Yesterday’s article on BRICS / CBDC has already caused quite a stir among readers of the blog. We’ve received a couple of questions so far that we feel need to be publicly answered.
Where have you guys been?
When we started our occasional, then more frequent collaboration, some early agreements were made. First among these was that we would not publish just for the sake of publishing. We wanted to have something to say. Secondarily, we wanted to find the angles that weren’t getting the attention they required.
The scene, if you will, has also changed quite a bit since this endeavor began. Back in ‘the day’, we knew most of the analysts who published regularly. We’d often swap info and compare information. Today that has changed. We’ve lost count of the number of authors, YouTube creators, etc. that follow these matters.
Since we never relied on the publishing of articles for income, which is the model of most ‘truth-tellers’ today, we didn’t feel the need to speak unless we had something worthy of adding to the discussion. We believe (our opinion) that the marriage of truth telling to one’s livelihood is a dangerous combination, so we didn’t do it. All that said we are glad to receive these questions.
Are you going to publish more regularly?
We DO expect becoming more regular again, simply because things in the corner of the world we study have started to move with purpose again. There was a period of stagnation in that regard for a while. The world consumed, ran up endless debt, ad nauseum. This was nothing new. We stopped analyzing the risk markets simply because fundamentals have ceased to matter. The multiples are insane, and there are already literally thousands of others doing that work. Should we enter another period of crisis similar to 2008, 2000, etc. we will probably provide some analysis, especially if the monetary actions are driving the crisis, which they almost certainly will be at this point.
Can we read your work elsewhere?
Andy sent the link and Word Document of the BRICS post to all the sites who had customarily published our work in the past. However, we did the same with the Modern Monetary Theory report back in 2020 and there were only a few takers. Your best bet is to subscribe to the blog. The only time you’ll receive an email is when we post something. Please see our Privacy Policy at the top of the home page regarding your personal information or click the link above.
What have you been doing all this time?
This might be the best question of all. We haven’t been dormant. In fact, we’ve been quite busy. In addition to our Cobb-Douglas based GDP model, we’ve been working on several others of a monetary nature. We are close to being able to release some initial results on one of those models – and investors in the share markets will find it very interesting. The idea for this model actual came from a reader of ours in Australia. It’s the newest, but we felt it might be the most timely so we shifted our time there.
Please keep in mind, we both have full-time jobs, families, and all the tasks related to those things. This is a labor of love for us. We have never and will never charge for this work. You’ll never see an ad on this blog. You’ll never hear us ‘plug’ any products or services. We’re doing the best we can to keep this blog pure. If you want to support the work, please share it with family, friends, colleagues, etc. That’s the greatest honor and if we’re worthy of that, then we’ve done our job.
The past few months have produced some rather notable monetary activity. For myriad reasons, the money pumping of the not-so-USFed during the period of 2009-2019 produced nominally higher price inflation, but not anywhere near the increases in prices that should have occurred. Our operating theory as the 2008 crisis was ending was that the newly unveiled ‘quantitative easing’ nay relentless money printing, would push up both consumer prices and the nominal prices of various asset classes as well. In essence, the ‘fed’ would replace the burst US residential housing market bubble with yet another bubble.
The central bank of the US, followed by other G7 central banks, embarked not just on money printing, but money channeling as well. The blowout preventers, if you will, for this excess were primarily the US Bond Market and the US stock market as well. Bond yields were artificially low during much of this period, thanks to the fed monetizing USGovt debt. Nominal yields were a joke. Real yields were far into the red. The US consumetariat didn’t notice this because, as always, credit was easily obtained. The consumer just dove deeper and deeper in debt. This was not a US-centric phenomenon. The European Union behaved in much the same manner, but the EU blew up a massive residential housing bubble as well, particularly England. Technically, England is no longer in the EU, but for practical purposes, this distinction is negligible.
What many people (investors in particular) forget is that there are always cycles. These cycles can rather easily be altered by extraneous actions of central banks, governments, and even consumers. However, the more distorted or prolonged the boom is, the bust is all the more pronounced. Think of Newton’s Laws and apply them to monetary policy and economics.
