It Is Inflation

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

There was a reason FDR’s administration in its first 100 days took the order it did. Contrary to some assertions, Executive Order 6102 was not a lawless expansion of executive privilege and prerogative. It had a very lawful basis, underwritten by theEmergency Banking Act of 1933 which itself was based on (and no part of this fact should be underappreciated) the Trading With The Enemy Act of 1917. The whole affair was perfectly consistent throughout, from 1917 to 1933 and on, as the US government through took to treating gold “hoarders” as the entire enemy of economic circulation, and simply stroked them into illegality with the whole legal apparatus.

Hoarding had to be outlawed otherwise the next step in economic revival would have been totally moot – devaluation. It is always dangerous to think in terms of a counterfactual, but here there isn’t so much controversy. Had the Congress and FDR not outlawed private gold it is very reasonable to assume that it would have flowed outside the US in massive quantities when they defaulted on the dollar (the true death of the strong dollar). What was done then was not just devaluation but in reality redefinition; the purpose of which was to exercise more complete control since it was judged that the people were not to be trusted with their own wishes and prudence on purely economic affairs (in its most basic and consistent format, not what passes for economics today).

I don’t want to rewrite or rehash what I have already written but there is a certain tediousness to the obvious repetition. What is at issue here is inflation, not in the CPI exactly but one far more devious and corrosive. I started with this issue last week in examining the widening chasm between reported profits, other definitions of profits and finally cash flow. This is far more than an accounting issue, having much to do with debasement of benchmarks and standards – the proper definition of inflation.

The idea about corporate profits is easy enough to see, as the BEA in part of its GDP estimates (GDI, more specifically) breaks out profits according to several components. You can read here for my specific critique on that mark, but needless to say this divergence has become extreme more so in this age of constant and rolling asset bubbles.

ABOOK June 2015 GDP Profits CP

The further you get into pliable measures, the greater this disparity. By the time you factor in all the fiscal “stimulus” through tax cutting (and even add profits gained through nothing more than interest cost reduction; or, a stable interest payment “supporting” a huge increase in debt on the balance sheet) all that seems to be increasing of corporate profits is everything but actual production. Continue reading

The Legend of the Almighty American Consumer

Submitted by Thad Beversdorf, Chief Economist – ABX / Bullion Capital

According to an article today from Bloomberg,

Screen Shot 2015-06-09 at 2.37.44 PM

Now quite clearly the claim and the chart are both ridiculous but that said, this brings up a good topic.  The Almighty American Consumer.

Screen Shot 2015-06-09 at 2.46.48 PM

We recently saw a tongue and cheek piece by WSJ’s, Hilsenrath, which seemed to fail to amuse but the point was that the world is effectively dead in the water until the American Consumer can find its legs and starts spending, spending, spending.  However, is it fair to put so much pressure on the American Consumer?  I mean, haven’t they done their fair share for the past 50 years?  Can you imagine where the global ‘economy’ would be without the past 50 years of American Consumer madness??

It is nearly impossible to comprehend the amount of shit that has been purchased, consumed and discarded only to be purchased again by Americans over the past 50 years.  But, what we know is that no other creature demographic in history has consumed anywhere near the amount as that of the Almighty American Consumer.  But can a level of consumption stretching so far beyond their means continue indefinitely?  Well isn’t that just the $64K question, eh??

Given we are using all the same models and benchmarks as before it would seem that the assumption is the American Consumer will simply shake off the brutal right hook and knock down blow of 2008.  The problem is, and anyone who’s done a bit of boxing knows, things can look very different after taking one to the back of the jaw.  You might want to get back in the fight and even have every intention to stand up swinging, but sometimes it just doesn’t feel the same.  Your balance is off, you’re a bit dizzy and your legs seem to have turned into spaghetti.  This all starts to affect your psyche.  You begin questioning if you can win this one, hell if you even want this one.  And once that creeps into your psyche it’s over.

Well think about the American Consumer.  90% of us still have 40% less net worth than we did before that right hook and those still working are generating 10% less income.  Demographics are pushing the baby boomers into ‘retirement’, which today just means working for no benefits and minimum wage in order to undercut the labour wages of a younger worker who is not yet on medicare.  Then we have the middle class struggling to stay ahead of the hyper-inflating healthcare, education, rent and food bills.  Move on to the millennials and recognize this generation was just getting started when the American Consumer ate that knock down blow.  They watched families and friends being evicted from their homes during the very life stage their value systems were being developed.  They understand that the chaos was a result of being overextended with credit facilitated by false assumptions that ‘things’ always move in the right direction.  Finally, we have the 50% of American Consumers now reliant on government stipends for some or all of their consumption.

