Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Inflation via QE - The Malachi Crunch Continues 2014

Economics / Inflation Jan 12, 2014 - 06:35 AM GMT

By: Andy_Sutton

Economics

Those of you who have known me any length of time know that I love to say ‘they always tell you what they’re going to do’. I had a really scintillating discussion yesterday with two fellow economists as to why that might be and we’ll shelve that for now, but let’s just say this: ‘they’ are at it again. Last week I referenced an IMF working paper penned by Harvard dynamic duo Ken Rogoff and Carmen Reinhart regarding asset confiscation and other ways to wiggle our way our the current economic morass that we find ourselves in. This week I’m going to perform a full dissection because there is material in there that you simply cannot go on without knowing if you expect to salvage even a shred of your financial state as it exists today.


Before I begin, let me make the following preface: what I am dissecting is an IMF working paper. These are basically pre-legislation, pre-policy position papers that are written by various parties associated with the bank. A term that might be familiar with some is ‘trial balloon’. Sometimes these papers disappear into the ether, only to resurface decades later, and sometimes they are implemented in the shorter term. The IMF claims that its working papers ‘don’t necessarily represent the opinions and views of the IMF’. Take that for what it is worth. After all, they printed it on their letterhead. I’ll let you decide the veracity of that claim.

I will also preface this article with the comment that every one of the 5 major suggestions and/or solutions made by Reinhart/Rogoff have already been done in the modern monetary era. By that I mean since the creation of the not-so-USFed and the age of the push away from specie-backed currencies. Given the unsustainability of America’s current economic trajectory and its continued loss of wiggle room in terms of buying time, it would appear that we are closer as opposed to farther from seeing more of the measures detailed in this paper come to pass.

With all that said, let’s get started. I’m going to take many quotes directly from the paper; be not afraid, it is written in fairly plain English. There are no fancy formulas, calculus, or anything to fear. Just words. They’re not trying to hide anything, which is one of the reasons the red flags went up over this particular paper.

From the Abstract:

“Even after one of the most severe crises on record (in its fifth year as of 2012) in the advanced world, the received wisdom in policy circles clings to the notion that advanced, wealthy economies are completely different animals from their emerging market counterparts. Until 2007–08, the presumption was that they were not nearly as vulnerable to financial crises. When events disabused the world of that notion, the idea still persisted that if a financial crisis does occur, advanced countries are much better at managing the aftermath, thanks to their ability to vigorously apply countercyclical policy. Even as the recovery consistently proved to be far weaker than most forecasters were expecting, policymakers continued to underestimate the depth and duration of the downturn.”

You can see right from the word go that they’re admitting what we’ve already known for years, but what the media and government lie like filthy rugs about. There’s no recovery. Certainly not a secular one, based on fundamentals, production, savings, genuine capital creation and allocation, and increased standard of living. But did we really need Messrs. Rogoff and Reinhart to tell us this in a working paper with a bunch of fancy graphs to back it up? Not a chance. All we had to do was a little basic observation. Buckle up my friends; it gets a lot better.

The paper goes on to claim that Europe’s sovereign debt crisis, which is ongoing, was an offshoot of the 2008 blowout. I would take exception to that only because the circumstances that led to the Eurozone crisis were already in place long before Bear Stearns, AIG, and Lehman. Certainly the events of 2008 forward did not help Europe and likely did help the EU along its crash course path. But that path was long cast in stone, going back to when the Union was initially created. If anyone needs a refresher, just go and see how the rules were bent to allow Greece to join. I’ll rest my case there. Let’s move along.

“The claim is that advanced countries do not need to apply the standard toolkit used by emerging markets, including debt restructurings, higher inflation, capital controls, and significant financial repression. Advanced countries do not resort to such gimmicks, policymakers say. To do so would be to give up hard-earned credibility, thereby destabilizing expectations and throwing the economy into a vicious circle. Although the view that advanced country financial crises are completely different, and therefore should be handled completely differently, has been a recurrent refrain, notably in both the European sovereign debt crises and the U.S. subprime mortgage crisis, this view is at odds with the historical track record. In most advanced economies, debt restructuring or conversions, financial repression, and higher inflation have been integral parts of the resolution of significant debt overhangs.”