With the proverbial spring fully compressed by the massive deficit spending commencing in 2020, the not-so-USFed poured literally trillions in fresh dollars into the USEconomy, monetizing massive amounts of government debt to finance social spending. Since the US consumer, as a whole, has negligible savings, when economies were shutdown, the government became the primary support structure at levels never before seen. The ‘channeling’ of the 2009-19 period went out the window and the fresh dollars were poured directly into the consumer economy. We all know what happened next. Prices head for the stratosphere.
We noticed something curious start at the end of Q1 2023, however. The US M2 monetary aggregate began to contract – for the first time in.. well, forever basically. Was this a one-off month or the beginning of a new trend. We’ve seen a few months’ worth of data now and it would appear that there is something of a trend brewing. Deflation. Not falling prices, but an actual contraction of the money supply. It is interesting to note that during this stretch, US stock indexes, particularly the DJIA have forged towards all-time highs. What gives? Housing prices have taken a hit, which, in ordinary circumstances, would be a good thing – from an affordability perspective at least, but the reason housing prices are cooling is simply because the cost of mortgages has been pushed out of the reach of many by mortgage rates that are still hovering around 7%.
Our thesis – for now at least – is that the not-so-USFed is once again channeling money, but not in the same way it was during the 2009-19 period. It appears – and we admit it is very early to say for sure – that the consumer economy has, in the aggregate, been cut off from new money. The financial economy has not. However, the net effect is the contraction of the US M2 aggregate.
Interestingly enough, the last data pointed to a reversal, which complicates the situation a bit. The reversal could end up being a one-off event, or it could be a true reversal in the trend. Further study on prior deflationary periods is in order. In any case, the top to bottom action in the aggregate as shown above does explain the slowing of the rate of price inflation. Remember, inflation is a monetary event that manifests itself in prices. While the mainstream financial press claims otherwise in their headlines, the whole of their reporting proves they know the truth and choose to obfuscate, which is typical.
Since monetary data has a significant lag associated with it, we will not be able to ascertain until likely the end of 2023 or Q1 2024 if this is definitely the case or not. There should be anecdotal indications between now and then and we will certainly keep the readers of this blog appropriately informed.
The world started 2020 on the most shaky of terms, economically speaking. The world was already in the early stages of a contraction in aggregate demand. The covers of magazines had articles of various corporate analysts and CEOs talking about a serious recession as early as late 2018. We stress this was a global contraction, not limited to one or even a few countries. As was the case in 2008 some would fare better than others for myriad reasons. The last few months of 2019 and the beginning of 2020 saw the resignation of CEOs from several prominent companies such as Disney.
Being perpetual cynics, we wondered if they knew something the rest didn’t. The prospect of a recession was largely downplayed in the US/UK/EU mainstream press, which was no surprise. They’ve been derelict in their duty for decades now. The average American/Brit/European had no idea what was coming. Even the central banking community was bathed in complacency. They’d achieved Ben Bernanke’s ‘Goldilocks Economy‘ even if only in their own minds.
We pointed to one event as a harbinger of an upcoming crisis as early as 2016 – the appointment of Neel Kashkari to the position of President of the Minneapolis ‘Fed’. Huh? Neel Kashkari was tapped by Henry ‘Hank’ Paulson back in 2008 to head up the TARP fund created by Congress in November of that year as part of the massive Wall Street bailout brought on by a spate of bankruptcies, insolvencies, and general financial mayhem.
Why Kashkari in 2016? The last we’d heard, he was living in the mountains of California planting potatoes or some such. The TARP mess stank on every level and it was apparent that once his work was done, Kashkari was off for a long, long early retirement. So his appointment to such a position registered an 8 out of 10 on the weird-stuff-o-meter.
Moving into 2020 the United States economy was balancing on the triple supports of consumerism, financial sector activity, and government excess. The FY 2019-20 Federal deficit was going to be one for the ages long before the term ‘Corona’ was known as anything other than part of the Sun.
Geopolitical tensions were high with the sanctioned assassination of a prominent Iranian general within the first few days of 2020 and the failed ongoing ouster of Venezuelan President Nicolas Maduro at the forefront. Add to that an ongoing trade war / war of words / saber-rattling between Washington and Beijing as well as a good deal of ill-rhetoric between Washington and Moscow. That’s just a small sampling.