And so we must ask, are we to assume that the Almighty American Consumer is the same fighter they were before eating the, still recent, economic haymaker?  Time will tell, it always does, but can we see any signs of wavering?  Well let’s go right at it, what do honest consumption figures tell us?  By honest, I mean let’s look at personal consumption growth but let’s filter out growth in auto loans, student loans and increases in government welfare to consumers.

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What we find is that despite the ‘incredible improvement’ to unemployment statistics,earned  rather than borrowed or government sponsored personal consumption expenditure has been trending down for 5 years and has now gone negative.  And this doesn’t filter out revolving credit or it would be even uglier.  Now when was the last time we saw this go negative?  You got it Pontiac!  2008.

Well surely that’s just an odd coincidence, right??  Ok but maybe it’s just my funny math playing tricks with debt and welfare.  What do things look like upstream? For instance, what are we seeing in factory orders, which side steps the whole debt and welfare funniness? Continue reading

Why Greece Must Leave

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

John Vachon Five o’clock crowds, Chicago 1941

French Economy Minister Emmanuel Macron and German Vice-Chancellor Sigmar Gabriel published a piece in the Guardian last week that instantly revived our long nourished hope for the European Unholy Union to implode and be dissolved, sooner rather than later. The two gentlemen propose a ‘radical’ reform for the EU. Going a full-tard 180º against the tide of rising euroskeptism, the blindest bureaucrats in European capitals are talking about more centralization in the EU.

Here’s hoping that they follow up with all the energy they can muster, and that we’ll hear a lot more about the ‘reforms’ being proposed. Because that will only serve to increase the resistance and skepticism. Let them try to ‘reform’ the EU. We’re all for it. If only because if they do it thorough enough, referendums will be required in all 28 member nations, which all need to agree, in a unanimous approval vote.

The gents know of course that that is never ever going to happen. So sneaky ways will have to be found. Something Brussels is quite experienced at. They’ve shown many times they won’t let a little thing like 500 million citizens get in their way. We’re curious to see what they’ll come up with this time.

Meanwhile, though, the rising skepticism threatens to rule the day in many countries, and Greece is by no means the leader in the field. Germany has a rising right wing party that wants out (just wait till Merkel leaves). Marine Le Pen has vowed to take France out as soon as she gets to power, and she leads many polls. Britain’s Ukip is merely the vanguard of a broad right wing UK ‘movement’ that either want out or have treaties thoroughly renegotiated.

Portugal’s socialists are soaring in the polls on an EU-unfriendly agenda. Spain’s Podemos is no friend of Brussels. In Italy, M5S’s Beppe Grillo has gone from skeptic to outright adversary over the past few years. There are varying levels of antagonism in all other countries too.

Now obviously, not all countries in the union carry the same weight, politically speaking (why do we so easily agree that’s obvious, though?). You have Germany, then a big nowhere, then France and Britain.

Greece, equally obviously, has no say. They can elect a government that wants to change things even just at home, and be told no way. If Germany would elect such a party, all EU policy would change in the blink of an eye. A true union of sovereign nations it therefore is not. And that of course was never possible, it was just something people wished for who never contemplated the details or consequences.

Still, given that the whole project has always been represented as a one-way street from which escape is not possible, the weight of the smaller nations should not be underestimated. Perhaps all it will take is one defector to make the entire edifice unstable. Statements to the contrary are made only by people who eat hubris for breakfast, lunch and dinner.

If either France or Germany leave -the former looks far more likely right now-, it’s project over. The same would probably hold for Italy. Spain would be a grave blow. Britain might be quite a bit easier (no euro), though negotiations -let alone referendums- over treaties could cause a lot of havoc and unrest. While various bigwigs try to fool you into thinking that letting small nations leave can be ‘ringfenced’, that is utter nonsense, they have no way of knowing. Continue reading

Everyone Hates The Dollar But Loves The Monetary Flexibility Without Realizing They Are The Same Thing

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

In some ways, President Obama’s leaked contempt for the “strong dollar” is well-deserved if only due to the mistakes about the semantics of it. Maybe I am being overly pedantic in decrying this taxonomy, but since we live in an economic age of high and burdensome redefinition this is more than just a debate for academic affairs to me. The increasing “value” of the dollar versus other currencies is just as undesirable as the inverse experienced in the last decade. The latter denoted nothing more than the rise of the eurodollar standard while the current condition more than suggests its continued fall; neither of those are particularly worthwhile outcomes.

