Tuesday, November 2, 2010

Don't Piss On My Leg And Tell Me It's Raining

When reality doesn't coincide with what we hear, it's time to question the narrative that permeates the public discourse because so much of what we think we know is fed to us without an intent to educate. Rather we are treated as though it is preferred to keep us in a state of child like ignorance. It takes more effort to gather dislocated data and reach an independent conclusion than it does to accept prepackaged material. More often than not we accept the story we want to hear. It is a surrendering of one's own perceptions for the words of another person, whose motives may not always be noble. If not sinister, they may be deluded. If they have something to gain from your ignorance then distrust is advisable. It's easier to trust. It feels good. Believing in yourself is gospel but even that is suspect as our own perceptions are occasionally, if not frequently flawed. There is no divine quality within us that can discern the truth unquestionably. The mechanics of money are intentionally clouded to keep us from learning the truth about it's origins and manipulations. We trust that it works in a fair way. The economic news that we receive however is most certainly suspect when the financial system repeatedly lurches from crisis to crisis. One has to consider that just maybe the system itself is a flawed design. Dig a little deeper and also consider that the financial system may not be flawed at all. Perhaps it is operating exactly as it was designed to. That is to tap the resourcefulness of labourers to enrich those who pull the financial levers. Forget everything you think you know. Look at what is unfolding before your eyes. See it without the filter of a nattering all knowing economist, reporter, or politician

Our money is debt based. All money has been borrowed into existence. Paradoxically the more money that is sloshing around in the economy, the more indebted we become in aggregate. There is a good reason that bankers encourage inflation, which is simply an increase in the debt supply. They profit from it. In fact most of our money is bank created credit. The amount of actual physical money is surprisingly small. Basically, they take a depositor's money, keep a tiny portion of it to satisfy the depositor that there is actually money in his account, and then they lend out the rest to a borrower. That person then spends this money which finds it's way into the account of another person, who now believes that it is his money sitting there, except the original depositor is still in under the belief that it's his money. Now there are two people with claims on the same money. Following the money trail further, that original deposit is magnified many times over before the lending tree is extinguished. Thus money is magically born. This exchange of money back and forth throughout the economy amplifies the money supply exponentially and bankers have developed even more sophisticated ways to leverage obscene riches from the humble beginnings of honest folks working and expecting something in return. Problem is there isn't enough money in the bank to satisfy all depositors. It's not even close. This is the wonder and horror of fractional reserve banking that is the basis of our financial system.

It is this leveraging of seed money and the magic of fractional reserve lending that has inflated the money supply and prices for practically everything. We all cheer when our homes and stocks go up in price but boo when the cost of living rises in tandem. Regardless, this is all debt. With debt comes the interest that is attached to it and the interest owing on the money supply compounds. Odd thing is that it's impossible to pay the interest on the principle because it hasn't been created yet. There is more money owing than currently exists by design. If it is starting to sound like a Ponzi scheme then the modern financial system is beginning to be understood. The only way it can function is if new debt is sold to service the existing debts and so on. This is unsustainable. The money supply will collapse as the compounding interest grows ever larger outstripping the ability of the economy to service it. This is the reason why all debt based monetary systems must inevitably fail. It's basic math. It will collapse by design.

