Friday, February 26, 2016



Now some stats about the US government:

U.S. Tax revenue: $2,170,000,000,000

Fed budget: $3,820,000,000,000

New debt: $ 1,650,000,000,000

National debt: $18,990,000,000,000

Recent budget cuts: $ 38,500,000,000

Now, remove 8 zeroes and pretend it's a household budget:

Annual family income: $21,700

Money the family spent: $38,200

New debt on the credit card: $18,990

Outstanding balance on the credit card: $142,710

Total budget cuts: $385!!!!!


Imagine that one player can print all the money they want.

Before long, that one player will own everything, and everyone else is broke or in debt.

Exponential growth and debt can only be maintained over a finite period of time. As in case of Ponzi schemes, during this initial time period, the scam works and investors are paid in full to attract future investors. Everyone believes therefore that the scheme works. QE worked the same way. But when the exponential growth slows down, the pyramid collapses, primarily because the initial interest rate that was set was too high. Bernard Madoff's Ponzi scheme has shown that choosing a lower interest rate prolongs the time frame that the scam works. Banks indeed work with even lower interest rates, so draw your own conclusion.

The art and craft involved in managing a good Ponzi scheme is in how well the perpetrators can position themselves for the inevitable crash and bust before it actually happens. While things are going relatively well for all in the economy, the financial elite spend their time and money buying up land, industry, war materials, yachts and anything else you can imagine. When the economy finally cracks completely, they are prepared to survive. Just look at the recent history of luxury real estate purchases or gold repatriation.

This new breakout of contagion is the latest confirmation that competing economies are in a "race to the bottom." As global growth rates continue to shrink, each economy is forced to resort to "beggar thy neighbor" policies to steal growth from other countries. 

Simply put, negative rates are simply the latest fad designed to keep currencies depressed, in an effort to support exports and avoid deflation. It may seem counter-intuitive, but a strong currency is not necessarily in a nation's best interests.

A weak domestic currency makes a nation's exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products. This improvement in the terms of trade generally translates into a lower current account deficit (or a greater current account surplus), higher employment, and faster GDP growth. The stimulative monetary policies that usually result in a weak currency also have a positive impact on the nation's capital and housing markets, which in turn boosts domestic consumption through the wealth effect.

Since it is not too difficult to pursue growth through currency depreciation – whether overt or covert – it should come as no surprise that if Nation A devalues its currency, Nation B will soon follow suit, followed by Nation C, and so on. This is the essence of competitive devaluation.

This phenomenon is also known as "beggar thy neighbor," which, far from being the Shakespearean drama that it sounds like, actually refers to the fact that a nation which follows a policy of competitive devaluation is vigorously pursuing its own self-interests to the exclusion of everything else.

However, some of the worst fears about negative interest rates are that the banks would pass them on to consumers, causing them to withdraw their deposits and stash the money under their mattresses—as of yet it has not yet come to pass. However, to the extent the banks absorb the cost of the negative interest rate on their own, profit margins will come under even further pressure than they have already, adding to the stress on the credit markets.

When the drugs no longer work as expected and the patient is still desperately ill, it is time to put the priest on notice that he may be called at any minute to perform the last rights.

Given the recent moves in the stock and credit markets it is further proof that QE and low interest rates are not working but they remain the favored and only tool available to the Bank of Japan and ECB to keep their patients alive.

As it becomes ever clearer that the drugs are losing their potency the gloom deepens on the prospects for economic growth. Banks do not make money in a negative interest rate environment nor one in which the risk of corporate and sovereign default rises.

We are told that there will not be a repeat of 2008 but the doubts are growing, very serious cracks are appearing.

Liquidity has a reputation for being very much in evidence when not required, and then disappearing without trace the moment you need it.There is a broad-based problem insofar as the investor base across markets has developed a greater tendency to crowd into the same trades, to be the same way round at the same time. This "herding" effect leads to markets which trend strongly, often with low day-to-day volatility, but are prone to abrupt corrections.

In principle, markets could gap to a point where they went from being absurdly expensive to being absurdly cheap, without very much trading. But the existence of the feedback loop to the real economy means that the fundamentals tend also to be affected by extreme market moves: "cheap" may be a moving target. This in turn could force central banks to step back in again. 

But then we are left with a paradox,The more liquidity the central banks add, the more they disrupt the natural order of the market. On the way in, it has mostly proved possible to accommodate this; however the way out is proving not to be so fact it may be impossible.


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