Apparently, the President’s remarks were made in private and then leaked to the pressvia the French (why is that the French always play an antagonistic role in the affairs of the dollar, and now the “dollar”?).

A senior U.S. official denied on Monday a news wire report that President Barack Obama had told a Group of Seven industrial nations’ summit that the strong dollar was a problem.
Bloomberg News earlier quoted a French official as saying Obama had made the comment.
“The President did not state that the strong dollar was a problem,” the U.S. official said.

We seem to be unable to comprehend the manner in which the strong dollar truly applied, as it was an instrument of stable and robust growth; and as much a healthy, well-balanced financial system it should be pointed out. The dollar being nothing but a derivative, currency properly defined, the strong dollar meant that convertibility was nothing out of the ordinary. During periods of financial stress, like 1929 and immediately thereafter, convertibility was all that mattered. The proffered answer to that “weak dollar” was to end the dollar.

What was formed in 1944 at Bretton Woods was only somewhat recognizable as the dollar, including, somehow, continuing the pound in a parallel reserve currency condition. For both UK and US monetarism and the growing desire to exercise “optimal control”, the reserve currency role was an apparent impediment. In what has been called Triffin’s Paradox was nothing of the sort, as Robert Triffin wondered how the dollar could maintain gold convertibility under Bretton Woods while at the same time operating an expansionist monetary policy (which the UK had already undertaken, to several pound crises during the period, especially the very damaging 1967 episode that sounded the end of sound money as too restrictive for what monetary economists wish to manipulate).

After Solow and Samuelson argued in favor of an “exploitable” Phillips Curve, the Fed decided to embrace the theory of “buying” employment with inflation. The gold exchange standard was supposed to get in the way of that, since that was what convertibility actually meant, meaning there really was no paradox for Triffin to solve. Events proved that correct, as the whole effort of “buying” employment with inflation gained very little employment and a whole lot of inflation. It also ended what little was left of the dollar once the Bank of France started asking for US gold in convertibility of its dollar reserves.

Milton Friedman, who played an outsized role in demonstrating the futility of Solow and Samuelson, also (paradoxically?) advocated for floating currencies and greater central bank flexibility. But even he recognized the limitations that were necessary to maintaining healthy balance. What he advocated was not total authoritarianism on all sides of a floating regime, but rather a hybrid system where even a fully “flexible” internal central bank would be checked by external market forces.

Friedman advocated for either a fixed exchange with discretionary internal monetary policy (as the former would reign back the latter) or the reverse (a fixed internal monetary policy with a floating currency). In his mind, and I think academically this made a lot of sense, there had to be a market mechanism to act as a release against the buildup of unsustainable pressures.

The eurodollar standard obliterated all of that, ending certainly Triffin’s Paradox because the Fed got total freedom over internal monetary mechanics while the global liquidity system converted from actual money to a credit-based exchange system. While that last part sounds like a market mechanism, and even started out in that manner, it has been overwhelmed by volume and moral hazard. Initially there was some hope that the vestiges of Friedman’s outline would remain and offer at least some self-limitation, but that ended around 1995 when eurodollars transformed from the replacement of the Bretton Woods gold standard into a purely speculative vehicle for global asset bubbles. Continue reading

The Warren Buffett Economy—-Why Its Days Are Numbered (Part 2)

There is no reason whatsoever to believe that the financial carrying capacity of the US economy—-or any other DM economy—-has improved since the 1980s. In fact, it has gone the other direction in recent years due to aging demographics, declining competitiveness versus the surging EM economies, dwindling rates of productivity growth and a dramatic increase in the leverage ratio against both public and private incomes.

All of these adverse macro-trends mean that the US economy’s ability to generate growth, incomes and profits has been significantly lessened. Accordingly, since its ability to service debt and equity capital at an honest market rate of return has diminished, the logical expectation would be that the finance ratio to national income would fall.

In fact, once Greenspan took the helm and his apparently atavistic embrace of gold standard money melted-down under the Wall Street furies of October 1987, the finance ratio erupted. As shown below, it has never looked back and at 5.5X national income has reached a point that would have been unimaginable on the morning of Black Monday.