For the first time in generations the total money supply is shrinking. This is what has generated so much angst in the financial world. The inflationary pressure of their money making machine has stopped. Customers are no longer walking out of the banks with new debt. The economy is saturated with it. The Ponzi scheme is faltering. Central banks and governments are trying to force debt into the economy to keep this thing stimulated, so they say. It is a false attempt. In desperation or by design, Central banks have become the lender of last resort while the governments have become the borrower of last resort. The real economy has been subjugated. Accounting rules are being rewritten. Stock markets are propped up by the Federal Reserve. Interest rates are approaching zero which means money is actually losing value against the inflating cost of living. It doesn't pay to save. The truth is that interest rates must stay low in order for governments to service existing debts. Rising interest rates would be devastating to the balance sheets. In spite of this chicanery, the death spiral of deleveraging debt continues. It must. The purpose of the stimulus and bailouts was not to revive an economy. It's purpose was to curb the rate of deflation by creating new debt to replace that which is being destroyed because in a debt saturated economy the existing debts must either be paid or defaulted upon. It is disingenuous of bankers and governments to expect that all debts be honoured when the system itself prevents it. There isn't enough money in the world to satisfy all debts. Let's be honest about it. Governments have demonstrated no willingness to pay back the debts as deficit spending persists in earnest. Our financial system relies on it or all that is levered to it will grind to a halt once money creation stops and debt destruction takes hold. Once debt is repudiated, the money disappears and the inflated values that are based upon it's existence must deflate as well. We are starting to see this play out in the real estate market. Deflation is the bogeyman of all economists and bankers. Mention the word and we are conditioned to think back to the depression era with fear. The strain is obvious. Ignoring the reality that our monetary system is designed for infinte growth while the real economy is confined by the limits of a finite resource base is not helpful. We are approaching the endpoint of a mature debt cycle with quantitative easing being the terminal strategy.

Stimulus is a word that economists use to camouflage a more sinister motive. It is a wealth transfer. The 'Too Big Too Fail' are getting bigger. Money is being concentrated and power is being consolidated into an elite group. The financial system is designed to squeeze every last dollar from the masses until the only assets left over are foreclosed upon. Our continued faith and ignorance of the financial system permits this government backed theft. We are captured by it. A child is born into debt. If they really wanted to stimulate consumption, as if that is really needed, they would have just handed out a cheque to all households which would have either been used to buy stuff, pay off personal debt, or deposited. This was not even considered because such an even handed approach doesn't transfer wealth. All it achieves is diluting the value of the existing dollars spurring the likelihood of a hyper-inflationary episode as money loses all value. Money should be a stable medium of exchange for traded goods and services. Diluting it's value through inflationary policies is theft. We don't need financial experts chastising us for not having enough retirement savings while at the same time supporting inflationary policies which reduces our disposable income. We don't need our governments encouraging retirement saving while it raises taxes to bail out the bond and stock holders of failed corporations. It is also disingenuous of them to promise pensions with money that hasn't even been created yet. Of course it's easier to promise money at the back end of a person's life than reward them up front.

There is a campaign to calm the sheep. We are getting nervous. The money managers will not inform us of the dire situation that is confronting us. They spin new debt as stimulus. They will continue to characterize the financial crisis as though it was an unpredictable natural occurrence that threatens to destabilize our fragile economy. They will say anything to deflect our attention away from those who manufactured the crisis while presenting themselves as guardians of our wealth. Maybe they actually believe that putting taxpayers on the hook for more debt will somehow make us richer. Maybe they believe that spending and consuming is more productive than conserving and saving. Maybe they believe that markets should not be free. Or just maybe it's all a lie to facilitate the transfer of wealth from the working class to the rich and well connected. No, we will not be encouraged to go beyond the soundbite understanding of our economy. Instead we are being placated with green shoots propaganda. We want to believe that there is a coordinated group of educated wise souls looking out for us. We want to believe that the interests of our elected leaders are aligned with ours. However when the truth is obfuscated, when corporate crime and corruption occur without any sanction, when our governments lie and mislead, when the will of the people is thwarted, lawlessness and moral hazard take root. Abandon your faith. What you believe to be true may not be true at all. Look at what is occurring around you with fresh eyes. Question the source of your knowledge, do your own research, draw your own conclusions and act accordingly.