So what exactly is this ‘toolkit’ they mention? It is made up of 5 distinct parts according to the working paper:

1) Economic Growth

2) Fiscal Adjustment/Austerity (Think entitlement programs)

3) Explicit (de jure) default and/or restructuring (Think bail-ins)

4) Inflation surprise

5) A steady dose of financial repression followed by a steady dose of inflation.

Of all of these, economic growth is the ONLY one that won’t either immediately or eventually adversely affect the welfare of the economic agents invested in that particular system – namely you and I. We’ve certainly heard plenty about austerity in the EU, and that isn’t working out so well. I’m not going to give a sitrep of the Eurozone crisis spots in this essay, but let’s just ask why the Greek stock market has surged at the beginning of 2014 even as the unemployment rate surges upward along with it? Someone’s expecting another bailout or other sort of financial mischief to keep things from seizing up totally.

Defaults and debt restructuring is an interesting issue for America and this connection goes back to last week’s piece regarding the stance of the China-Russia alliance in Syria. They took us out behind the woodshed and beat us like a rented mule. There’s no other way around it. I cannot stress enough the importance of that event in the grand scheme of things because it tells us that the balance of power has shifted. So, with that said, how likely are we to get cooperation from the China/Russia alliance with regard to debt restructuring? They might be very cooperative, however, if that is the case, it is very likely that terms will be very undesirable for the average American.

America has been implicitly defaulting on its debt for a long time now. How long is up for debate. I’d draw the line at 8/15/1971 when we stopped settling external trade imbalances in gold. Some would say it was when the Petrodollar was created by agreement with the oil-producing nations to buy our debt in exchange for oligopoly pricing power in the US energy markets. In either case, it doesn’t matter all that much. Both of those events occurred coming up on a half century ago. The debt agreements (bonds) were sold under the premise that they would be paid back in dollars. However, nobody bothered to mention that perhaps the dollars that are paid back should have the same purchasing power as the dollars that were borrowed to begin with.

But what Rogoff/Reinhart are talking about is an actual default – you don’t get your money back, China, Russia, pension plan A,B,C, or this or that mutual fund, etc. This has happened before, but NOT in the financial free-for-all era we live in now. America forgave huge debts after the first two World Wars. We’ll get into that in a bit, likely at another time. Those other countries defaulted. The authors are suggesting that this tool, which used to be reserved only for ‘emerging market’ type countries, should now be used by what they term ‘advanced countries’. We’d call them first world countries. Others might say G-20 or G-8 countries. So let’s say Uncle Sam defaults on a portion of its debt. Who will be left holding the bag? Maybe your pension fund has 20% of its assets invested in USGovt bonds. Sorry, folks. Maybe you work for the federal government and are invested in the Thrift Savings Plan or the Civil Service Retirement System and own the ‘guaranteed’ bond fund. How is that going to play out?

The very next sentence after the last direct quote is the one that will blow most folks away:

“It is certainly true that policymakers need to manage public expectations. However, by consistently choosing instruments and calibrating responses based on overly optimistic medium-term scenarios, they risk ultimately losing credibility and destabilizing expectations rather than the reverse. Nowhere is the denial problem more acute than in the collective amnesia about advanced country deleveraging experiences (especially, but not exclusively, before World War II) that involved a variety of sovereign and private restructurings, defaults, debt conversions, and financial repression. This denial has led to policies that in some cases risk exacerbating the final costs of deleveraging.”

Managing expectations, eh? How long have virtually everyone on the Austrian side of the fence been talking about that? No quibbling with what they’re saying here either. By lying and obfuscating policymakers only make it worse in the long run. What is left unsaid, however, is that they don’t care. That is my biggest gripe with this paper; it doesn’t address the real reasons why these events took place and will do so again – evil. True evil at its most visceral level. What we’ve got is a bunch of megalomaniacs behind the scenes who want it all. They’re not happy with what they have. No, they want that, plus what everyone else has too and frankly, they don’t care what they have to do to get it. I don’t expect Messrs. Rogoff and Reinhart to understand this and their analysis proves it. It is a dry, academic analysis, but the motive is unmitigated greed. And there is little to no benevolence in the hearts and minds of those the power is shifting to, either.