Stated differently, under a regime of honest money and market determined financial prices, the combined value of corporate equities and credit market debt would not have mushroomed by 8X—- from $11 trillion to $93 trillion—- during the past 27 years. For crying out loud, the nominal GDP grew by only 3.5X during the identical span. In effect, the US economy has been capitalized at higher and higher rates for no ascertainable reason of fundamental economics.

Indeed, there is no reason why the 260% ratio of equity and credit market debt to GDP that was recorded in 1986 should have risen at all. At that point Paul Volcker had completed his historic task of extinguishing runaway commodity and CPI inflation and had superintended a solid recovery of real economic growth.

Arguably, therefore, the US economy was carrying about the right amount of finance. And, at that healthy ratio, today’s $17.7 trillion economy would be carrying about $43 trillion of combined market equity and credit market debt.

In a word, the Greenspan era of central bank driven price falsification and monetization of trillions of existing assets with credits conjured from thin air has generated a $50 trillion overhang of excess financialization. And that’s just for the US economy. In fact, the central bank error is global and the worldwide excess financialization is orders of magnitude larger.

Total Marketable Securities % of GDP - Click to enlarge

To be sure, the Keynesian economists and power-seeking apparatchik who run the Fed do not openly admit to a massive falsification of financial prices and to responsibility for generating what amounts to a $50 trillion bubble in the US alone.

That’s because they are narrowly and mechanically focused on an altogether different, but impossible task. Namely, guiding the $18 trillion US economy to its full-employment potential. So doing, it pursues its so-called Humphrey-Hawkins “dual mandate” in a manner consistent with the strictures of its Keynesian DSGE (dynamic stochastic general equilibrium) model representation of the US economy.

Moreover, this particular iteration of god’s work is viewed by the monetary central planners and their academic and journalistic proponents as not being merely discretionary. That is, its not just an exercise in making the good, better.

Instead, by relentless and plenary interventions in the financial markets designed to smooth and optimize the business cycle, the Greenspan era central planners came to believe that they were actually saving capitalism from its own purported death wish. That is, an endogenous tendency toward instability, underperformance and depressionary collapse.

This whole story is a crock. Cutting to the chase, the Humphrey-Hawkins Act is one of the stupidest and most dangerous laws ever enacted.

It amounts to a plenary delegation of power to a tiny unelected and unaccountable posse of monetary bureaucrats who are free to define the key goals—-maximum employment and stable prices—-anyway they wish; and are then further empowered to manipulate—without standards or limits—-any and all financial prices in whatever arbitrary manner they choose in hot pursuit of the arbitrary quantitative metrics, whether efficacious or not, that they have slotted into the Act’s rubbery, content-free aspirations for societal betterment.

In plain English, 5.2% unemployment on the U-3 measure and 2% inflation on the core PCE deflator are economically meaningless targets. They are impossible to achieve through interest rate manipulation and the rest of the fed’s tool-kit, especially its wealth effects “put” under the stock market.

Likewise, the so-called Humphrey-Hawkins targets have no discernible relationship to societal betterment—–since there is not a shred of evidence, for example, that wage workers are better off with 2% inflation as opposed to 1% or any other arbitrarily chosen value of a flawed price index over completely arbitrary, and usually unspecified, time frames and prices cycles. And, most crucially, forcing the macro-economy into adherence to these policy targets is utterly unnecessary because the predicate that capitalism has a death wish and is prone to depressionary collapse is dead wrong.

In truth, it’s a self-serving scary story peddled by the monetary central planners and their grateful Wall Street beneficiaries. I have addressed the myth of the foundation events—-the Great Depression of the 1930s—elsewhere. Suffice it to say that the modern Keynesian narrative has it precisely upside down.

The Great Depression did not stem from a fatal flaw of capitalism or the failure of the 1930-1933 Fed to crank up the printing presses or even Hoover’s allegedly benighted dedication to fiscal rectitude and honest gold standard money. Just the opposite. The Great Depression was owning to the excesses of state action—–the massive indebtedness and inflation of the Great War and the easy money credit bubbles of the Roaring Twenties—-not to its supposed deficiencies.

Likewise, the post-war business cycles prior to Greenspan’s accession were short-lived, well-contained and self-correcting; they were owing to the errors of state actions, not the inherent flaws of capitalism or an alleged business cycle instability that threatened an unstoppable downward spiral.