Thursday, November 5, 2009

The Fat Man at the End of the Table

The US has a huge unmanageable deficit and growing debt. Twelve trillion and counting. This coincidentally is bumping up against their legislated debt ceiling. It will be ignored. This needs to be financed by selling more bonds at Treasury auctions. China and Japan have been the primary foreign purchasers of US debt so the big question is whether or not they will continue to feed the fat man at the end of the table? While they haven't stopped buying bonds yet, they are buying less and in shorter durations. Their confidence in the US is waning. Their actions speak of a lower tolerance for risk. To prevent an embarrassing auction failure, the Federal Reserve began a quantitative easing program, which is a fancy way of saying they participated at the auction by buying up the available debt with new money. New money dilutes the value of the existing pool of money. This explosion of money/debt creation, with it's attached interest, will be a growing burden for the taxpayer as debt servicing will consume a growing portion of the declining tax revenues. Normally this should signal a policy shift toward less government spending, instead the Obama government is expanding it's waistline. The U.S. is moving swiftly towards more government control. This is extremely concerning for investors around the world who have served up cheap credit over the past decade.

The currency markets are pricing in the weakening US dollar. It has been in a long term downward trajectory since it's high in 2002 when it topped at $1.20. After a few temporary interruptions it's now sitting around 75 cents. The Fed hasn't tried to defend the dollar by raising the interest rates to entice risk takers to buy more of their debt, nor has the government attempted to show any kind of fiscal restraint. So despite talking about their desire for a strong dollar, the actions display a willingness to let the dollar depreciate. This is likely on purpose as the preferred strategy to pay back the debt with devalued dollars and to promote exports. Debts are static. The conventional wisdom is that while the US buys time, the economy will hopefully recover, tax revenues will improve, and the debt will begin to shrink. It's a desperate gambit of a desperate nation. If this strategy fails, the dollar will be destroyed as the Fed will likely pump out as much money as the Treasury requires to prevent a default of some kind, making a mockery of the US dollar.

The effect of this hyper-inflationary monetary policy is that US imports will become more expensive. Think of oil in particular. As the cost of oil shoots up, costs of manufacturing and transportation rise in tandem, and while businesses will be reluctant to pass on that cost to a cash strapped consumer, margins will eventually get squeezed to the point where inflation of goods and services must take take hold. Many businesses will go bankrupt during this period of monetary inflation if they are unable lure enough customers into the stores. More layoffs, higher unemployment, less income, less income tax, weaker dollar and one can see how a death spiral manifests itself as assets deflate in value while costs inflate. A monetary collapse will wreck havoc on the global economy but the impact will most acutely be felt by the fat man. After decades of gluttony, he will have a heart attack. The US exported most of it's manufacturing base. They are proud, patriotic consumers and to this day feel they were doing the world a favour by eating it's products. This is the depth of their egocentricity. Now they are lecturing that we, the world, cannot rely on the US consumer anymore and we need to step up to the table and start consuming domestically while they digest the debt.

Other countries linked to the economy of the US need to react to this devaluation. China's growth is dependent on exporting cheap products to the US. They need to keep their currency pegged to the dollar to keep their exports viable. This takes a toll on their imports. Again think oil and commodities involved in manufacturing all that stuff they produce. They will feel the pinch as they struggle to stay competitive. They propped up the US dollar by churning the money made from it's exports back into Treasuries, thus financing the US government, keeping interest rates low, by keeping the demand for them artificially high. This investment flows back to them as long as the trade continues. As significant holders of US dollars, devaluation will impact the value of their large US dollar reserves. China will likely reduce it's activity in future Treasury auctions and keep the purchases on the short term duration to keep their long term risk contained. They will also diversify out of their US dollars by purchasing hard assets. Buying real resources with US dollars while it still has some value. Stock piling reserves of oil, copper, gold and other commodities for future production would be prudent and expected. As the US economy drags, their exports will diminish, having a significant impact on their economy. The Chinese government is resisting this rebalancing by keeping the Yuan pegged to the Dollar. As long as their currency is below the US, their exports will remain competitive. They are preferring to take the hit of inflation rather than gain the advantage of buying cheaper imports with a stronger Yuan but with a weaker economy. Other countries that got mired in debt have similar problems. They too are in the quantitative easing mode in order to buy some time, and are devaluing their currency to keep their exports competitive as well. Any country with a strong currency will see it's exports get priced out of reach. This unhealthy dependence on the US for it's own economic well being is a sore spot. Competition is fierce as they all race to the bottom.

