Auf Wiedersehen der Slagwerker, Hallo Gitarre

Andy’s Notes: On a more personal note, 2017 has been a year of great reflection for both Graham and myself. Neither of us are particularly sure it is worth it to continue posting articles as the readership has consistently dropped. This in spite of the fact that the people who DO read ‘My Two Cents’ claim the articles are relevant and implore us to continue.

We may continue. We may not. On a more personal note, I have been devoting more time to music to calm the storms in my mind. I had played drums for many years, but recently have taken up guitar playing again and have given myself over to it. To getting better. I love playing 80’s hair band rock – despite the fact that I have no hair. It’s something of an irony.

Graham is a computer junkie as a habit and I envision his European temporary dwelling stacked with pizza boxes and Mountain Dew bottles. If one can get such things where he lives.

I guess we could call this a sabbatical. There is actually too much going for any one person or even a team to keep track of, The headlines are good for less than a half a day anymore, while the entire time we are hurtling towards our inevitable date with our self-created destiny.

If things explode (either figuratively or literally), the sabbatical will end immediately. Otherwise we’re going to enjoy our personal pursuits for now. We’ll make periodic entries here. I would encourage everyone to bookmark the blog as so many of the sites which had previously been friendly towards us have refused to post articles. I have a pretty good idea as to why, but there is no point mentioning it.

We will talk soon.

Lack of Credit-Driven Auto Sales a Negative Omen

Andy’s Notes: Elections have little/nothing to do with the economy. Once people start understanding our ‘leaders’ are mere figureheads who offer clever soundbytes and that policy is crafted by the establishment, then we’ll be able to start having a serious discussion about the economy and why it isn’t going anywhere (and won’t). Aggregate demand has stalled globally; this isn’t just an American problem. The solution starts at the consumer level with intelligent, empowered individuals. We are a long way from home in that regard.

The revival of the auto industry drove the factory sector out of recession; the flipside doesn’t look promising.

Federal Reserve data released last week on July industrial production offered little more than more of the same. Despite post-election optimism for a rebound in activity on the nation’s factory floors, the data reveal a continued throttling down in the growth rate to just over 2 percent compared with this time last year.

The main drag on activity — the auto sector — should come as no surprise to investors. Rather than rising by 0.2 percent over June as projected, manufacturing production contracted by 0.1 percent, marking the third decline in five months. Motor vehicles and parts production fell by 3.6 percent on the month, taking the year-over-year slide to five percent.

Blue Line: IP Manufacturing, Growth Y-o-Y%… Red Line: IP Manufacturing Ex-Motor Vehicles and Parts, Growth Y-o-Y%

Evidence continues to build that a sampling error may be to blame for the surprising strength in June and July car sales. Inventory continues to pile up, suggesting more production cuts are in the offing: As of June, the latest data on hand, auto inventories were up 7.4 percent over last year, leaving manufacturers choking for air. In July, General Motors Co. alone was sitting on 104 days of supply, well above its target of 70 days. Industry-wide, the July/August average of 69 days ties the August 2008 record and sits above the historic average of 56 days of supply.

In all, automakers have 3.9 million units of unsold light vehicles, up 324,600 from last August and the highest on record for the month. For context, July and August tie for the leanest stock levels of the year.

The decline in July sales was already the steepest this year. Fresh loan delinquency data suggest more pain ahead. “Deep subprime” borrowers have been a big boost at the margin, propelling back-to-back record years of sales in 2015 and 2016 as lending standards loosened sufficiently to allow millions with credit scores below 530 to access financing.

Equifax, the consumer credit reporting firm, didn’t hold back in its second-quarter update, saying the performance of recent vintages of deep subprime loans was “awful.” While industry insiders are quick to point out that the overall pace of defaults across all borrowers remains in check, up just marginally over last year, there is growing concern that deep subprime delinquencies are back at 2007 levels. “The bottom line is excess auto inventories are clearly evident and the auto sector is now in recession,” said The Lindsey Group’s Peter Boockvar.

Boockvar’s conclusion raises the question of what’s next for the broader economy. Downside risks are on full display when viewed through the prism of manufacturing net of motor vehicle and parts production. The revival of the auto industry drove the factory sector out of recession; the flipside doesn’t look to be promising. As one economist quipped at the sight of the following chart, “It looks like it’s time to get out the gray crayon.”

IP Manufacturing Net of IP Manufacturing Ex-Motor Vehicles & Parts – Y-o-Y % Change

A deeper question yet is what the implication is for long-term economic growth if credit-compelled sales continue to push the economy in and out of recession, as was the case for home sales in the last cycle and looks to be increasingly the case for the auto sector in the current cycle.

A recent analysis by The Liscio Report, an economic consultancy, dug deeper into the long demise of the private sector’s investment in the economy. Their findings:

At 2.1 percent of GDP, net fixed investment by the private sector is just over half its 1950 — 2000 average of 3.8 percent. At 1.0 percent of GDP, investment in equipment and software, which has long been identified with long-term productivity growth, is more than a third below its average over the same period of 1.6 percent.

The latest political turmoil suggests a further dampening in animal spirits in c-suites across America. That only underscores the need to switch the focus to infrastructure spending.

Infrastructure investment is supported on both sides of the aisle. No politician likes to run for office with the economy in recession. With the midterm elections just over the horizon, it would seem the imperative to set aside differences at this juncture are that much greater. For the sake of an economic jumpstart, it might be as simple as making America’s highways and byways passable again.

US – South Korea War Games to Start Monday

Are tensions cooling in the Korean Peninsula? The United States and South Korea will find out Monday, when the two allies are scheduled to start joint military exercises that are known to anger North Korea, sometimes triggering a show of force.

This year’s war games come at a particularly delicate moment. There have been exchanges of war rhetoric between President Trump and North Korea’s Kim Jong Un. Trump’s chief strategist, Steve Bannon, has further complicated the situation, by stating in an interview there’s “no military option” in North Korea while floating a possible deal with Pyongyang that would leave Seoul hanging.

Amid all this back and forth, the U.S. and South Korean military will simulate warfare with North Korea from Aug. 21 to 31, well aware that North Korea could respond with another missile test.

“Over the course of the next two weeks I expect tensions to escalate,” said Scott A. Snyder, a Korea specialist with the Council on Foreign Relations who previously was the Asia Foundation’s representative in Seoul. “This is always a sensitive issue, but it is more hair-trigger as the North Koreans are very sensitive to the likely additional nuclear-capable aircraft flyovers.”

The United States says biannual exercises are defensive in nature, but North Korea and China have long criticized them as a provocation and an affront to regional security.

“There certainly will be some reaction,” said J.D. Williams, a retired Marine colonel and defense policy researcher at the RAND Corporation in California. He said he wouldn’t be surprised if North Korea conducted some kind of missile launch — not a test but a defiant demonstration of might.

North Korea last week threatened to fire four missiles toward Guam, a U.S. territory, a rebuttal to President Donald Trump’s “fire and fury” remarks of Aug. 8. North Korea’s Kim later backed off that threat, saying he’d watch “the foolish and stupid conduct of the Yankees” before deciding on the launch, a decision that Trump quickly tweeted was “very wise and well reasoned.”

The exchange suggested that cooler heads were prevailing in the latest U.S. standoff with North Korea. But next week’s war games could rekindle hostilities. On Thursday, North Korean state media declared that the military exercises will “further drive the situation on the Korean Peninsula into a catastrophe.”

Held every fall in South Korea, the Ulchi-Freedom Guardian war games are the world’s largest computerized command and control exercise. Some 30,000 U.S. soldiers and more than 50,000 South Korean troops usually take part, along with hundreds of thousands of first responders and civilians, some practicing for a potential chemical weapons attack.

The exercise, along with one in March, often triggers anti-war protests in South Korea and condemnation from China. While Chinese President Xi Jinping has been noticeably cool toward Kim Jong Un, and has been critical of North Korea’s development of nuclear weapons, China has long wanted the United States to shrink its military footprint in Asia, including some 12 bases in South Korea and Japan.

Over the course of the next two weeks I expect tensions to escalate

Scott A. Snyder, Council on Foreign Relations

In an editorial Monday, China’s Global Times newspaper, an arm of the Communist Party’s People’s Daily, lambasted the decision by the United States and South Korea to go ahead with Monday’s exercises.

“The drill will definitely provoke Pyongyang more, and Pyongyang is expected to make a more radical response,” the newspaper said. “If South Korea really wants no war on the Korean Peninsula, it should try to stop this military exercise.”

North Korea has been known to react strongly during the biannual war games. In 2014, the north fired off scud missiles during the March exercises held by the U.S.-South Korean command, called Foul Eagle.

During the 2015 Ulchi-Freedom Guardian exercises, North Korea and South Korea exchanged artillery and rocket fire over their border. That exchange came after two South Korean soldiers were maimed stepping on land mines in the Demilitarized Zone. South Korea accused North Korean soldiers of sneaking across the border and planting the land mines.

China and Russia have been urging the United States to consider a “freeze for freeze” agreement to reduce tensions. In such a deal, Pyongyang would agree to suspend its tests of missiles and nuclear weapons, and Washington and Seoul would agree to suspend large-scale military exercises.

U.S. military experts say such a deal would give a lopsided advantage to North Korea, which could continue its military training even as the U.S.-South Korea exercises were suspended. “It is hard to imagine why the United States would accept that, because of the vulnerability it would create,” said Bruce Bennett, a senior defense researcher at RAND.

In a media briefing on Tuesday, U.S. State Department spokeswoman Heather Nauert said the United States will continue to hold joint exercises with South Korea.

The next day, the administration’s Korea plans were rocked by quotes attributed to Bannon, the White House Chief Strategist. In an interview with the American Prospect, Bannon said he might consider a deal in which North Korea suspended its nuclear buildup with verifiable inspections and the United States removed its troops from the peninsula.

The comments come as many in South Korea are uncertain about Washington’s commitment to the 64-year old U.S.-South Korean alliance. As McClatchy reported last month, numerous South Korean lawmakers support their country developing its own nuclear weapons program, to counter the threat from the north.

South Korea has two major concerns with the Trump administration. One is a question about commitment. The other is the potential for Trump to launch a preemptive military strike on North Korea without consulting Seoul, which would bear the brunt of Pyongyang’s response.

On Tuesday, South Korean President Moon Jae In sent a blunt warning to the White House. “No one should be allowed to decide on a military action on the Korean Peninsula without South Korean agreement,” Moon said in a televised speech.

On Thursday, after meeting with Gen. Joseph Dunford, chairman of the Joint Chiefs of Staff, Moon said he’d been assured South Korea would be consulted before any military action is taken.

Read more here: Website


It has come to my attention that my firm’s domain name ‘’ has been re-launched and is claiming a ‘Grand Re-Opening’. I no longer own that domain and have nothing to do with whatever content, etc may be placed on that site. I will be sending the new owner a request for a disclosure to that effect and will be reporting the activity to FINRA as well. This posting is meant to represent a public disclosure.


Andy Sutton

US-China Trade War to Begin 8/14?

Andy’s Notes: Yep, this sounds like a fantastic idea… Analysis below is fairly straightforward. Note that this ‘war’ comes parallel with various demands being tossed to and fro by both Washington and Beijing regarding North Korea. Yes, it all ties together. Also, forget about the Duck; he’s the figurehead, not the artist of this latest policy disaster. These decisions were made years ago. We’ll make whitepapers from various policy institutes available to anyone who is interested.

As if there weren’t enough geopolitical stress points in the world to fill a lifetime of “sleepy, vacationy” Augusts, late on Friday night President Trump spoke to Chinese President Xi Jinping and told him that he’s preparing to order an investigation into Chinese trade practices next week, according to NBC. Politico confirms that Trump is ready to launch a new trade crackdown on China next week, citing an administration official, a step that Trump delayed two weeks ago under the guidance of his new Chief of Staff Gen. Kelly, but now appears imminent. It is also an escalation which most analysts agree will launch a trade war between Washington and Beijing.

As Politico details, Trump on Monday will call for an investigation into China over allegations that the nation violated U.S. intellectual property rights and forced technology transfers, the official said. While it’s unclear how much detail Trump will get into in the announcement, administration officials expect U.S. Trade Representative Robert Lighthizer to open an investigation against China under Section 301 of the Trade Act of 1974. The ordering of the investigation will not immediately impose sanctions but could lead to steep tariffs on Chinese goods. Trump has expressed frustration in recent months over what he sees as China’s unfair trade policies.

As we discussed two weeks ago, Trump had planned to launch the trade investigation more than a week ago, but he delayed the move in favor of securing China’s support for expanded U.N. sanctions against North Korea, the senior administration official said.

The pending announcement also comes amid heightened tension between the United States and China, even after the Trump administration scored a victory in persuading Beijing to sign onto new United Nations sanctions on North Korea. Still, Trump has delayed trade action before, amid pressure from business groups and major trading partners:

Two Commerce Department reports examining whether to restrict steel and aluminum imports on national security grounds were expected by the end of June but have been bottled up in an internal review. Trading partners raised threats of retaliation and domestic steel users complained of being hurt by price increases and restricted supply.

The trade investigation will immediately strain relations between the U.S. and China as the two countries wrestle with the unpredictable situation over North Korea.  Should Trump follow through, the move will lay the groundwork for Trump to impose tariffs against Chinese imports, which will mark a significant escalation in his efforts to reshape the trade relationship between the world’s two largest economies. In other words, even if there is now conventional war announced with either North Korea or Venezuela, Trump’s next step is to launch a trade war against China.

“The United States government can, and does, work with countries to address serious concerns such as North Korea while also pursuing measures to address economic concerns, such as the theft of U.S. intellectual property,” a U.S. National Security Council official said.

It wasn’t immediately clear how China would react to the move.

When reports of the potential trade investigation first emerged more than a week ago, China’s Commerce Ministry stressed the importance of U.S.-China trade ties and of resolving differences “through dialogue and consultation.”

“We would like to emphasize that the Chinese government has always attached importance to intellectual property protection,” a spokesman said. “The results are there for all to see.”