Specifically, two of these recessions were the temporary consequence of cooling-down red hot war economies in 1953-1954 (Korea) and 1969-1970 (Vietnam). The first one of these was self-cured by the inherent resilience of market capitalism and involved virtually no fiscal or monetary stimulus under the orthodox strictures of President Eisenhower and William McChesney Martin at the Fed.

Likewise, the post-Vietnam so-called recession hardly registered in the economic statistics—–save for a 70-day auto strike. That wasn’t even a business cycle, but a random shock from the complete shutdown of GM and its massive supplier base in the fall of 1970 at a time when GM was at its peak and occupied 45% of the entire US auto market.

Needless to say, that strike was eventually resolved by the parties involved, triggering a sold rebound immediately thereafter. There was no business cycle failure or threatened tumble into an economic black hole—nor did the fiscal and monetary authorities of the day do much to “stimulate” the natural forces of recovery.

By contrast, the two deepest recessions of the pre-Greenspan period—-the 1974-1975 downturn and the 1981-1982 recession—-were caused by a very evident villain. In those cases, you can pin the tail squarely on the donkey at the Federal Reserve itself.

As I demonstrated in the Great Deformation, the mid-1970s cycle was not caused by the 1973 post-embargo oil price surge; it was the result of Fed Chairman’s Arthur Burns abject submission to Nixon’s demand for a 1972 pre-election surge of the US economy.

As to the deep plunge of the early Reagan era, the Mighty Volcker was at the helm, of course, only because Arthur Burns and his successor, the hapless golf cart manufacturer, William Miller, had fueled a massive domestic credit expansion during the second half of the 1970s. The double-digit inflation that Volcker brought to heal was manufactured by the central bank, not by the OPEC cartel, silver and copper speculators or greedy consumers, as Jimmy Carter had it at the time.

As of Volcker’s turn at bat, there was at least a possibility that state policy might escape from the thrall of Keynesian economics. It had been installed on the fiscal side during the Kennedy-Johnson era, and embraced by Nixon himself when his itinerant policy groupie, George Schulz, professor of labor economics, persuaded him to adopt the full-employment budget concept.

That was pure Keynesian claptrap. It was predicated on the idea of a closed domestic economy that resembled a giant economic bathtub—–which needed to be filled to the brim with GDP for maximum societal welfare; and that the job of the state through the coordinated action of its fiscal and central banking branches was to pump aggregate demand into the tub until the economic experts averred that potential GDP and full employment had been achieved.

Mercifully, the primitive experiments with this during Johnson’s “guns and butter” policies after 1965, and the Nixon-Burns money printing spree of 1972-1974 resulted in the 1970s catastrophe of stagflation. Accordingly, bathtub based Keynesianism was on deaths door when Ronald Reagan arrived at the White House in 1981.

And the giant Reagan deficits notwithstanding, it was further buried by the roaring success of Volcker’s hard money policy and the Reagan’s administration resolute refusal to consider anything that smacked of proactive fiscal or monetary stimulus during the dark days of 1982.

The giant Reagan deficits were owing to an explosion of defense spending and a tax-cut bidding war that got totally out of hand in the summer of 1981, not any notion at all that capitalism needed the helping hand of the state in order to get back on its feet after a state sponsored credit inflation had set it on its heels.

Then came the 1984 election campaign about morning in America, which was mainly harmless political bloviating. But the White House politicians could not leave well enough alone. Soon followed the disaster of the Plaza agreement of 1985 designed to trash the dollar and artificially stimulate domestic economic activity, and then trasnpired the real calamity.

To wit, Ronald Reagan was tricked by Jim Baker and the Republican elders on Capitol Hill into forcing Volcker out of his job as chairman of the Fed.  In Part 3 it will be shown that the double-talking, power-seeking, lapsed gold bug named to replace him brought Keynesian bathtub economics right back into the center of policy.

Yet in the world after Mr. Deng’s pronouncement that it is glorious to be rich, the idea of a full bathtub policy in a single country is absurd. It embodies the spurious notion that the primitive measures of labor and business capacity utilization published by the rickety statistical mills of government measure anything that is accurate or economically meaningful.

In fact, the U-3 unemployment rate and the Fed’s industrial capacity utilization figures amount to nothing but noise.  The utilization rate of the auto industry, for example, might have been remotely relevant before 1980. Today it measures the same cycle over and over, but means nothing, as will be demonstrated in Part 3.

Greece, Germany and the Eurozone – Keynote at the Hans-Böckler-Stiftung, Berlin 8th June 2015

Submitted by Yanis Varoufakis  –  The Yanis Varoufakis Blog

Thank you for inviting me. Thank you for being here. Thank you for the warm welcome. Above all thank you for the opportunity to build bridges, to pave common ground, to bring harmony in the face of blatant attempts to sow the seeds of discord between peoples whose historic duty is to come together.


Since the end of the war Greeks and Germans, together with other Europeans, have been uniting. We were uniting despite different languages, diverse cultures, distinctive temperaments. In the process of coming together, we were discovering, with great joy, that there are fewer differences between our nations than the differences observed withinour nations.

Then came the global financial disaster of 2008 and, a year or two later, European peoples, who were hitherto uniting so splendidly, ended up increasingly divided by a… common currency – a paradox that would have been delightful if only it were not so fraught with danger. Danger for our peoples. Danger for our future. Danger for the idea of a shared European prosperity.

History does seem to have a flair for farce, judging by the way it sometimes repeats itself. The Cold War began not in Berlin but in December 1944 in the streets of Athens. The Euro Crisis also started life in Athens, in 2010, triggered off by Greece’s debt problems. Greece was, by a twist of fate, the birthplace of both the Cold War and the Euro Crisis. But the causes run much wider, spanning the whole of our continent.

What were the causes of the Euro Crisis? News media and politicians love simple stories. Like Hollywood, they adore morality tales featuring villains and victims. Aesop’s fable of the Ant and the Grasshopper proved an instant hit. From 2010 onwards the story goes something like this: The Greek grasshoppers did not do their homework and their debt-fuelled summer one day ended abruptly. The ants were then called upon to bail them out. Now, the German people are being told, the Greek grasshoppers do not want to pay their debt back. They want another bout of loose living, more fun in the sun, and another bailout so that they can finance it.

It is a powerful story. A story underpinning the tough stance that many advocate against the Greeks, against our government. The problem is that it is a misleading story. A story that casts a long shadow on the truth. An allegory that is turning one proud nation against another. With losers everywhere. Except perhaps the enemies of Europe and of democracy who are having a field day.


Let me begin with a truism: One person’s debt is another’s asset. Similarly, one nation’s deficit is another’s surplus. When one nation, or region, is more industrialised than another; when it produces most of the high value added tradable goods while the other concentrates on low yield, low value-added non-tradables; the asymmetry is entrenched. Think not just Greece in relation to Germany. Think also East Germany in relation to West Germany, Missouri in relation to neighbouring Texas, North England in relation to the Greater London area – all cases of trade imbalances with impressive staying power.

A freely moving exchange rate, as that between Japan and Brazil, helps keep the imbalances in check, at the expense of volatility. But when we fix the exchange rate, to give more certainty to business (or, even more powerfully, when we introduce a common currency), something else happens: banks begin to magnify the surpluses and the deficits. They inflate the imbalances and make them more dangerous. Automatically. Without asking voters or Parliaments. Without even the government of the land taking notice. It is what I refer to as toxic debt and surplus recycling. By the banks.


It is easy to see how this happens: A German trade surplus over Greece generates a transfer of euros from Greece to Germany. By definition!

This is precisely what was happening during the good ol’ times – before the crisis. Euros earned by German companies in Greece, and elsewhere in the Periphery, amassed in the Frankfurt banks. This money increased Germany’s money supply lowering the price of money. And what is the price of money? The interest rate! This is why interest rates in Germany were so low relative to other Eurozone member-states.

Suddenly, the Northern banks had a reason to lend their reserves back to the Greeks, to the Irish, to the Spanish – to nations where the interest rate was considerably higher as capital is always scarcer in a monetary union’s deficit regions.

And so it was that a tsunami of debt flowed from Frankfurt, from the Netherlands, from Paris – to Athens, to Dublin, to Madrid, unconcerned by the prospect of a drachma or lira devaluation, as we all share the euro, and lured by the fantasy of riskless risk; a fantasy that had been sown in Wall Street where financialisation reared its ugly head.

Put differently, debt flows to places like Greece were the other side of the coin of Germany’s trade surpluses. Greece’s and Ireland’s debt to German private banks maintained German exports to Greece and Ireland. This is similar to buying a car from a dealer who also provides you with a loan so that you can afford the car. Vendor-finance, is the term used.