While the money supply is inflating, it is being contained within the banking system as they hoard the reserves at low risk. They borrow from the Central banks at zero per cent, while collecting a small tidy interest while they keep it on reserve. They need this cash in order to have any semblance of solvency because most of the big banks are taking a huge loss on real estate loans. The Fed is also buying much of their toxic mortgages. The big banks are being propped up while many of the smaller regional banks are going bankrupt. The 'too big to fail' banks are getting bigger. Financial power is being concentrated. The expected hyper-inflationary scenario won't play out until these reserves get loaned out into the general economy, however for that to occur, the demand for credit from businesses and individuals need to emerge. The consumer is maxed out, so the demand is not there, and they have already pulled forward future needs with credit, thus most of the needs are satiated. The governments feels they need to stimulate the economy by being the spender of last resort. Thus the supposed need for stimulus programs which puts more debt onto the already overburdened taxpayer. It all becomes rather circular.

The US will not have the funds and resources to maintain all it's obligations. The quantitative easing must end to prevent a complete loss of trust in the currency, if it's not already too late. In order to attract much needed investment back into the country, interest rates will have to rise. This will squeeze the indebted citizen. This will curb any chance of a recovery and this will not be politically popular. The other strategy to stimulate demand for US debt is to induce a stock market crash. This would hopefully push the money back into the traditional safe havens. Wealth will be wiped out but the government will have it's money to service the loans. One way or the other, the bills will have to be paid. As the citizenry get more desperate and angry, civil unrest will become more prevalent. Global trade will likely collapse as governments will feel pressured to keep jobs within it's borders. Economies will become leaner and more local. The rebalancing will occur. Meanwhile the fat man at the end of the table will suffer the hunger pains once he realizes the days of living off cheap super-sized junk food has ended, and hopefully he gets off the chair and starts working again to produce something for a change. Let us hope it isn't a war.

Saturday, October 17, 2009

The Big Lie

Life begins fresh every morning as we turn on our television and radios. The past is yesterday's news. The DOW is over 10 000 again. Everybody with money still in stock markets cheer and pat themselves on the back for not selling at the panic low during the big scare. Memories are short. The DOW first breached the 10 000 level over ten years ago. It would be fun to go back and read what the stock market gurus and the legions of financial advisers were advocating in those ebullient years. The self proclaimed experts are loathe to revisit the past because it reveals their lies, deceit, bias, or just plain blind optimism. The short attention span of the mainstream media plays right into their hand. We went from all time highs, to near collapse, and back to huge profits and bonuses for the banking elite all within a year. This is crazy. A well functioning financial system should not be gyrating from one extreme to the next. The economists are convinced the economy is recovering and the compliant media are quick to report it. This only has the veneer of truth. Scratch the surface and you will find little substance. The narcissistic banking elite care not for the truth. For them, the facts are to be twisted and distorted to serve their own selfish interests.

Narcissists are happy until they don't get what they want. Then they huff and puff, create havoc, plead, sulk, and generally make the lives of everyone around them miserable until they get what they want. The wise person knows enough not to give in, otherwise it reinforces the bad behaviour. Money managers who were collecting huge bonuses were slapped back into reality in 2008. Their fantasy of endless profits and stock market gains came crashing down as a direct result of their greed and malfeasance. They pointed the finger elsewhere while they held out the other hand for a bailout. Politicians who are prone to short term thinking and self interest looked the other way, handed them billions of taxpayer dollars, and now the petulant are happy again, gloating even, basking in the pile of fresh money still warm from the printers. The political class are in cahoots with the money men. The problems that nearly led to the collapse of the global financial system appear to have abated. The stimulus and bailouts appear to have worked. The barometers of a healthy economy are suggesting a recovery. Stock markets have bounced back with ferocity posting incredible gains. The GDP numbers have turned positive. The recovery is underway, or is it? Just because a story is stated over and over again, doesn't necessarily make it true.