With nearly all of the first world nations running persistent current account deficits and the rest of the economic superstructure living heavily on debt and financial speculation, it was only a matter of time. Would it be a pin that popped the ‘everything bubble’ or would it simply just slowly deflate (not to be confused with monetary deflation)?
So pervasive was and is the presence of debt in the circumstance of nations, states, trading blocs, provinces, municipalities, companies, and individuals that the trillions of dollars racked up by the US alone was not even viewed askance by economists OUTSIDE what would be considered the mainstream of the scientific economics community. Keynesianism was like a high-quality dime store pinata. Now matter how hard it was hit, it just kept spitting out candy.
We mentioned in My Two Cents on several occasions that this whole ‘system’, if you will, would go until it didn’t. It was a confidence game, just like the multitude of fiat currency regimes that backed it in the various corners of global commerce. As long as economic actors had ample supply of tokens (currencies), and another economic actor would accept those tokens in exchange for scarce land, labor, capital, and technology, the system worked.
Then the world got sick.
There has been much talk of ‘black swan’ events. The term was coined by a current events/geopolitics author Nassim Taleb. The black swan is something that nobody is looking or planning for. It is not on the radar. Period. There have been some who have been talking about pandemics in general for quite some time now in similar fashion to your authors considering the likelihood of economic fallout from the fact that the organized world has violated every law of economics imaginable. There’s always a reckoning day.
We are not going to discuss the SARS-nCOV-02 situation from a biologic/scientific standpoint as that is outside the scope of our expertise. We’re going to focus on nCV as a triggering event or black swan and the likely economic ramifications.
The amount of money that has already been borrowed/printed and spent is mind-blowing. It cannot be complicated by the human mind. The US National Debt blew right past $25 trillion. It is hard to fathom this but the growth of the national debt is a mathematical function based on the concept of fractional reserve banking. The debt was headed to where it is now anyway. That is going to be the biggest take-home. Would have it happened this fast without nCV? Probably not, but it was headed past $25T in the next 12 months regardless.
What nCV does is give governments the world over a free pass if you will on the print and spend / borrow and spend fiscal irresponsibility that has been going on for decades now. Europe reached its breaking point because of this foolishness in the past decade. The 2020s will be looked upon in history as the decade when the USDollar finally died.
That’s a bold pronouncement isn’t it? Not really. Who in their right mind is going to continue to lend to any entity that is so fiscally reckless? Ourselves along with many others have laid bare the runaway fiscal policy that has infected the US for so long. Now there is the element of public health involved and the general consensus is that we have to continue these spending policies, bailout entire industries, and even provide income to the populace. Anyone speaking out against any of this is labeled as being against helping people.
What needs to be understood is that this ‘help’ is only temporary. Think of the minimum wage. It is a very applicable analogy. Every increase of the minimum wage only lasts so long then another increase is required to produce the same result. Now, scale that up to the world’s economies and that’s what you’ve got. The ‘system’ needs ever-increasing amounts of stimulus to produce the same effect.
While grossly overused, the analogy of a drug addict is a very good one. Eventually the addict needs a fix just to feel normal. And so goes the global economy. If the stimulus is scaled back, the economy goes into withdrawal. The US economy is around 70% consumption and has been that way for nearly two decades now. This is not just a national or government problem. It transcends all layers of the economy. Even successful companies loaded up on cheap, low interest rate debt to conduct share buybacks, thus pushing stock prices higher.
Where do we go from here?
Even before the new year began, countries and companies outside the US were cutting deals outside the dollar. The dollar’s status as world’s reserve currency was being challenged. Expect that to continue – and accelerate. There won’t be a pronouncement that the dollar is no longer the world’s reserve currency. It likely will not be a headline. It’s been happening incrementally for years now. This latest fiscal quagmire will accelerate the matter. China is testing a digital currency. Russia has thousands of tons of gold. These countries don’t get along with America and Europe on a good day. The Russians already dumped nearly all of their US Government debt, but the Chinese still have a significant amount around $1 trillion.
A global reshuffling of the economic order was already taking place before 2020 started. Europe endured a partial crisis over excess debt and the austerity that followed. And all of that was just a small piece of the problem. Economic history is replete with examples of complacent countries and empires who thought it could never happen to them. Complacency might just be the most dangerous state of mind that man can occupy. We are quite sure the Romans would agree.
This paper is attached to an older blog entry, but given the fact that the world’s central banks are busy enacting the 5 planks of MMT as we write this, we thought it pertinent to refresh that post. Please feel free to distribute this paper to anyone you know who might be interested in finances or is confused about what is going on financially/economically. If you re-post, we just ask for a simple citation. The timeliness of the material far surpasses the need for any ‘credit’. There is a lot of misinformation going on right now. We have some of the best thinkers out there as readers. Keep thinking! Fear disables critical thinking. We have not been given a spirit of fear, but that of a sound mind. Don’t forget that.
I will be on either a brief Q&A segment with Joe Cristiano’s Liberty Talk Radio or I’ll be releasing a short podcast this evening. I know many of you are not in the US so my apologies for the short notice. Please email your questions when you can and we’ll go from there.
Topics? While I have medical training, I am not qualified to speak on the issue of COVID-19 beyond the most general of terms. I would like to focus on the global financial markets and the very strong likelihood that another 2008-style event was imminent as early as last summer.
Now, with global markets shredded, economies left in doubt, and the population of a growing number of countries behind closed doors, what needs to happen next? We’ve heard some solutions. Are they the right ones?
We’ll be addressing these issues – and your questions – tonight. Don’t miss it!
“The past month has been one of nearly continuous turmoil in the financial markets”. That might well be the understatement of this still fairly new century. Keep in mind that during the past 20 years, we’ve had 2 significant recessions (according to the Bureau of Economic Analysis), a complete meltdown of the .com mania, the inflation of a real-estate bubble and its subsequent bursting, the halving of US financial indexes, and the bankruptcy of names like Lehman Brothers, and AIG to name a few. Throw in a massive bailout, a fusillade of rescue programs like TARP, TSLF and the resulting blowout of the federal reserve’s balance sheet. This is within the first 10 years. Keep that in mind.
The second ten years have featured D-E-B-T – on all levels. Governments
of the world, states and provinces, local municipalities and parishes,
students, consumers, homeowners. In short? Pretty much everyone. That debt has
driven the economy for the past decade. Globally. Many will think this is just
an American problem. It’s not. Misery loves company, right? Not so fast. In
this brave new world of interlocking economies and financial systems, a failure
on the other side of the world can cause problems in our own back yards.
Entire countries have gone bust and have had to go hat in hand to their representative central bank. Remember Portugal, Ireland, Italy, Greece, and Spain? Don’t forget the tiny island of Cyprus and its king-sized banking crisis, which led to a bank holiday and eventually a bail-in. Wait, we just talked about a bailout. What’s a bail-in? We penned a serious of articles on this topic back in 2013. Read them here. Keep in mind that this is very non-exhaustive and brief summation of some of the more important events.
Which brings us to the present. Yesterday, 3/11/2020, the ENTIRE yield curve for USGovt bills, notes, and bonds was under 1%. That’s not a typo. There is rampant talk of negative interest rates here in the US. This phenomenon is already happening in Germany – the powerhouse of the European Union and several other easily recognizable nations. Moves in the bond market that generally take many months are now taking days. If you’re planning on retiring and living on the interest of your bonds, you might want to rethink that strategy. Many of the people we communicate with regularly have themselves or know quite a few people who have gotten a 20% haircut or more on their equity investments since the beginning of the year.
Much of the more recent activity has been blamed on the emergence
of a new Coronavirus. The fear alone that has been imparted by the mainstream –
and even alternative media is bound to have some kind of impact on the global
economy. Economists are already clamoring for cash payments to citizens as a
means of ‘stimulating’ the economy. In the US we’ve done this twice previously
in the past two decades. Both were credited with averting nasty recessions.
Both went directly on the federal budget deficit here in the US. Debt has
indeed become the answer to all that ails most economies the world over.
The gyrations and volatility in financial markets have been
enough to give even seasoned investors a serious case of whiplash. In the past
10 trading days the Dow Jones Industrials Average here in the US has had its
two biggest down days – EVER – in terms of the number of points lost. Sandwiched
in there are some of the biggest up days – EVER – again, in terms of index
points. Oil crashed over 20% in a single day. Gold has broken out and is once
again around/over the very important $1650 level. Silver is probably the
bargain of the century to this point. Throw into all this a major year in terms
of the political arena. And no, we are not breaking our tradition of focusing
on policy. The policy provides the answers. The names only serve to
muddle the issues.
As we write this evening of the 10th of March in the year 2020, it is quite possible and likely that the economic and financial foundation that we all rest on has begun yet another metamorphosis into something completely different than we’re all used to. Contemplate the concept of negative interest rates alone. Such a ridiculous move would take several hundred years of investing philosophy and modeling and flush them directly down the toilet. Again, this is likely an understatement. The US went from a national debt around $14T during the 2012 campaign season to a level of $23.5 trillion in the early part of 2020. In 1986, America reached the $1 trillion mark. Any stimulus will go right on the tab.
Many people are electing to stay home for fear of
contracting COVID-19 and with all the uncertainty that exists regarding this
virus, we refuse to pass judgement. Since consumers are responsible for nearly
70% of US Gross Domestic Product, even a month’s cessation of vacations,
cruises, flying, going shopping and all the other activities that fall under
consumption, we could easily see a sizable dent popped into Q1 GDP. Or the
money might be spent online, and it might not affect GDP that much at all. The
situation in China can only be guessed. Sadly, national governments have a
growing aversion to the truth even when lives are at stake.
In summation, we cannot and will not make any ‘predictions’
regarding Q1 GDP, consumer spending and the balance of trade. Given that oil
has dropped precipitously, that drop will translate into lower gas prices at
some point and that will lower that portion of consumer spending, which will
negatively affect GDP. This reality makes a strong case that we should be
measure growth in units rather than dollars wherever and whenever it is
practical to do so. The best advice we can give is gather as much information
as possible and try to avoid making decisions based on emotion. Seeing the Dow
Jones Industrials Average lose over 2,000 points in a single trading will
unnerve even the savviest of investors.
Living off the interest from investments, for all purposes,
is not going to be feasible for the foreseeable future. Our economies are
hooked on low interest rates. That is helpful for the borrower, but lethal for
the investor. It forces investors with shorter time horizons into the riskier equity
markets. This situation represents a clear and present danger to the standard
of living for millions of people in America alone.
This is not all gloom and doom, however. Again, like 2008,
we have a chance to endure the economic pain necessary to down regulate our
debt-laden, consumption-oriented economy into something that doesn’t need
trillions of borrowed dollars each year just to keep plodding along at a snail’s
pace. We have an opportunity. Will we avail ourselves of it? If the talking
points coming out of the television and Internet media outlets is any
indicator, we will most likely not take this opportunity, opting instead to
kick the proverbial can down the road ensuring that the pain will only be worse
for the next generation when they are forced to deal with it. We challenge not
only America, but the rest of the world to put down the credit cards and take a
step back. We did it here in the US during 2010. We can do it again. But will
we?
We appreciate the large number of inquiries, questions, and comments regarding our recent paper on ‘MMT’. We’d also like to thank www.marketoracle.co.uk for giving it such a favorable position on their website, we truly appreciate it. We do this not for accolades, however, but to raise awareness.
Along that thread, we’ve decided the best way to handle the communications we’ve received is with a brief audio transmission, which we will post on this site – within the next week – to give us more time to read additional emails and reflect on the material in general.
Once again we are blessed to have such great readers. The questions asked originated from points we’d made during our research and actually caused us to ask even MORE questions regarding this material. This is critical thinking at its absolute finest and we are again reminded that this is far more than just two guys – this is truly a TEAM. You are doing far more for the advancement of the science of Economics than you can ever imagine.