Can you see the problem? To maintain a nation’s trade surpluses within a monetary union the banking system must pile up increasing debts upon the deficit nations. Yes, the Greek state was an irresponsible borrower. But, ladies and gentlemen, for every irresponsible borrower there corresponds an irresponsible lender. Take Ireland or Spain and contrast it with Greece. Their governments, unlike ours, were not irresponsible. But then the Irish and the Spanish private sectors ended up taking up the extra debt that their government did not. Total debt in the Periphery was the reflection of the surpluses of the Northern, surplus nations. Continue reading

Will You Buy My Bonds, Your AWOLness?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

An Interesting Background Noise Amid Increasing Bubble Talk

As we have previously pointed out, a sharp increase in “bubble talk” is often a danger sign (see “Circular Bubble Logic” for details). There is some anecdotal, as well as some quantifiable evidence for this (such as Google search statistics). There has certainly been quite a bit of talk about certain bonds having reached unsustainable levels, but generally our impression was that there was actually a lot of complacency as well. This is especially true with regard to low or even negative yielding European government bonds, which reflected one of the most egregious central bank-directed market distortions yet (more on this further below).


However, amidst the complacency, one topic keeps intruding, namely growing concerns about the liquidity of assorted corporate bonds, especially of the junk variety. Bloomberg recently showed a comparison chart, illustrating the lack of proprietary bond trading by banks in the wake of new regulations.

These regulations are on the one hand an attempt to close the barn door long after the horse has escaped, on the other hand they form part of “financial repression” schemes enacted by governments, as they forcing banks and insurers to hold large amounts of capital in the form of allegedly “risk free” government bonds.

1-where the bonds areBanks no longer hold a great many corporate and other non-government bonds, as they have increasingly removed themselves from trading such assets to comply with new regulations.

One thing is clear: not only have banks been deprived of a source of income, but the rest of the market has been deprived of market makers. As Bloomberg reports:

More Wall Street executives are sounding alarms about the bond market. The latest to warn were Gary Cohn, president of Goldman Sachs Group Inc., and Anshu Jain, co-chief executive officer of Deutsche Bank AG. The concern is bond investors looking to buy, or especially to sell, will face wide prices swings and higher costs to get a transaction done.

“The problem is on the days when you need liquidity, it probably won’t be there,” said Cohn at a Deutsche Bank investor conference on Tuesday.

Large Wall Street banks, or dealers, are carrying a smaller share of bonds on their books, as regulations restrict the capital they can hold on their balance sheets. Money managers, meanwhile, are holding a lot more of them. Dealer inventories dropped by 27 percent between 2007 and early 2015 while assets held by bond mutual funds and exchange-traded funds almost doubled.

Federal Reserve officials have also taken notice. They discussed changes in the structure of bond markets at recent meetings, and said those changes may be a risk to financial stability.

Deutsche Bank’s Jain said at the Tuesday conference that he didn’t have a “dire warning” about the growing gap between the dealers’ holdings and bond funds’ assets. “But I would certainly say as one of the larger market makers in the system, we very much have an eye on this growing imbalance,” Jain said.”

Continue reading

The Business End Of Global Money

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

This morning HSBC announced plans to radically downsize its cost structure, mostly through cutting jobs. Most of the attention so far has been on the bank’s plans to use the expected profit boosts to fund a period of rising dividend expansion. Immediately, as a business, there is a bit of a conflict in that attempt as typically expanding dividends and shareholder “returns” is byproduct of successful business activities. When you grow organically you can direct more cash flow to your shareholders in greater proportion. To do this through heavy cost cutting, a reduction in global headcount of 25%, is surrendering on that point.

Unfortunately, this has been all-too-common in the post-crisis era of almost every large business. The impulse to “return” cash flow to shareholders has been overwhelming but not due to a massive and robust expansion, rather almost as financial penance for its absence. For global banks, however, there is the monetary element to consider as well which makes their participation corroborative of other assessments.

HSBC starts with a purported plan to reduce its risk-weighted asset tally by 25%, or $290 billion. Those are large numbers and while they do not necessarily mean asset sales (or security sales, which usually does not occur unless the bank is highly stressed) the bank is committing to selling down its global profile. That starts, apparently, with subsidiaries in Turkey and Brazil.

Europe’s largest bank by assets also revealed plans to streamline its 260,000 strong workforce and trim its branch numbers by around 12 percent. The bank said it intended to sell its Turkish and Brazilian operations—although it will maintain a presence in Brazil to serve large clients—in what the it called a “significant reshaping of its business portfolio”…
“Brazil and Turkey have limited value to the franchise and that is why we have made the announcements we have today. These announcements prove there are no ‘sacred cows’ in the business,” HSBC chief executive Stuart Gulliver told investors on a conference call following its statement.