Trump, who has been residing at his golf club in Bedminster, New Jersey, for the past week, plans to return to Washington on Monday to officially announce the trade investigation. The decision will not only take action against alleged Chinese violations of U.S. companies’ intellectual property rights, but could also be perceived as an attempt by the U.S. government to crank up the pressure on Beijing to rein in North Korea. “I think China can do a lot more,” Trump told reporters on Thursday. “And I think China will do a lot more.”

As CNN adds, the trade investigation is expected to be only one part of a multi-pronged push by the Trump administration to counter perceived Chinese trade abuses.  The administration has been eyeing other moves to rebalance the U.S.-China trading relationship. But analysts have cautioned that Trump faces a huge challenge in his desire to significantly reduce the U.S. trade deficit with China, which last year stood at more than $300 billion. “Protection measures against some specific items, such as steel and aluminum, may gain political favors, but are not likely to be of much help to rebalance trade,” economists at the Institute of International Finance wrote in a research note this week.

Meanwhile, as we reported previously, China state media signaled the nation would hit back immediately against any trade measures, as it has done in past episodes. This time around, the need to project strength domestically is compounded by the looming twice-a-decade leadership reshuffle that may further entrench President Xi Jinping’s power.

Chinese officials have mulled stemming U.S. imports should retaliation be necessary. Under a draft plan, soybeans have been singled out as the top product that can be dialed back, according to people familiar with the matter. Autos, aircraft and rare-earth commodities have also been identified as potential categories for restriction, the people said.

Still, Trump’s offensive comes at a very sensitive time for Beijing: just weeks ahead of the 19th Party Congress, when Xi Jinping wants everything in his economy to be perfect. “Ahead of the 19th Party Congress, the last thing that China will want is a trade war,” said Callum Henderson, a managing director for Asia-Pacific at Eurasia Group in Singapore. “It is also important that Beijing does not look weak in this context. As such, expect a cautious, proportional response.”

Of course, ultimately the big question – as Bloomberg puts it – is whether the Trump administration is willing to risk a trade war as it ups the ante. The IMF warned last month that “inward-looking” policies could derail a global recovery that has so far been resilient to raising tensions over trade. The problem, for both the US and China, is that as Trump gets increasingly more focused on distracting from his numerous domestic scandals, he is likely to take ever more drastic action in the foreign arena, whether that means “hot war” with North Korea, or trade war with China.

“So far, it’s all been posturing, with little action,”’ said Scott Kennedy, a U.S.-China expert at the Center for Strategic and International Studies in Washington. “Pressure is building to do something, so the U.S. doesn’t look like a complete paper tiger.”

And while we await the formal announcement on Monday and China’s retaliation, below again is a breakdown of the biggest US state winners and losers if and when trade war with China breaks out, from “Winners And Losers When Trade War Breaks Out Between The US And China

Who stands to lose – and win – if the U.S. takes aim at the unbalanced trade relationship with China? With total bilateral trade of more than half a trillion dollars a year, the list of potential losers is very long as Bloomberg analyzed recently. The most notable examples include:

  • U.S. companies such as Apple Inc., which assemble their products in China for sale in the U.S., and those tapping demand in China’s expanding consumer market.
  • U.S. agricultural and transport-equipment firms, which meet China’s demand for soy beans and aircraft.
  • Manufacturing firms from the U.S. that import intermediate products from China as an input into their production process.
  • Retailers including Wal-Mart Stores Inc. and the U.S. consumers that benefit from low-price imported consumer electronics, clothes and furniture.
  • Other trade partners caught in the crossfire of poorly-targeted tariffs. On steel, for example, U.S. direct imports from China account for less than 3% of the total — below Vietnam.

And while conventional wisdom is that the US has a chronic trade deficit with China – it does – the U.S. also runs a nearly $17 billion trade surplus with China for agricultural products. China consumes about half of U.S. soybean exports, America’s second largest planted field crop. Soybean farms are mostly located in the the upper Midwest (Illinois, Iowa, Indiana, Minnesota and Nebraska). The volumes are so significant that a spike in soybean exports was a noticeable contributor to GDP growth in the second half of last year as readers may recall. China is also a major buyer of U.S. aircraft, perhaps the only areas of manufacturing where the U.S. retains a competitive edge (though not for much longer). The U.S. also has an $8 billion dollar trade surplus with China in the transportation equipment category.

U.S. Trade Balance With China by Product

How about geographically?

It may come as a surprise that on a state-by-state basis, eight U.S. states are running surpluses with China, six of which supported Trump in last year’s presidential election, including West Virginia. In 2016, Louisiana registered the largest surplus, at 2.9% of the state’s GDP. Louisiana’s exports to China are likely inflated given that 60% of U.S. soybean exports are shipped through the Gulf coast. Washington state was second at 1.6% of GDP, largely due to aerospace exports.

Tennessee maintains the largest trade deficit with China at 6.5% of GDP, meaning tariff-induced increases in the price of imports could have the biggest impact on this state.

The biggest losers? Mississippi, Georgia, Illinois and  California, all of which maintain deficits at more than 3% of GDP.

For the sake of brevity, we will not discuss another, more troubling, aspect of conventional wisdom, namely that trade wars almost inevitably lead to real wars. Aside for the US military industrial complex, there are no winners there.

WTI Heads Towards $50 / Critical Resistance Point

Andy’s Notes: Rig counts aside, it would appear that once again, we have a momentum casino going – this time in the oil markets. Shorts, who piled in over the fast few months are getting hammered and are being forced to cover at higher and higher prices. While many find this amusing, it goes to show (once again) that the ‘markets’ of today are no place for the average investor, particularly the futures markets and foreign exchange markets. A lifetime of work can literally be lost in a few ticks and I’m not even kidding a little about this. So to all you Ralph Kramdens of modern finance, who have some get rich quick scheme plotted, remember it can just as easily turn into a get broke even quicker scheme. Add borrowed money (leverage) to the situation and you’re decorating your very own financial casket. Buyer beware.

Ahead of today’s rig count data, WTI (and Brent) Crude is extending its short-squeeze gains after the bullish inventory data trend was confirmed (shrugging off the surge in production). Signals from an increaisng number of firms that they are cutting capex (and this drilling) has helped send WTI and Brent back above their 200-day moving-averages.

Halliburton, promising to be disciplined in adding more fracking gear to the oilfields, says U.S. explorers are “tapping the brakes” on drilling as the price of oil struggles to breach $50 a barrel.

Brent’s front-month has pushed into backwardation and the medium-term WTI curve the same…suggesting producers are actively hedging next year’s supply at these new high prices…

The recent strength has pushed WTI back above its 200-day moving-average…

Support or Resistance? We suspect the 1pmET rig count data will decide the rest of the day.

Andy Blasts off on Liberty Talk Radio – “Then and Now”

Andy’s Notes: This might have been one of the best ever. Certainly one of the top 5. Not because I was involved, but because of the content discussed and it was a very wide range of topics for just an hour show. People are frustrated and looking for things they can do. Listen in and hopefully you’ll get some ideas. Graham and I hope to be back on the writing horse before too long. The summer has been plagued with health issues, injuries, personal struggles, and the full gamut. We hope to be 100% soon and thank you for your emails of support. We are truly blessed to be surrounded by such nice people.

Fed Data Suggests Gold Standard Didn’t Tame Inflation (Fake News?)

Andy’s Notes: Again, I will point out that economics is a science, not a debating society. However, like most of science these days, everything is open to debate. There are no standards anywhere. Not in gold, not anywhere else. It is this kind of flim-flam, blown about by every wind of doctrine that has caused us to doubt everything except for maybe the color of the sky and the so-called ‘sanctity’ of big government. If gold was so bad, you’d think the fed – and especially the banks that own it would have nothing to do with it. Instead they own it by the trainload. Go figure. It sort of reminded us of the old economics joke – “Why is talk so cheap?” Answer – ” Because there’s an oversupply of it”. Nowadays anyone can go online and write to their hearts content about pretty much anything they want, which is great, but it has its drawbacks; the biggest of which being who is passing truth, and who is in the propaganda business. Without a solid underpinning in economics, it is almost impossible to tell the difference. Even the worst research has a few nuggets of truth. Being recipients of the quarterly journal published by the St. Louis ‘fed’ ‘The Regional Economist’, Graham and I are very familiar with Martin’s work. It is mediocre at best and always appears to be purposed towards opinion shaping. The author of the analysis below, Mike Shedlock, has his own opinions on the science of economics. We share some of them. Others we don’t. No one has a perfect analysis of any science, least of all, us. Lest we throw stones from a glass house, we encourage everyone to read, analyze, re-read, then go do your own research and form an educated, informed view of the science of economics. Don’t just take your opinions from us or an article on the Internet.

Oh, by the way, did you all see that the SEC now wants to regulate crytocurrency because they are claiming they are a ‘security’. What an oxymoron that is!

The Wall Street Journal reports Gold Standard Didn’t Really Tame Inflation, New Research Says.

The research was by St. Louis Fed economist Fernando Martin. Curiously, his study precisely shows that the gold standard did indeed tame inflation.

Let’s investigate Martin’s bogus claim and his peculiar logic in making it.

In his email to the WSJ, Martin stated: “Most of the price increase in the period starting with World War II is due to two specific episodes.”

WWII was the first episode and the “1970s inflation episode was unambiguously the result of Fed policy blunders.” Supposedly, “the lessons learned from the experience helped central bankers start a multi-decadelong effort to lower inflation to historically low levels.”

I cannot tell if the second set of quotes is the WSJ view or Martin’s.

Martin’s Peculiar Logic

Here is Martin’s peculiar logic in explaining why the gold standard does not work: “You can still have high inflation with a metallic standard” because history shows governments regularly go off such regimes.

Got that? The gold standard won’t tame inflation because … the government won’t stick with it!

This is what constitutes critical research and absurd posting of said research by the Wall Street Journal.

CPI Since US Founding

Policy Error by the Fed

The article cited a “policy error” by the Fed as the cause of the stagflation period.

Actually, the policy error was Nixon closing the gold window on August 15, 1971, ending convertibility of gold for dollars. Our balance of trade soon went haywire, as did the explosion of credit and debt.

Balance of Trade

Total Credit

Median Home Prices

The preceding three slides from my June 24, Venture Alliance group presentation.

Not Properly Counting Inflation

The Fed does not count asset bubbles including housing in its absurd measure of inflation.

Moreover, Martin conveniently overlooks the Great Recession and all of the damage it did while the Fed was allegedly providing “stable inflation”.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.

  1. My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
  2. My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Meanwhile, economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.

Deflation on Deck?

Is deflation on deck? Yes, asset deflation, a very destructive kind of deflation. When it happens, please thank the Fed for low inflation and volatility suppression.

Supply Side Economics – 42 Years Later – Paul Craig Roberts

Andy’s Notes: While there are portions of the supply side ‘school’ of thought that remain in dispute (mostly due to lack of accurate input data and fudged numbers), this is a good summation of something that was never taught in schools and thus never really caught on in the mainstream. The kicker is we never really utilized supply side economics to any large degree because it doesn’t serve the goals of a fiat monetary system where inflation is necessary. The lie was sold easily to an uneducated American public that inflation was necessary for growth and we’ve never really looked back. This, like any other fad, will run its course and end disastrously  – like most economic fads. As I’ve said many times before, Economics is a science, not an art. There are rules. You break the rules, there are consequences. Just because the consequences can be pushed out in time by further breaking of the rules doesn’t mean the consequences are avoided. We’re already learning that hard lesson, but as usual, the media, government, and banking establishments are pushing the blame elsewhere. Should this really come as a surprise?

Supply-Side economics burst onto the economic policy scene in Washington, D.C., on September 21, 1975 in the Sunday Washington Star in an article I had written for US Representative Jack Kemp that provided a supply-side economic basis for his capital formation bill. Subsequently, I generalized the supply-side approach when I realized that changes in marginal tax rates altered relative prices and could shift the aggregate supply side curve. Until that time, economists assumed that fiscal policy only impacted the aggregate demand curve.

Today 42 years after this article and 36 years after the passage of the Economic Recovery Tax Act that constituted the supply-side economic policy of President Reagan, there is still scant understanding of the economics that cured stagflation and enabled Reagan to pressure the Soviets to end the Cold War.

For example, in Wikipedia’s account Supply-Side economics is presented as a claim that cutting tax rates increases tax revenues. This is ignorant nonsense.

As the Assistant Secretary of the Treasury for Economic Policy, I had the central role in the implementation of Supply-Side economics. On US Representative Jack F. Kemp’s staff as economic counsel and in the House of Representatives as Chief Economist for the Republicans on the House Budget committee, I wrote the Kemp-Roth bill that addresses stagflation and that President Reagan adopted as presidential policy. As staff associate of the Joint Economic Committee in the US Senate I convinced some Republicans and the most important majority Democratic committee chairmen that Supply-Side economics was the way out of the stagnation trap. The first Joint Economic Committee annual reports endorsing Supply-Side economics came from committee chairman Lloyd Bentsen, a Texas Democrat. My book, The Supply-Side Revolution, peer-reviewed and published by Harvard University Press in 1984, explains the theory of Supply-Side economics and provides empirical evidence and the history of Reagan’s policy.

A few years ago Harvard University Press informed me that China had published a Chinese language edition of The Supply-Side Revolution. I have a copy on my bookshelf. On my wall hang letters from President Reagan thanking me for the implementation of the Supply-Side economic policy. On another wall is a letter from President Reagan to the French Ambassador and Finance Minister on the occasion of the ceremony that presented me with the French Legion of Honor for my service to economics. In his letter Reagan says “Craig is the architect of the economic policies of my administration.” I have the US Treasury’s Meritorious Service Award for “outstanding contributions to the formulation of US Economic Policy.”

Yet the Wikipedia account of Supply-Side economics excises both me and the content of Supply-Side economics. In our place are the accumulation of decades of propaganda against “Reaganomics.”

The missing subject matter becomes even stranger when we take into account the fact that I wrote the peer-reviewed New Palgrave Dictionary of Money and Finance (Macmillan, London, 1992) entries on Supply-Side Economics and the Laffer Curve. The New Palgrave is the premier economic encyclopedia. It is extraordinary that anyone would be so careless as to write a Wikipedia economics entry without consulting The New Palgrave. I also wrote the entry for the McGraw-Hill Encyclopedia of Economics.

The Laffer curve is not a theory. It is not Supply-Side economics. It is an expository device that illustrates that both high and low tax rates can produce the same tax revenues. There is nothing wrong with this demonstration.

The economic policy of the Reagan administration was most certainly not based on tax rate reductions paying for themselves in increased revenues. The Treasury’s revenue forecast of the Reagan tax rate reduction was the Treasury’s traditional static revenue forecast that every dollar of tax cut would lose a dollar of tax revenue. In other words, it was a worse forecast of revenue loss than the Keynesian economists predicted. Keynesians predicted that some of the revenues would be regained from increased employment and output. Walter Heller, chairman of the Council of Economic Advisors under President John F. Kennedy said that the Kennedy reduction in marginal tax rates, on which Reagan’s reduction was modeled, paid for itself in increased revenues.

Possibly. But the Reagan Treasury—in which I was entrenched with two deputies of my choosing, US Rep. Jack Kemp’s support, President Ronald Reagan’s support, Treasury Secretary Don Regan’s support, former Treasury Secretary William E. Simon’ support, the House Republicans’ support, support from influential Democrats and Republicans in the Senate, and support from the Wall Street Journal where I was associate editor prior to my Treasury appointment—based its revenue forecast on the traditional Treasury static revenue estimate that every dollar of tax cut would lose a dollar of revenue. This is a fact not subject to dispute. It is in the public record.

So how did the fabricated fake news story originate that Supply-Side economics was a theory that cutting taxes would increase tax revenues. It originated from three sources.

One was that in those days Republican economics consisted of fear of deficits. Cutting taxes would at least initially worsen the deficit and, from Wall Street’s point of view, would lead to higher interest rates that would sink their stock and bond portfolios. The result was that Wall Street economists campaigned against Supply-Side economics, and misrepresentation was part of their attack.

A second was that Supply-Side economics challenged Keynesian demand management policy by its emphasis on supply. In other words, Supply-Side economics took the leadership over economic policy away from the long-entrenched Keynesians. Academic economists aggressively defended their turf and misrepresentation—“trickle-down economics,” “voodoo economics”— was part of their attack.

The third was that in order to reassure Senate Republicans who were prone to hysteria over federal budget deficits, Budget Director David Stockman, against my advice, raised the inflation forecast in the five-year budget projection in order to forecast higher GDP and, thereby, higher tax revenues. The higher the inflation forecast, the higher the nominal GDP and the tax base that it provided.

I argued, correctly as it turned out, that inflation would come in lower than Stockman’s figures and that our opponents would place the blame for the budget deficits on the tax rate reductions instead of blaming the faulty inflation forecasts. However, the argument that the Republican Senate could not be trusted to vote for a budget that projected deficits carried the day and brought the consequences that I predicted.

What produced the unequitable distribution of income in the 21st century was not the Reagan marginal tax rate reductions, but the offshoring of high-productivity, high value-added, high wage jobs by global US corporations. When a country moves its middle class manufacturing and professional skill jobs abroad, it decapitates itself by reducing both personal income and personal income tax revenues.

What is Supply-Side economics? Supply-Side economics is a correction to Keynesian demand-side economics. In Keynesian theory, the supply function is fixed and changes only very slowly with technology and discovery of new resources. Supply is passive and aggregate demand, the summation of consumer demand, investment demand, and government demand, determine employment and economic growth.

If consumer and investor demand are insufficient to maintain full employment, the Keynesians say that the government can add to demand by running a deficit in its budget. The government can create a deficit by holding spending constant and cutting taxes, or it can hold taxes constant and overspend the revenues. The Keynesian policymakers preferred the latter fiscal policy, because it let them expand the size and responsibilities of government. In other words, Keynesians could use their employment policy also for social engineering. Content in this role, they didn’t think about the supply-side of the economy.

It was the neglect of the supply-side of the economy that had produced stagflation, which required a rising rate of inflation in order to maintain full employment. Supply-Side economics showed that the Keynesian picture was incomplete and corrected it. Keynesians emphasized that fiscal policy impacted aggregate demand. Supply-Side economists showed that fiscal policy directly impacts aggregate supply.

The Keynesian policy of pumping up consumer demand with easy monetary policy while suppressing the response of output with high marginal tax rates resulted in prices rising more than output. This is the explanation of stagflation. As Assistant Secretary of the US Treasury in charge of US domestic economic policy, this was my challege.

Supply-side economics says that the aggregate supply schedule is not dependent merely on technology and discovery of new resources. The ability to produce is also determined by the incentive effects of tax rates. The supply of labor is dependent on choices on the margin between work and leisure, and the supply of savings is dependent on choices between current consumption and future income.

Supply-side economics introduced into macroeconomic policy the valid point that the cost of leisure is the foregone income from not working and that the cost of current consumption or immediate enjoyment is foregone future income from not saving and investing.

In other words, taxation is a cost of production. A high marginal tax rate on labor makes leisure inexpensive in terms of after-tax foregone income from not working A high tax rate on saving makes current consumption cheap in terms of foregone future income.

In other words, Supply-Side economics introduced microeconomics into macroeconomics and should have won a Nobel prize.

Keynesian demand management relied on easy monetary policy to stimulate consumer demand and relied on high tax rates to reduce purchasing power and restrain inflation. The result was that the high tax rates curtailed output while the easy monetary policy pushed up consumer demand. The result was that prices rose.

The Supply-Side policy was a tremendous success. The US economy has not experienced worsening “Phillips curve” trade offs between inflation and employment since the Reagan economic program went into effect. Stagflation is a problem of the past until new policy errors revive it.

Yet, this entire story is totally missing in the Wikipedia account of Supply-Side economics.

In 1989 I wrote an assessment published by the Institute for Political Economy of the results of Reagan’s supply-side policy. It was republished in The Public Interest, by a think tank in England, and in peer-reviewed premier economic publications in Germany and Italy, such as Zeitschrift fur Wirtschaftspolitik and Rivista Di Politica Economica.

Despite the abandance of factual information, propaganda has prevailed.

Know Something We Don’t? Large Bet Placed on Bond Volatility

Andy’s Notes: Someone either has $10 mil to throw around or else said individual (or individuals) are trying to push the bond market into a volatile state, which would benefit said unknown entity. The nonsense never stops in the new ‘markets’, which are already merely volatility casinos to begin with. We shall see how this stunt plays out. To many players, $10 million is pocket change, but given the right amount of volatility they could easily see a ten-fold increase in their wager. Something to watch for would be individuals, etc making comments in an attempt to kick off volatility in the 10-year market.

Step aside “50 cent”, there is a new mystery vol trader on the block, one who is certain that a vol quake is about to strike US Treasurys.

According to Bloomberg, which first spotted the trade, someone just bet that bond volatility is about to soar. The unknown trader bought $10 million in out-of-the-money puts and calls on 10Y Treasury futs (a strangle). The outsized trade was spotted as it involved huge block sizes of about 63,500 on either side: “a strangle of that magnitude is rare, and possibly unprecedented” according to several rates traders who spoke to Bloomberg.

But just as notable as the size is the timing: the strangle expires July 21, giving the trade a shelf life of under 10 days before it expires worthless. Which means that the trader is confident enough about not only the size of the upcoming price swing to bet $10 million on it, but also when it will strike.  According to Bloomberg calculations, the theta on the trade is so high that just to recoup the premium, the yield on the 10Y would have to rise or fall about 10 bps from 2.38%, and preferably very soon.

Once the 10Y moves beyond 10bps, gains are unlimited, and the trader “stands to gain about $50 million on a quarter-point move in either direction from the starting level, which would involve approaching this year’s highs and lows for 10-year yields.”

Briefly this morning, the trade seemed like slam dunk when Yellen’s “dovish flip” sent the 10Y tumbling 6 bps before it stabilized around 2.32%.

But it’s not over yet: as Bloomberg observes there are enough potential catalysts in the coming week to send the 10Y surging… or tumbling:

The calendar over the next several days presents ample opportunities to rekindle volatility. In the U.S., political drama aside, the Labor Department releases consumer price index data Friday, which could influence the Fed’s timing for rate hikes and balance-sheet reduction. Retail sales data come out the same day. And, the day before the position expires, the European Central Bank announces a policy decision.

Backtesting the trade does not give high odds of success: not only has MOVE (the Tsy vol index) plunged alongside VIX, suppressing price swings but the 10Y yield has risen or dropped by more than 10 basis points just four times this year on a weekly basis, compared with 10 times in the same period of 2016 according to Bloomberg calculations. Then again, lightning may be about to strike twice: at last check, the MOVE was trading at levels just before the 2013 Taper Tantrum. We all know what happened to bond volatility after.

What about the mysterious trader’s counterparty – are they, inversely, betting that vol remains subdued for the next 10 days? This time the market maker appears to not be convinced that the prevailing lack of volatility will persist, and as Bloomberg concludes, “the total volumes traded in the two options Tuesday exceeded the open interest change” suggesting that the other side of the trade was likely hedged.

Finally, what is perhaps also notable is that while the trader has a very high conviction on a surge in rates vol, there was no comparable bet on exploding vol in any other asset classes, which may be an option for anyone wishing to piggyback on the trade, as such a sharp move in US Treasurys will certainly reverberate not only in US equities but in bonds around the globe.