Stock markets have bounced back. That's a half truth however. After missing the tell tale signs of a looming economic crash, the experts are now smugly chiding everyone with money on the sidelines for not participating in the rebound of the equity markets. The message is clear. Time to reinvest in riskier assets where there is a return on your investment, so they say. Central banks have lowered interest rates to essentially zero. That's great for borrowers but not so good for savers. Everyone with savings who don't want to participate in stocks, takes the loss. What is an investor to do? Agents of the financial industry want our money. They will say anything to resist our urge to take it away from them and put it elsewhere. Contrary to popular belief, equities do not always give you better returns, even in the long term. The returns of all the major stock indices around the world are down over the past ten years. An even more startling fact, that is rarely brought to light, is that the DOW has returned nothing since the mid sixties once it has been adjusted for inflation. The trusting buy and hold equity investor who invested in the biggest of the blue chips has had to endure a lot of stress and risk for almost half a century only to come up even.

The graph that is always trotted out showing the incredible gains is deceiving because it isn't adjusted for inflation. Those gains were only possible because of the loose monetary policies of the government and central banks. Inflate the money supply and the price of everything goes up, including stocks. Coupled with institutional encouragement of private retirement plans, the equity ball got rolling, drawing more and more people into it. Money that should have been put toward paying down large mortgages were redirected into speculative stocks. Even conservatively managed pension plans felt compelled to take on more risk to keep up with it's burgeoning obligations. Seniors in retirement or nearing retirement were encouraged to put a good portion of their nest egg into equities for growth. They were practically forced into it with interest rates so low. The financial industry became very profitable as a result of this new found tolerance of riskier assets. The all pervasive sell job pushed equities higher than they deserved to be. The systemic embrace of equities, coupled with loose monetary policies fuelled the stock market gains over the past couple of decades.

The modern financial system organized itself around the belief that sustained economic growth and the associated stock market gains would continue unabated. Witness the fallout and subsequent reaction of the latest downturn. From celebrating rapid gains in stocks and real estate, the near collapse of the entire system was followed by an unprecedented intervention of governments and central banks globally. Stock markets are not allowed to go down. They have become the barometer of our economic well being. Risk taking and stock market participation has been the elixir to cure all financial problems. As long as they kept going up, everyone was happy. However the dark side to all this pleasantry is that the future financial well being of the population was now directly linked to a fragile, temperamental market that historically has not provided much wealth to it's participants.

The stock market has bounced back. Don't be fooled though. It was orchestrated through secretive complex market machinations. The bankers and politicians needed the stock market to go up and they made it so. The latest rally was not fuelled by organic growth of a recovering economy or by widespread re-investment from the retail investor. Mutual fund flows are going into bond funds, not equity funds. Volume of trading is low. Goldman Sachs and their ilk are the savvy ones with the means to move markets. They were given access to cheap money and they were given a government guarantee that they will not fail. The system is rigged to loot the taxpayer and unwitting investors. The real economy is not healthy. Retail sales are languishing. Businesses are struggling. Unemployment remains very high. Real estate is still bottoming in the US. The banks are still holding toxic assets. The rosy GDP numbers include government spending which has been accelerating. Deficits are ballooning. Price to earnings ratios of stocks are at historical highs. Unless real substantial measures are put into place to reckon with the structural imbalances of the global economy, and the suffocating debts, there will be no lasting recovery. This so called recovery is a fabrication of epic proportions. The people at the helm are narcissistic, pathological liars. They are aided and abetted by a subservient financial press and a generation of trusting stock investors who want to believe that everything is just fine. Remember that those who make a market go up can make it go down. Stock markets have always been fraught with risk and that is more true today than ever.

Friday, July 10, 2009

Quote of the Week

Make no mistake about it: in this credit collapse we are witnessing the death throes of irredeemable currency. In vain have governments and their client banks tried, for hundreds of years, to graft this repulsive and degenerate bastard on the living organism of society. The result was always the same: the healthy organism rejected the unnatural implant in its own good time. The present episode is no different from earlier ones except, perhaps, in the degree of the conceitedness of the perpetrators, and in their contempt for the native intelligence of man.

Dr. Fekete