“Limited value” as it stands now, but that wasn’t the case when HSBC was enthusiastically embracing BRICs and emerging markets. The bank intends to continue on the path in some EM’s, however, just those in Asia rather than elsewhere. As noted by the Wall Street Journal at the end of April,

It is unclear how much of the Brazil unit, which employs 21,000 people, is up for sale, these people say. HSBC’s Latin America division, which also includes Mexico and Argentina, suffered a difficult 2014 with adjusted profit before tax dropping 50% as the Brazilian economy slowed. Meanwhile costs rose in the region, impacted by union agreed salary hikes and inflation.
HSBC runs the seventh largest bank in Brazil with a 2.7% market share, in terms of assets. HSBC Brazil swung to a loss of around £200 million ($306.8 million) in 2014.

Continue reading

Americans “Looted” Nazi Gold – Reminder of Gold’s Role in Times of Crisis

Submitted by Mark O’Byrne  –  GoldCore

– Documents uncovered in Washington show American’s seized Nazi gold in last days of war
– Himmler stashed emergency fund of gold and currencies in post office of small Eastern town to protect from bombing of Berlin
– Loot quickly shipped to Frankfurt where trail ends
– Story shows strategic importance of gold in times of crisis

In the last days of the Second World War American troops uncovered a large stash of gold, silver and paper currencies at the post office of a small town in eastern Germany called Plauen. Documents show that the stash was directly linked to SS chief Heinrich Himmler.

The Americans seized the town on 16th April 1945. Documents uncovered in Washington by German historian Peter Heintje show that eleven days later a convoy left the town for Frankfurt.

Apparently the post office of the small town was also a secret branch of the Reichsbank. As the bombing raids on Berlin intensified in 1944 Himmler arranged for the stash to be secreted in the quiet eastern town.

Hitler’s Nazis had looted gold
throughout Europe. Indeed we featured the frightening but compelling video which details the plundering of Austrian, Czech, Polish and other national gold reserves and the theft of German and European citizens, especially Jewish people’s gold, for the German Reichsbank back in 2008 – see video here.

On 26th April, 1945, a post office employee was interrogated. “He spoke of a safe in the post office building. In it were 900 kilos of gold mainly in the form of coins, 70 kilos of silver and cash found, ” Heintje told German press.

The city of Plauen after bombings in WWII

The key to the safe was not available and so US engineers broke into it with explosives. The bullion was stashed in 35 sacks. The hoard also included one million Swiss francs and 151,560 Norwegian kroner and 98,450 Dutch guilders. The fund would be valued at 32 million euros today. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

The Warren Buffet Economy – Why Its Days Are Numbered-Part 2 (David Stockman)
QE ‘Sucking Out’ Liquidity In Markets (CNBC)
Mergers Might Not Signal Optimism (Sorkin)
What’s Wrong with the Administration’s Trade-Deal Arguments (Eric Zuesse)
Why China Is Blowing An Equity Bubble (John Plender)
Chinese Farmers Hope To Harvest Bumper Stock Profits (CNBC)
China’s $6.5 Trillion ‘Wonderful’ Market Bubble (Bloomberg)
Is The European Union Already On The Brink Of Inevitable Disaster? (
Life Under Austerity Shows Why Syriza Are Fighting It So Hard (Conversation)
Greeks Chose Poverty, Let Them Have Their Way (Francesco Giavazzi)
If The Eurozone Thinks Greece Can Be Blackmailed, It’s Wrong (Costas Lapavitsas)
Greece, Germany and the Eurozone – Keynote, Berlin June 8 2015 (Varoufakis)
Too Poor To Die: The Pauper’s Funeral Returns In Austerity Britain (Guardian)
Prosecutors Search Deutsche Bank Offices For Transaction Evidence (Reuters)
US Police Kill More In Days Than Other Countries Do In Years (Guardian)
Hiring Black Officers Is Difficult: ‘So Many Have Spent Time In Jail’ (Guardian)
San Francisco First City To Approve Health Warning On Sugary Drinks (AP)
Migrants Race Through Italy To Dodge EU Asylum Rules (Reuters)
Migrants Crossing Mediterranean Exceed 100,000 So Far This Year (AP)