Category Archives: Economy and Meltdown

Spot The Naval Hot Zone


‘Things’ appear to be hotting up in a couple of places around the world. While the Middle East’s incessant instability only grows worse; the following clip from Stratfor sheds light on the ‘discussion’ that is occurring in the middle of the Pacific with the Chinese and the Phillipines over potential energy rights. Nothing to see here, move along.

 

 

And on the Chinese maritime ‘excursion’…

 

And Iran and Syria…

Source: Stratfor

Former Citi Boss: Reduce Leverage to 15 Times Assets, Put EVERYTHING Back on the Books, and Mark All Assets to Market EVERY DAY


It is – justifiably – big news that former Citi CEO Sandy Weill said that we should break up the big banks, and separate traditional depository banking from speculative investing. Indeed, even congress members are confronting top government officials on why they haven’t done this.

But Weill said 3 other equally important things today.

First, Weill told CNBC that the financial crisis was largely caused by too much leverage, and that we should reduce leverage to between 12-15 times. (Background.)

Secondly, Weill said that we have to restore transparency, so that nothing is hidden off balance sheet. (Leading economist Anna Schwartz told the Wall Street journal in 2008: “The Fed … has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”)

Third, Weill said that assets must be marked to market every day. (Background here and here.)

Mr. Weill’s suggestions would go a long way toward fixing our broken financial system and giving us a shot at prospering once again.

Guest Post: Why Listen To Keynes In The First Place?


Submitted by James E. Miller of the Ludwig von Mises Institute of Canada,

 

In a recent BBC News article, philosopher John Gray asks the quaint but otherwise vain question of what would John Maynard Keynes do in today’s economic slump.  I call the question vain because practically every Western government has followed Keynes’ prescribed remedy for the so-called Great Recession.  Following the financial crisis of 2008, governments around the world engaged in deficit spending while central banks pushed interest rates to unprecedented lows.  Nearly four years later, unemployment remains stubbornly high in most major countries.

Even now in the face of the come-down that inevitably follows any stimulus-induced feelings of euphoria, certain central banks have taken to further monetary easing.  The Bank of England recently announced an extension of its quantitative easing program by £50bn.  Not to be outdone, both the People’s Bank of China and the European Central Bank cut interest rates in an effort to boost consumer borrowing.  Still, these new rounds of monetary stimulus don’t appear to be doing the trick.  The Keynesian miracle cure has been a spectacular dud thus far.  All that modern day disciples of Keynes can do is scratch their heads and say “more should have been done.”  They never allude to how many more trillions of paper dollars should have been created or spent; just call it the excuse that keeps on giving.

Perhaps for these reasons Gray doesn’t make a full blown recommendation of Keynes’ famed countercyclical policy to combat the ongoing downturn.  Instead he asks if Keynes would propose a policy that contrasts heavily with the influential theories presented in The General Theory of Employment, Interest, and Money.  To Gray, Keynes was an intellectual heavyweight who possessed a “deep understanding of the complex, unpredictable and at times insolubly difficult nature of human events.”  According to Gray, policymakers worldwide should see to it to welcome Keynes’ vision of achieving an “intelligent variety of capitalism.”

Gray’s simple query of “what would Keynes do” really begs another question: who was Keynes and why is he looked to by as a brilliant mind?  Does this man truly deserve the praise he receives by the intellectual establishment closely aligned with government?

To answer these questions, it helps to first observe the early years of the 20th century’s most famous economist.  For starters, Keynes was not born into a family with little means.  In fact he was incredibly privileged while growing up as his father, John Neville Keynes, was an important figure within Cambridge University.  With the help of his father and his father’s good friend and economist Alfred Marshall, the young Keynes was introduced to the aristocratic life of Britain’s intellectual upper-class.  This included his joining of the Apostles as a student at Cambridge University.  The Apostles was a secret society reserved for those connected to or within the country’s ruling class.  Keynes’ membership would ultimately shape his view on life and humanity in general.  It would lead to his adopting a self-serving elitist bent for much of his career.

And it all began at Cambridge with the Apostles.  He and other members would frequently refer to those not within the highly secretive clique as “phenomena” and not “real.”  As an undergraduate, Keynes wrote in a letter to his friend Giles Lytton Strachey,

Is it monomania — this colossal moral superiority that we feel? I get the feeling that most of the rest [of the world outside the Apostles] never see anything at all — too stupid or too wicked.

Keynes’ feeling of superiority was also accompanied by the Apostles’ disdain toward notions of morality and values held by the middle class such as thrift.  After graduation, he would help form the Bloomsbury Group which became an intellectual force in early 20th century England.  The Bloomsbury Group, like the Apostles, embraced avant-garde views toward aesthetics and morality and detested traditional values.  Much of Keynes’ hatred toward sensible views of good and evil was influenced by a philosophy professor at Trinity College named G.E. Moore.  To Keynes, Moore’s magnum opus Principia Ethica was “exciting, exhilarating, the beginning of a new renaissance, the opening of a new heaven on earth.”  In his memoir “My Early Beliefs,” Keynes insisted that Moore’s personal ethics, “made morals unnecessary….We entirely repudiated a personal liability on us to obey general rules.”  Towards the end of the paper, he also ensures his readers that “I remain and always will remain an immoralist.”

Keynes’ rationalization for government intervention  and horribly inflated ego lead him to be one of the most sought after economists during the initial throws of the Great Depression.  To the politician who fancies himself as a molder of the perfect society, the theories Keynes presented which divorced themselves from all semblance of reality were a Godsend.  The General Theory would go on to provide the intellectual cover needed by the political class to convince the man on the street that only the state could deliver him to the land of the plenty.

Most controversial of Keynes’ theories was that investment should be socialized to, in a sense, “euthanize” the rentier class that had no justifiable income.  He went as far as to write “Interest today rewards no genuine sacrifice…[T]here are no intrinsic reasons for the scarcity of capital.”  The ultimate solution would then be to engineer “an increase in the volume of capital until it ceases to be scarce.”  To do so meant lowering the interest rate for borrowers by expanding the money supply.  To the delight of public officials, increased government expenditures would then follow in tandem.

Of course this strategy would be successful if it weren’t for one critical detail: capital doesn’t consist of pieces of fiat currency.  Capital is real savings represented by things such as industrial machines, assembly lines, factory equipment, optical cables, and raw materials.  In other words, capital can never be rendered scarce since it can’t be printed on command.  However, this truth has yet to stop politicians from promising “free” goodies for life to susceptible voters.

And that’s why The General Theory wasn’t just a book on economic theory; it was a “how to” guide on winning elections.  Should it be any wonder then why so many apologists for the state saw it containing some great, hidden-until-then wisdom?

Indeed, what politician doesn’t love to hear that prosperity is just a few laws away?  The world of homogenous aggregates Keynes presented to the Establishment played into their lustful desire for societal control.  In a world of lifeless statistics, the people are nothing more than pawns on a chessboard to be moved to and fro with the faintest of ease.  Objections matter naught; the path to virtue is only seen by those central planners who, like Keynes, regard themselves as the chosen few not constrained by the primal instincts of the common people.

In short, John Maynard Keynes didn’t just provide a roadmap for a centrally managed economy, he did so by wrapping his intellectual dishonesty in incomprehensible jargon and charisma.  As Murray Rothbard pointed out in his short biography “Keynes, The Man,”

Keynes displayed a positive taste for lying in politics. He habitually made up statistics to suit his political proposals, and he would agitate for world monetary inflation with exaggerated hyperbole while maintaining that “words ought to be a little wild – the assault of thoughts upon the unthinking.” But, revealingly enough, once he achieved power, Keynes admitted that such hyperbole would have to be dropped: “When the seats of power and authority have been attained, there should be no more poetic license”

Keynes’ ego was so grand that when pressed by friend and Austrian economist Friedrich Hayek on the kind of totalitarianism his theories were inspiring, he assured a worried Hayek that he could swing public opinion easily; as if by the quick twisting of his hand.

The question of interest shouldn’t be “what would Keynes do” but rather “why even listen to someone so pompous and nihilistic to begin with?”  Just as Keynes missed the Great Depression, modern day Keynesians missed the housing bubble and financial crash.  From his contempt for moral principles to his enthusiastic support for eugenics, Keynes saw the world as something separate from the bubble of his fellow elitists.  He was a charlatan who convinced a generation of economists that the pool of real savings for any given country could be made infinite if only the state fully embraced the printing press like a dictator embraces the gulag.

The “intelligent variety of capitalism” that Gray terms is just a clever way of saying central planning.  To Keynes and his followers, capitalism is inherently ignorant because it is consumer based; which means the common man determines what is produced and how much of it.  For someone who pictured himself as floating seamlessly above the fray of fools, the growth of the market economy must have worried someone as power-thirsty and narcissistic as Keynes.

Perhaps the best summary of Keynes comes from Rothbard who once remarked:

To Robbins (Lionel) he is the Godlike figure with a golden light…around a halo.  I’ve got a slight different assessment.  Sum up Keynes: arrogant; sadistic; power-besotted bully; deliberate and systemic liar; intellectually irresponsible; an opponent of principle; in favor of short term hedonism and nihilistic opponent of bourgeoisie morality…; hater of thrift and savings; somebody who wanted to liquidate the creditor class…exterminate the creditor class; an imperialist and anti-Semite; and a fascist.

Outside of that I guess he was a great guy!

Kyle Bass Vindication Imminent? Largest Japanese Pension Fund Begins To Sell JGBs


Sayonara internal funding. In what we suspect will become a major issue (and warned of in April), Bloomberg reports that Japan’s public pension fund, the world’s largest, said it has been selling domestic government bonds as the number of people eligible for retirement payments increases. “Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash.” It would appear the Ponzi has reached it’s Tipping Point. Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and eligible for pensions. That’s putting GPIF under pressure to sell JGBs so it can cover the increase in payouts.

The fund needs to raise about 8.87 trillion yen this fiscal year. GPIF is historically one of the biggest buyers of Japanese debt and held 71.9 trillion yen, or 63 percent of its assets, in domestic bonds as of March.

This leaves the biggest question “to whom will the pension fund sell?” After all it is all marginal and everyone just front-runs the biggest players (Governments and their Central-Bank caring internal funds). Now that the pensions funds are out, there is no more incentive to frontrun them – a la The Fed – which is summed up by the fund’s manager “There isn’t much value in short-term notes as the BOJ’s massive asset purchases have made their yields extremely low.”

 

(h/t Brian)

The Extortion Racket Shifts to Spain


Wolf Richter   www.testosteronepit.com

After 21 summits to save the euro, followed by dog-and-pony shows to calm the markets, followed by confidence-inspiring pronouncements about insurmountable firewalls and pandemic structural reforms, the euro is in greater danger than ever before. After the last summit at the end of June, Spanish Prime Minister Mariano Rajoy walked away with a victory smile, and Italian Prime Minister Mario Monti was so triumphant that it aggravated other heads of state. Now, Spain is on the brink. Its collapse would be so spectacular that people have stopped watching Italy for now.

Despite repeated assurances that Spain would not need a bailout, though it already accepted €100 billion to bail out its banks, rumors floated to the surface Monday that it would seek a bailout. The price: €300 billion. This would be the topic in Berlin on Tuesday where Spanish Economic Minister Luis de Guindos would meet German Finance Minister Wolfgang Schäuble, the lynchpin in any of this. True to Eurozone bailout form, de Guindos denied the rumors and emphasized again that Spain would not need a bailout.

Spain is desperate. Yields on 10-year bonds hit 7.5%, approaching the point where the high cost of borrowing would lock Spain out of the credit markets. But in October, €28 billion in government debt will come due. Hence de Guindos’ mission in Berlin.

But Tuesday morning, new rumors seeped out: de Guindos would push and shove Schäuble to allow the European Central Bank to buy Spanish debt in the secondary markets to force down yields and preserve Spain’s access to the markets. The government, with support from its triumvirate partners France and Italy, has been castigating the ECB that it wasn’t doing its job, which was to print money and buy sovereign bonds, something it had done before, but had inexplicably stopped in mid-March, and it fingered the behind-the-scenes culprit: Germany.

If de Guindos couldn’t persuade Schäuble to give in, “sources” of el Economista said, he would seek a temporary line of credit, not a bailout, to deal with Spain’s “temporary problems,” namely its maturing debt, funding its deficit, and bailing out its regions—Valencia, Murcia, and Catalonia already asked the central government for help. The line of credit would buy time—the mantra in all Eurozone bailouts. And if he couldn’t hoodwink Schäuble into agreeing to a line of credit, “sources” suggested that more “forceful measures” must be studied….

Default. Because Spain has no money to meet its upcoming obligations in October. Then there would be haircuts, the “sources” said. Dreadful words. It worked for Greece; it’s going to work for Spain. Given the amount of Spanish debt and related derivatives decomposing in closets of German banks, those words were a loaded gun to Schäuble’s head.

The extortion racket, perfected by successive Greek governments, has switched to Spain. But this alternative is so extreme, the sources said (thus putting the gun back into the holster for now), that it isn’t the most likely option. Nevertheless, Spanish Credit Default Swaps jumped 31 basis points to a record of 636.

Suddenly, plot twist. Meeting over, a new rumor bubbled up: the Germans wanted Spain to formally request a … €300 billion bailout! It might fund Spain for a year and a half or so—to buy time. €100 billion would come from the current bailout fund, the EFSF—which would leave it with only €38 billion, after its commitments to Spain, Greece, Portugal, and Ireland, and possible commitments to Cyprus. €200 billion would come from the permanent but still non-existing bailout fund, the ESM; it’s still awaiting the rubber stamping by the German Constitutional Court. Apparently, de Guindos and Schäuble agreed that both funds could buy Spanish debt. Schäuble, however, didn’t yield on one item, despite the big gun to his head: the ECB would not buy Spanish bonds.

The conditions linked to the bailout package haven’t been determined yet. However “sources“ close to the government believed that no additional harsh conditions would be imposed due to the structural reforms announced two weeks ago and those already implemented—measures that have caused demonstrations and some violence across the country. And an utterly peaceful and tongue-in-cheek protest by naked Firefighters [I’m not kidding; check out the video…. Naked Firefighters Protest Salary Cuts].

Given how bailouts have gone so far, the combined €400 billion won’t be enough, and it will probably be clear that it won’t be enough before the ink on the deal is even dry. Just like Greece now needs a third bailout, which it is unlikely to get, Spain’s final bailout costs will be far larger than the €400 billion, and far larger than any of the prior bailouts. And then there’s Italy. Read…. But Who The Heck Is Going To Do All The Bailing Out?