To the people who have been waiting patiently for this paper, we apologize. Our own ‘deadline’ for this was a month or so ago, but life generally conspires to get in the way of even the best laid plans. While there is little in the way of good news contained in the work itself, there is an upside in that the world has still yet just barely dipped its toes into the dubious world of ‘Modern Monetary Theory’. Knapp should not be blamed for what modern policymakers do in his name – Knapp had a healthy suspicion regarding governments and their use of money and wrote as such.
Over 100 years later and having that same strong sense of skepticism and the benefit of history to go along with it, we present to you this paper. Some of these concepts are already in use today. With regards to those, hopefully the paper helps you understand they ‘why’ of the situation. However, MMT has not yet been fully rolled out in all of its statist grandeur and for that we must rejoice. MMT is the Capstone of the monetary enslavement process going on worldwide at the present time – our opinion. We hope to have some opportunities to discuss this paper publicly. If that doesn’t transpire, then we’ll come up with something because we know there are a lot of you out there who still care what happens – even if the masses do not.
Please click the link below to access the paper. It is in PDF format. You may also right-click the link and save the PDF to your computer.
This is the second post in a week on Chicago’s epic financial train wreck. That’s a lot of attention and it probably won’t happen again, given the target-rich world we live in.
But jeeze, talk about not learning from past mistakes.
This latest chapter begins with the Chicago mayoral race and the two candidates’ stances on the Jussie Smollett controversy – one is on his side, the other on that of the Chicago PD.
That’s interesting but otherwise irrelevant.
The race is between two African American women, one gay and the other presumably not, one from deep in the local political machine, the other from outside it. So far so good. The tent is getting bigger, more categories of people can aspire to high office, go Chicago.
But this is also apparently irrelevant, because when it comes to saving the city from pension-driven financial collapse, well, here’s a snippet from today’s Wall Street Journal:
There’s little daylight between the two Democrats on policy. Both support higher taxes to pay for pensions, though they differ on which levies to increase. Ms. Lightfoot this week endorsed a value-added tax on legal and accounting services. She’s also proposed an increase in the city hotel tax—already among the highest in the nation—and a real-estate transfer tax. Ms. Preckwinkle is supporting Democratic Gov. J.B. Pritzker’s proposal for a graduated state income tax. Both oppose modifying worker pensions and want to impose a moratorium on charter schools.
Trailing in the polls, Ms. Preckwinkle and her supporters have resorted to weaponizing identity politics. Last weekend U.S. Rep. Bobby Rush smeared Ms. Lightfoot at a Preckwinkle rally as a killer of black people and champion of police because she has served on the Chicago Police Board and Police Accountability Task Force. “Everyone who votes for Lori, the blood of the next young black man or black woman who is killed by the police is on your hands,” Mr. Rush declared.
Ms. Preckwinkle declined to denounce the comment. She may believe fomenting racial discord will help her turn out the vote in the city’s heavily black South and West sides, where she performed well during the primary. Thus, Ms. Preckwinkle may not want to be seen supporting the police investigation of Mr. Smollett, who claims to be innocent and a victim of racial discrimination.
The Journal reporter concludes:
“Neither candidate appears likely to arrest the city’s spiral into insolvency. But stopping its descent into cynicism and racial grievance may be an equal imperative.”
Wrong, WSJ. The financial spiral is everything. Chicago is experiencing an already catastrophic rate of out-migration, as people who can afford to (a.k.a. the tax base) move to less rapacious places. And the two mayoral candidates both oppose scaling back union benefits while proposing much higher taxes and more stringent regulations, which will turbo-charge the descent into financial chaos.
And this, recall from the post that appeared here a few days ago, comes as both Chicago and its host state Illinois begin massive and sustained borrowing campaigns to cover existing shortfalls.
The conclusion? They can only behave this way in a financial market that assumes no matter how badly they mess up, national taxpayers will be coerced into saving them and their investors. Look up “moral hazard” in the dictionary and you might find a picture of the Illinois state seal.
If you’ll please forgive the glitch at the end – the line dropped suddenly and we couldn’t get it back – there is a good discussion of how MMT is going to be rolled out. We are currently working on a paper about this timely topic and hope to have it posted here soon. It’s a research piece so it is taking quite a bit longer to put together.
