategy of giving the USSR “its own Vietnam” brought about the Soviet “collapse.”
But it was not really a collapse. The Soviet Empire did not descend into failed-state chaos, the way Afghanistan, Iraq, Libya, Syria, Yemen, and Somalia recently have thanks to the American War on Terror. That is what a true “collapse” looks like.
In contrast, what happened throughout the Soviet Empire was not a violent collapse, but a relinquishing of power and a generally peaceful dissolution. Such an outcome rarely results from war. To the contrary, war is the health of the State, as Randolph Bourne taught. War tends not to loosen, but to tighten a regime’s grip on power. It is not war, but peace and detente that can lead to peaceful dissolution. It is when people no longer feel so besieged by enemies abroad that they feel secure enough to demand greater freedom (even to the extent of full secession) from their “protectors” and rulers.
It was the Reagan-Thatcher-Gorbachev thaw of Reagan’s second term that created the necessary climate for ending the proxy war in Afghanistan. And it was the subsequent combination of far-abroad datente and near-abroad peace that created the necessary climate for the Soviet dissolution.
Brzezinski’s jihad did not win the Cold War. It only sowed the seeds for the Terror War.
In 1990, the US seized the emerging post-Berlin “unipolar moment” of peerless pre-eminence by launching its first globo-cop “police action”: the Persian Gulf War (Operation Desert Storm) against Saddam Hussein’s regime in Iraq.
Desert Storm was preceded by Operation Desert Shield, in which the US built up a military presence in Saudi Arabia (troops, arms, and bases) for use in staging attacks on Iraq in the upcoming war.
F-15Es parked during Operation Desert Shield.
Contrary to US promises, the military occupation of Saudi Arabia persisted after the war, as the bases were used to enforce a blockade on Iraq throughout the 90s (which starved over a half a million children). This had a twofold impact on Islamic radicalisation.
As Lawrence Wright wrote in The New Yorker :
“The presence of American troops in Saudi Arabia was a shattering event in the country’s history, calling into question the ancient bargain between the royal family and the Wahhabi clerics, whose blessing allows the Saud family to rule. In 1992, a group of the country’s most prominent religious leaders issued the Memorandum of Advice, which implicitly threatened a clerical coup. The royal family, shaken by the threat to its rule, accommodated most of the clerics’ demands, giving them more control over Saudi society. One of their directives called for the creation of a Ministry of Islamic Affairs, which would be given offices in Saudi embassies and consulates. As the journalist Philip Shenon writes, citing John Lehman, the former Secretary of the Navy and a 9/11 commissioner, “it was well-known in intelligence circles that the Islamic affairs office functioned as the Saudis’ ‘fifth column’ in support of Muslim extremists.”
The occupation of the Arabian Peninsula also began Bin Laden’s vendetta against his former patrons. As Eqbal Ahmad told it:
“He turns at a particular moment. In 1990, the U.S. goes into Saudi Arabia with forces. Saudi Arabia is the holy place of Muslims, Mecca, and Medina. There had never been foreign troops there. In 1990, during the Gulf War, they went in, in the name of helping Saudi Arabia defeat Saddam Hussein. Osama Bin Laden remained quiet.
“Saddam was defeated, but the American troops stayed on in the land of the Ka’aba [the most sacred site of Islam, in Mecca], foreign troops. He wrote letter after letter saying, ‘Why are you here? Get out! You came to help but you have stayed on.’ Finally he started a jihad against the other occupiers. His mission is to get American troops out of Saudi Arabia. His earlier mission was to get Russian troops out of Afghanistan.”
Even after this turn, the western lionization of the the Soviet-Afghan War’s Mujahideen veterans, and of Bin Laden in particular, continued into the 90s. As late as December 1993, The Independent (a major British newspaper) even published a puff piece on Bin Laden, plastered with a huge photo of the smiling sheik, titled “ Anti-Soviet warrior puts his army on the road to peace.” The article lauded Bin Laden as a humanitarian, gushing over how the “Saudi businessman who recruited mujahedin now uses them for large-scale building projects in Sudan.”
As it turned out, his largest-scale project was to build up the international militia that the CIA helped him recruit into Al Qaeda, which he would then lead in a terror jihad against the West throughout the 90s. With that wave of attacks in mind, Brzezinski’s 1998 interviewers asked if he had any regrets over blowback from Operation Cyclone. The statesman was totally dismissive.
Q: And neither do you regret having supported the Islamic fundamentalism, having given arms and advice to future terrorists?
Brzezinski: What is most important to the history of the world? The Taliban or the collapse of the Soviet empire? Some stirred-up Moslems or the liberation of Central Europe and the end of the cold war?
Q: Some stirred-up Moslems? But it has been said and repeated: Islamic fundamentalism represents a world menace today.
Later in 1998, mere months after Brzezinski’s interview, Eqbal Ahmad delivered the exact opposite assessment of Bin Laden and Al Qaeda, warning his American audience:
“They’re going to go for you. They’re going to do a lot more. These are the chickens of the Afghanistan war coming home to roost.”
Three years later, Brzezinski was proven spectacularly wrong, and Ahmad tragically right, when the terror jihad of Bin Laden’s Mujahideen-descended band of “stirred-up Muslems” culminated in the attacks of September 11, 2001.
During the planning of those attacks, Bin Laden and his inner circle were hosted by the Taliban, yet another band of Mujahideen-descended “stirred-up Moslems,” then ruling Afghanistan.
As Ahmad foretold, the chickens of the CIA’s Afghan Jihad (and of the Gulf War) had indeed come home to roost.
True to their names, Operations Cyclone and Desert Storm sowed the wind. Years later, it was 3,000 American civilians who reaped the whirlwind.
Incredibly, that whirlwind harvest was then reseeded, ensuring that still more civilians would later reap an even bigger whirlwind. Apparently cultivating chaos is the only trade that empires know. The regime and its kept news media sowed the whirlwind by exploiting America’s post-9/11 fear and anger to garner acquiescence for even larger and more frequent foreign misadventures: for a globe-spanning Long War that continues to this day.
First came the Afghanistan War against the Taliban and in pursuit of Al Qaeda. Almost inexplicably, Bin Laden escaped into hiding in US-alliedPakistan after being pinned down in the caves of Tora Bora. It is somewhat less inexplicable in light of the fact that the neocon-led Bush administration was trying to fear-monger the public into countenancing another war in Iraq, and that this involved pushing bogus intelligence connecting Saddam Hussein with Al Qaeda. At least until the regime got its post-9/11 bonus war, it was convenient to still have Dread Pirate Osama at large to keep America’s war fever up. Better dread than dead.
Similarly, in 2002, the Bush administration denied the military’s request for permission to kill another figurehead terrorist: Abu Musab al-Zarqawi, who had in the 80s been yet another recruit for the CIA’s Afghan Jihad. That too was likely about the administration getting its war in Iraq. At the UN, Secretary of State Colin Powell falsely identified Zarqawi as a link between Saddam and Al Qaeda (he was allied with neither, and an enemy of the former), in order to paint the planned invasion of Iraq as a necessary front in the War on Terror.
As it turned out it was the Iraq War itself that unleashed Zarqawi in 2003, freeing him to emerge from autonomous Kurdistan, where he had been hiding from Saddam’s security forces under the protective aegis of an American no-fly zone. His formerly obscure terrorist gang rapidly ascended amid the chaos of the Iraq War, becoming Al Qaeda in Iraq or AQI (after Zarqawi swore allegiance to Bin Laden), and then the Islamic State in Iraq or ISI (after Zarqawi was finally killed).
After suffering severe setbacks in Iraq, in 2011 the Zarqawiites began infiltrating neighboring Syria to take part in the insurgency against Bashar al-Assad’s regime. Thereafter renaming itself ISIS (Islamic State in Iraq and Syria), the group, along with its offshoot the Al Nusra Front and other Mujahideen militias, came to dominate that insurgency.
The growth of ISIS and Nusra in Syria was fed by the United States (the State Department, the Pentagon, and the CIA) and its Western and regional allies (the UK, France, Turkey, Saudi Arabia, the Gulf States, etc.). By at least 2012, these powers had launched a veritable Operation Cyclone 2.0: recruiting, training, financing, and arming Mujahideen fighters for the purpose of overthrowing the secular ruler Assad (who, like the post-1973 secular Afghan regime, is an ally of Russia).
Just as in Afghanistan decades ago, young men, radicalized by the call to jihad and militarized by the promise of weapons and money, have poured in from countries throughout the Muslim world, and from Europe too. This has not only led to the death of hundreds of thousands of Syrians and the displacement of millions, but has turbo-boosted ISIS and Nusra in myriad ways.
US Senator John McCain with mujahideen from the Northern Storm Brigade.
The Syrian Jihad, like the Afghan Jihad, was preceded by less direct and lower grade subversion using militant Islamists. In the Afghan prelude, America’s dirty work was done by Pakistan and Iran. In the Syrian prelude, it was done by the Saudis and lesser Gulf Sheikdoms, who with US approval, began sponsoring anti-Assad Salafist militias in neighbouring Lebanon as early as 2006.
There were voices even among the Saudis who, like Eqbal Ahmad, darkly forebode blowback from dealing with such devils. One former Saudi diplomat warned:
“Salafis are sick and hateful, and I’m very much against the idea of flirting with them. They hate the Shiites, but they hate Americans more. If you try to outsmart them, they will outsmart us. It will be ugly.”
Yet they were drowned out by voices who, like Brzezinski, shrugged off such concerns over “stirred-up Salafis.” A US government consultant related to the great journalist Seymour Hersh that:
“This time… Bandar and other Saudis have assured the White House that ‘they will keep a very close eye on the religious fundamentalists. Their message to us was ‘We’ve created this movement, and we can control it.’ It’s not that we don’t want the Salafis to throw bombs; it’s who they throw them at…”
In other words: “Thanks for paying for our jihad in the 80s. And sorry about your towers. But this time around it’ll be totally different, trust us. Sincerely, the Wahhabis.”
Yet, regarding Syria, the American deep state has been just as much sinister as it has been gullible and hubristic, if not more. As a recently disclosed Pentagon intelligence report reveals, US planners knew full well that they were once again “sowing the cyclone,” and that others would soon “reap the blowback.” The report from 2012 predicted that supporting the Syrian insurgency would create “the ideal atmosphere” for ISIS “to return to its old pockets” in Sunni Iraq and also create “the possibility of establishing a declared or undeclared Salafist Principality” in the region.
And that is precisely what happened. In 2014, strengthened by the US-backed Syrian Jihad, ISIS burst back into “its old pockets” in Iraq, conquered the northwest of the country down to the gates of Baghdad, and declared a Caliphate (a Salafist Principality).
The wind sown by Operation Cyclone took two decades to fully germinate into the blowback that blew the Twin Towers down. Yet it only took two years for us to reap the whirlwind from the Syrian Jihad. Scott Horton proposes the term “back-draft” for blow-back that is so prompt and predictable: like the fire-storm that immediately erupts in your face upon opening the door of a burning hot room.
The US and its allies have opened the door to Hell in Syria. And the ensuing ISIS back-draft has lately spread far beyond Syria and Iraq, consuming 44 lives in the bombing of a Beirut marketplace, 224 lives with the bombing of a Russian airliner, and 130 lives with the recent attacks in Paris.
It took longer than it did in 1979, but America’s current proxy jihad has drawn in Russia once again. The chief difference is that this time, the US and its allies are not limiting themselves to covert ops, but are involving their air forces as well. This is ostensibly to “destroy” ISIS. However, the US-led coalition also wants the Assad regime gone, while the Russian-led coalition is trying to save it and to fight the US-supported non-ISIS Mujahideen as well (including Syrian Al Qaeda). So the countless warplanes buzzing over and bombing Syria are flying at cross purposes. This has turned the Levant into a nuclear powder keg.
And now, unthinkably, a US ally may have just lit a match. Just this week, Turkey shot down a Russian warplane. Two pilots were reportedly executed by anti-Assad insurgents in mid-air. A video has emerged on the internet of insurgents standing over one of the dead Russians saying “Allahu Akbar” and apparently calling themselves “Mujahideen.”
Remember, Turkey is a NATO member, who can drag the entire West into a thermonuclear war if it picks a big enough fight. The back-draft we reap from this latest American jihad may consume us all.
Even if we survive this near-term global existential crisis, our warlords have more in store for us. The Paris attacks especially have yielded yet another crop of fear and loathing in the West, which the tillers of terror are keen to plow right back into still more proxy warfare and mayhem.
But they cannot do so if we, their tax cattle, refuse to pull the plow or let them drive us like beasts of burden that are so easily spooked and prodded. We the people must convey that if they do not stop cultivating the storms of chaos, then we will cast off their yoke once and for all.
ken from Zero Hedge…
Back in early 2009, just around the time the Fed announced it would unleash QE1, we warned that any attempt to reflate the debt (a pathway which ultimately leads to hyperinflation as monetary para-drops are the only logical outcome as a result of the deflationary failure of the intermediate steps) would fail, and instead would saddle the world with even more debt, making monetary financing, i.e., para-dropping money, the inevitable outcome.
We said that instead, the right move would be to liquidate the excess debt, and start anew – a step which, however, would wipe out trillions in (underwater) equity, something which the status quo would never agree to, as that is where the bulk of its wealth is contained.
7 years later, debt is well over $200 trillion, having risen by more than $60 trillion in the interim, and we are rapidly approaching the peak of the world’s debt capacity as we noted a month ago in “The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That.”
Today, we find that none other than Adair Turner, a member of the Bank of England’s Financial Policy Committee and a Chairman of the Financial Services Authority, wrote a long essay in Bloomberg which admits everything we have warned about.
Advanced economies’ public debt on average increased by 34% of GDP between 2007 and 2014. More important, national incomes and living standards in many countries are 10% or more below where they could have been, and are likely to remain there in perpetuity.
The fundamental problem is that modern financial systems inevitably create debt in excessive quantities. The debt they create doesn’t finance new capital investment but the purchase of existing assets, and above all real estate. Debt drives booms and financial busts. And it is a debt overhang from the last boom that explains why recovery from the 2007–2008 crisis has been so anaemic.
… debt contracts also have adverse consequences: They’re likely to be created in excessive quantities. And the more debt an economy assumes, the less stable that economy will be. The dangers of excessive debt creation are magnified by the existence of banks and the predominance of certain kinds of lending. Almost any economics or finance textbook will describe how banks take money from savers and lend it to borrowers, allocating money among investment options.
At the core of financial instability in modern economies lies this interaction between the infinite capacity of banks to create new credit, money and purchasing power, and the scarce supply of urban land. Self-reinforcing cycles of boom and bust are the inevitable result.
His punch line: “unless tightly constrained by public policy, banks make economies unstable.”
If central banks increased interest rates to slow the credit growth, standard economic theory said lower real growth would result. The same pattern and the same policy assumptions can now be seen in many emerging economies, including China: Each year, credit grows faster than GDP so that leverage rises and credit growth drives economies forward.
And then this:
But if that is really true, we face a severe dilemma. We seem to need credit to grow faster than GDP to keep economies growing at a reasonable rate, which leads inevitably to crisis, recession and debt overhang. We seem condemned to instability in an economy incapable of balanced growth with stable leverage.
Hmm, this sounds exactly like what we said in 2010: “Why The Staggering U.S. Debt Load Is Sure To Prevent Economic Growth.” But what does a fringe, tin-foil blog know.
So, yes, the very top echelon of central bankers finally admits what we have said all along: creating excess debt creates asset bubbles, slows down growth, recurring crises and leads to even more “unconventional”, and taxpayer funded systemic bailouts.
Hardly a surprise.
What does Turner recommend?
For the answer we have to go back to what he said yesterday in an IMF paper titled “The Case for Monetary Finance – An Essentially Political Issue.” But before going into it, here is what the reported the IMF new chief economist, Maurice Obstefld, said:
“I worry about deflation globally,” new IMF Economic Counsellor Maurice Obstfeld said in an interview ahead of an annual IMF research conference that focuses this year on unconventional monetary policies and exchange rate regimes. “It may be time to start thinking outside the box.”
Weak—and in some cases falling—price growth has plagued Japan, Europe, the U.S. and other major economies since the financial crisis. Plummeting commodity prices are exacerbating the so-called “lowflation” and deflation problems that curb investment, spending and growth.
Surveying several dozen of the largest economies around the world, Mr. Obstfeld said the number of countries experiencing low inflation is rising. Combined with slowing emerging market output, ballooning government debt and monetary policy constrained by the lower limits of interest rates, the deflation risk is fuelling fears the global economy could be fast stuck into a deep low-growth mire.
Yes, this comes as the Fed is desperately pushing for a rate hike, just so it can telegraph that “things are better than they seem.” It remains to be seen how successful this experiment will be: we know that every single country that has been at ZIRP or below, and has tried to hike rates, has promptly failed most notably the case of Japan in August 2000 when it, too, hiked by 25 bps from 0% only to lower 7 months later.
Which brings us back to Adair Turner, and his note on “monetary financing.” This is what he says:
“Monetary finance” is defined as running a fiscal deficit (or a higher deficit than would otherwise be the case) which is not financed by the issue of interest-bearing debt, but by an increase in the monetary base – i.e. of the irredeemable fiat non-interest-bearing monetary liabilities of the government/central bank.
The easiest way to think about this is in terms of Friedman’s “helicopter money”, [Friedman, M. 1960] with the government printing dollar bills and then using them to make a lump-sum payment to citizens.
But in modern reality:
- It could involve either a tax cut or a public expenditure increase which would not otherwise occur.
- It can be one-off or repeated over time.
- And it would typically involve the creation of additional deposit rather than paper money. This would be initially in the form of deposit money in the government’s own current accounts which would then be transferred into private deposit accounts either as a tax cut or through additional public expenditure.
And the punch line: this is what the upcoming monetary Para drop will look like:
There are a number of ways in which the money could be “created” with different precise implications for the central bank balance sheet. They include:
- The central bank directly credits the government current account (held either at the central bank itself or at a commercial bank) and records as an asset a non-interest-bearing non-redeemable “due from government” receivable
- The government issues interest-bearing debt which the central bank purchases and which is then converted to a non-interest-bearing non-redeemable “due from government” asset
- The government issues interest-bearing debt, which the central bank purchases , holds and perpetually rolls over (buying new government debt whenever the government repays old debt), returning to the government as profit the interest income it receives from the government. In this case the central bank must also credibly commit in advance to this perpetual rollover.
But the choice between these different precise mechanisms has no substantive economic consequences, since in all cases:
- The consolidated balance sheet of the government and central bank together is the same.
- The monetary base of irredeemable non-interest-bearing money is increased
- And the government is thus able to cut taxes or increase expenditure without incurring any future liability to pay more interest, or to redeem the capital value of the money created.
And so on: there is more in the paper which we suggest everybody reads as it lays out precisely what will happen once the next attempt to reflate fails.
What is more disturbing, is that this is now effectively policy: with this paper by one of the most respected economists among the intellectual oligarchy, which expressly endorses “monetary financing” it is just a matter of time before it goes from theory to practice, first in Japan within the next five years. Quote Turner:
Monetary finance in today’s economic circumstances. I argue that monetary finance should be an available policy tool, and that in at least one country – Japan – it not only should be but inevitably will be used within the next five years.
First in Japan, then everywhere else and… on a “continuous basis.”
I also consider whether money finance should be used only as an emergency measure in the face of a post-crisis debt overhang, or whether, faced with possible secular stagnation, we will have to use it on a continuous basis.
So the blueprint for what is coming has now been laid out and only those who willingly refuse to see what is before them, will be surprised when “monetary financing” is finally unveiled.
In conclusion we go back to Turner’s op-ed in Bloomberg from this morning in which he says:
Many people are legitimately angry that few bankers have been punished. Some were incompetent, others dishonest. Yet they were not a fundamental driver of the crisis any more than the misbehaviour of individual financiers in 1920s America caused the Great Depression.
The hypocrisy is astounding: in one paper Turner promotes a policy that will perpetuate, and reward, the banking status quo, and in another letter he urges punishment for the very same bankers who will benefit the most from having robbed the middle class for the past 7 years thanks to policies enacted by people like him!
The sad truth, however, is that after reading the above, one barely even has the energy to feel disgust.
But perhaps just to help spark if not disgust then a little bit of anger, we will conclude with the quote used by Turner at the very top of his paper which confirms that at least one person knew how it was all going to end a long time ago:
“Consider for example a tax cut for households and businesses that is explicitly coupled with incremental Bank of Japan purchases of government debt – so that the tax cut is in effect financed by money creation”
Ben Bernanke, Some Thoughts on Monetary Policy in Japan, 2003