Exit Strategies – Past and Future

Rogoff and Reinhart list four lessons of the past regarding debt, financial crises, and the escape methods used to ameliorate the problems and /or reset the systems.

“Lesson 1: On prevention versus crisis management. We have done better at the latter than the former. It is doubtful that this will change as memories of the crisis fade and financial market participants and their regulators become complacent.”

You can give whatever grade you like to the policymakers, etc. for managing the crisis as it relates to American debt and financial crisis, but I’ll rely on an old adage that an ounce of prevention is worth a pound of cure. These clowns knew exactly what was going to happen when they pulled down Glass-Steagall. They knew exactly what was going to happen when they ran interest rates to nothing and fired up the inflation machine. They knew exactly what was going to happen when the decision was made that the Anglo-American syndicate would deal in paper and bombs while the rest of the world prepared to deal in tangible goods, production, and a lack of national excess and ignorance. There is no pass given here for ‘we didn’t know’. They knew. And they know what is going to happen moving forward as they prepare to gut our retirement system to square away the mess they made in the first place. Here’s where the not-so-subtle advocacy of a return to ‘financial repression’ begins:

‘Although economists’ understanding of financial crises has deepened in recent years, periods of huge financial sector growth and development (often accompanied by steeply rising private indebtedness) will probably always generate waves of financial crises. As the late Diaz-Alejandro famously titled his 1985 paper “Good-bye Financial Repression, Hello Financial Crash,” many crises are the result of financial liberalization gone amok. Diaz-Alejandro was writing about an emerging market (Chile in the early 1980s), but he could have said very much the same thing for advanced countries today.

Figure 1 presents a composite index of banking, currency, sovereign default, and

inflation crises (BCDI Index), and stock market crashes. Countries are weighted by their share of world income, so advanced countries carry proportionately higher weights. The figure, and the longer analysis of crises in Reinhart and Rogoff (2009), show that the “financial repression” period, 1945–1979 in particular, has markedly fewer crises than earlier or subsequently.’

So what exactly is this ‘financial repression’? It certainly doesn’t sound good, does it? This ties in with lesson 4, and since this is the crux of the matter, we’ll get straight to it. There is much, much more here and I’ll probably use the next episode of ‘Beat the Street’ to hash it out in further detail, but let’s get to brass tacks.

“Financial repression” includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and generally a tighter connection between government and banks.”

Did you catch that? ‘Directed lending to government by captive domestic audiences’. What exactly is a captive domestic audience? The $18+ trillion in retirement savings in America is exactly what they’re referring to here. It is captive in that it cannot easily be extracted from the system, especially pension and 401k type arrangements where one would have to quit their job to even have any chance of getting access to their savings. Next on the list are IRAs of various flavors because unless you meet the age requirements, you’re going to take a huge hit. And the authors are saying that during the periods when these sorts of draconian economic measures are taken is when crises tend to be less likely, at least according to their own model, however, the methodologies behind that model remain undisclosed.

In Summary

To sum all this up, what we have is two Harvard heavy-hitters for the IMF writing a working paper that suggests that your currency should be further devalued, you should be bailed-in to save your government or some bank, that your pension should be swiped, your capital controlled, and that you should have a GoverBank – a term coined by yours truly in January of 2009 – an incestuous relationship between big money and government. And what has happened so far? We’ve certainly seen the inflation via QE. We’ve seen the emergence of the bail-in first in Cyprus, and now developing in Detroit. If you’ve tried to move some money offshore you already know all about the subtle capital controls that continue to keep popping up.

Like I said, there is quite a bit more in this paper, but I think we’ve made the point – at least for now. And for the record, this is nowhere near the first working paper released on these topics, however, it is one that advocates not only a continuation of the current path (not a surprise considering Rogoff and Reinhart are dyed in the wool Keynesians), but an extension of what they’ve overtly labeled ‘financial repression’. I’ll close merely by saying I would be seriously shocked if we didn’t see at least several events following the course prescribed in Rogoff and Reinhart’s paper in 2014. They may not receive coverage from the lapdog media, but just because no one is in the forest to hear a tree fall doesn’t mean it falls quietly; or that it doesn’t land on someone.

By Andy Sutton

http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules