Guest Post: Boom and Bust – The Evolution Of Markets Through Monetary Policy


Via Nicholas Bucheleres of NJB Deflator blog,

 

Over the past two decades, the United States has seen prosperous levels of income and asset price growth.  With real GDP climbing steadily and the Dow Jones having more than tripled since the mid-90s, most would say that the US merely hit a road bump in 2007.  And that road bump just happened to be an extremely over-leveraged financial sector that was so desperate to reap profits that they traded peoples’ lives on the sketchy asset-backed securities (ABS) derivatives market.  But you can’t blame a dog for chewing through the sofa, blame the person who let the dog inside the house: the US Federal Reserve. The outcome of the next round of monetary policy will be similar to those in recent history: we will continue to set higher highs in equity markets, but asset prices and the nominal economy will continue to outpace the real economy until we see structural reforms addressed over liquidity provision.  It does not appear that will be the case for a while, though.  Consumer confidence is so low around the world that unless further easing is pursued, the bottom very well could fall out of the global economy.  Until then, there is no ceiling to money printing and central bank financial engineering.

 

Welcome to the 21st century.

 

The outcome of the next round of monetary policy will be similar to those in recent history mentioned in this paper…

Perceived inflation will go through the roof.  We’re talking about near 0% interest rates around the developed world (near-term rates in Germany hit 0% in the auction at the end of May and are expected to go negative).  Oh yeah, and massive inflation.  I think gold will have no trouble hitting $3,000/oz in the medium-term and I see copper tripling over the next decade.  This is, of course, until we hit the next bubble sometime around 2018 and start over again.  The trend remains: since the stock market crash of 1987, through the dotcom bubble, and into the real-estate & stock market bubbles of 2007, each euphoric high and ensuing crash have been more extreme than the last.  These extremes are fueled by the easing that is meant to cure us.  The policy that we are facing within the coming months/years will, as the trend dictates, trump them all, and so inevitably will its hangover.

From the beginning of boom and bust finance to a Fed-led evolution in crisis reaction, and from monetary transmission mechanisms to why the middle class is struggling, the following thesis provides much food for thought

 

Boom and Bust-Evolution of Markets

The Zero Hedge Daily Round Up #115 – 29/08/2012


So you’re at home and most likely bored with your destitute and sodden life. That’s OK, because here’s your daily fix of the one serum that keeps you ‘up and going’ (yeah right), like any good non-lethal drug should. No, I’m not refering to your stach of weed, hidden conveniently under the diner. The habit your wife obviously knows about. Thankfully you don’t know about the affair. It’s the Zero Hedge Daily Round Up. 

http://www.youtube.com/watch?v=ViHpr10AFGg (I appologise for the bland link, the embed function is broken.) 

1. $14.5 Billion looted from food fund, 350 million risk starvation, India. 2. Consumer deleveraging, mostly debt default. 3. Student loan bubble grows at Hyperinflationary rate. 4. Valencia meet Catalonia. Demands EUR3.5 billion in rescue money. 5. Nick Clegg, One-off rich tax, UK. 6. Mad market Thursday. 7. Merkel, quote genius. 

Alternatively, you can download the show as a podcast on iTunes or any RSS capable device.

http://thefinancialreality.podomatic.com/rss2.xml

Julius Reade

Asia’s Dragons – 8 Top Internet Gurus

Asia’s Dragons – 8 Top Internet Gurus
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Guest Post: To The US Govt, Failure To Disclose Foreign Accounts Is Worse Than Child Porn


Submitted by Simon Black of SovereignMan blog,

Jacques Wajsfelner of Weston, Massachusetts is a criminal mastermind. Big time. Like Lex Luthor. But rest easy, ladies and gentlemen, for this nefarious villain is about to face some serious jail time thanks to the courageous work of US government agents.

You see, Mr. Wajsfelner was finally caught and convicted of a most heinous crime: failing to disclose his foreign bank account to the US government. Note– he was not convicted of tax evasion. He was not convicted of failing to file or pay taxes. His crime was not filing the annual Report of Foreign Bank and Financial Accounts (FBAR).

Because of his failure to disclose his foreign bank account, Wajsfelner is now looking at FIVE YEARS behind bars in a Day-Glo orange jumpsuit.

Oh, one more thing– Wajsfelner is 83 years old. He was born in Germany during the global depression and rise of Adolf Hitler. The Wajsfelner family soon fled the Nazi regime and made its way to the United States. It was a different world back then.

Sentencing guidelines suggest that Wajsfelner will get some combination of jail time and supervised release to the tune of several years.

Then there’s Eric Higgins of Port Huron, Michigan, who was recently busted for major possession of child pornography and engaging in sexually explicit conversations with juveniles online. He was given 20 months. Oh… and Mr. Higgins was a US Customs & Border Patrol agent.

Or Melford Christmas, a US immigration officer from New York, who was given 18 months for demanding and accepting bribes to speed along US citizenship applications of foreign nationals.

Or Ricardo Cordero, another US Customs & Border Patrol officer who was given 27-months for personally smuggling 30 Mexican nationals into the United States, and assisting another smuggler to bring 15 Mexican nationals across the border. This genius even had the smuggler testify as a character witness at his divorce proceeding!

Or Jon Corzine, former CEO of Goldman Sachs and member of the political elite, who presided over one of the largest plunders in the financial system ever seen during the recent MF Global collapse. He walks the streets freely to this day.

It seems pretty clear where the US government stands: the victimless crime of failing to report a foreign bank account is far more egregious than, say, possession of child pornography, engaging with minors in online sex chat, bribery, extortion, fraud, and abuse of official power.

This is what justice means in the Land of the Free today. Have you hit your breaking point yet?

As a parting note, I just want to remind readers once again that US taxpayers with foreign financial accounts are obliged to file form TDF 90-22.1 to the Department of Treasury each year by June 30th, as well as file IRS form 8938 and 1040 schedule B with your normal tax return each year.

It should be clear by now that failing to file is not an option. If you are delinquent in filing from past years, it’s much better to catch up and file late than to not file at all.

Judgment Day For The Euro And What's At Stake


Originally posted at Project-Syndicate,

Hans-Werner Sinn – Judgment Day For The Euro

Hans-Werner Sinn is Professor of Economics at the University of Munich and President of the Ifo Institute for Economic Research. He also serves on the German economy ministry’s Advisory Council. Hi… Full profile

Europe and the world are eagerly awaiting the decision of Germany’s Constitutional Court on September 12 regarding the European Stability Mechanism (ESM), the proposed permanent successor to the eurozone’s current emergency lender, the European Financial Stability Mechanism. The Court must rule on German plaintiffs’ claim that legislation to establish the ESM would violate Germany’s Grundgesetz (Basic Law). If the Court rules in the plaintiffs’ favor, it will ask Germany’s president not to sign the ESM treaty, which has already been ratified by Germany’s Bundestag (parliament).

There are serious concerns on all sides about the pending decision. Investors are worried that the Court could oppose the ESM such that they would have to bear the losses from their bad investments. Taxpayers and pensioners in European countries that still have solid economies are worried that the Court could pave the way for socialization of eurozone debt, saddling them with the burden of these same investors’ losses.

The plaintiffs represent the entire political spectrum, including the Left Party, the Christian Social Union MP Peter Gauweiler, and the justice minister in former Chancellor Gerhard Schröder’s Social Democratic government, Herta Däubler-Gmelin, who has collected tens of thousands of signatures supporting her case. There is also a group of retired professors of economics and law, and another of “ordinary” citizens, whose individual complaints have been selected as examples by the Court.

The plaintiffs have raised several objections to the ESM.

First, they claim that it breaches the Maastricht Treaty’s “no bail-out” clause (Article 125). Germany agreed to relinquish the Deutsche Mark on the condition that the new currency area would not lead to direct or indirect socialization of its members’ debt, thus precluding any financial assistance from EU funds for states facing bankruptcy. Indeed, the new currency was conceived as a unit of account for economic exchange that would not have any wealth implications at all.

The plaintiffs argue that, in the case of Greece, breaching Article 125 required proof that its insolvency would pose a greater danger than anticipated when the Maastricht Treaty was drafted. However, no such proof was provided.

Second, Germany’s law on the introduction of the ESM obliges Germany’s representative on the ESM Council to vote only after having asked the Bundestag for a decision. According to the plaintiffs, this is not permissible under international law. If Germany had wished to constrain its governor’s authority in this way, it should have informed the other signatory states prior to doing so. On the other hand, Germany’s representative on the Governing Council is sworn to secrecy, which, the plaintiffs argue, precludes any accountability to the Bundestag.

Moreover, the plaintiffs claim that, while the ESM treaty is restrictive in granting resources to individual states, requiring a qualified majority vote, it does not specify the conditions under which losses are acceptable. Losses can result from excessive wages paid by the ESM Governing Council members to themselves, a dearth of energy in efforts to collect debts from countries that have received credit, or other forms of mismanagement. And, because Governing Council and Executive Board members enjoy immunity from criminal prosecution, misbehavior cannot be punished.

If losses arise, they must be covered by the initial cash contribution of €80 billion ($100 billion), which then would be topped up automatically by all participating countries according to their capital shares. If individual countries are no longer able to make the necessary contributions, others must do so on their behalf. In principle, a single country might have to assume the entire burden of losses. Such joint and several liability, the plaintiffs assert, contradicts the Court’s previous statements that Germany should not accept any financial commitments stemming from other states’ behavior.

Worse, according to the plaintiffs, although the liability of any country vis-à-vis external partners is limited to that country’s share of capital, this limitation does not apply to other signatory states. It is theoretically possible that a single country could be held liable for the ESM’s total exposure of €700 billion.

Finally, the ESM cannot be considered on its own, but must be seen in the context of the total exposure amount, which includes the €1.4 trillion in bailout funds that have already been granted. In particular, the Target2 credit drawn by the crisis-afflicted countries’ central banks, which already totals almost €1 trillion, should also be taken into consideration.

Nobody knows how the Constitutional Court will rule on these objections. Most observers believe that the Court is unlikely to oppose the ESM treaty, though many expect the judges to demand certain amendments, or to ask Germany’s president to make his signature subject to certain qualifications.

It is good that the Court’s decisions cannot be forecast, and even better that the Court cannot be lobbied or petitioned. The European Union can be based only on the rule of law. If those in power can break its rules on a case-by-case basis, the EU will never develop into the stable construct that is a prerequisite for peace and prosperity.

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