Category Archives: Modern Monetary Theory

Modern Monetary Theory is a monetary standard in which government-issued tokens are used as the unit of money. In such a system, fiat money is created by government spending. Taxation is employed to reclaim the money and control the total amount of fiat money in existence. Reclaiming most of this issued money via taxation is essential to maintaining its value in exchange.

Modern Monetary Theory states that under a fiat money system, net currency is created by government through deficit spending. Because the issued currency is not tied to or backed by a commodity, currency can only be created when the government spends. Government may, or may not, ask for that currency back in taxes. The demand to hold and acquire this government issued currency is driven by taxes levied by the state – which typically can only be paid in the state-issued fiat currency.

The theory was developed by economist G.F. Knapp into the 1920s, with important contributions by Alfred Mitchell-Innes also. It was influential on the 1930 Treatise on Money by John Maynard Keynes – Knapp and Chartalism are cited approvingly on its opening pages.Chartalism experienced a revival under Abba P. Lerner, and has a number of modern proponents, who largely identify as post-Keynesian economists.

Many proponents of chartalism argue that a fiat system is preferable to a commodity money system, particularly because it allows for government deficit spending for fiscal stimulus in ways not possible under a commodity money system.

“Literally, Your ATM Won’t Work…”


By Bill Bonner Of Bonner And Partners

Literally, Your ATM Won’t Work…

While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us.

Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

The same thing could happen to the money supply…

There’s Not Enough Physical Money

Here’s how… and why:

It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $11.7 trillion as of last month.

But there was just $1.3 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.)

What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for.

After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

A monetary system like this has never before existed. And this one has existed only during a time when credit was undergoing an epic expansion.

So our monetary system has never been thoroughly tested. How will it hold up in a deep or prolonged credit contraction? Can it survive an extended bear market in bonds or stocks? What would happen if consumer prices were out of control?

Less Than Zero

Our current money system began in 1971.

It survived consumer price inflation of almost 14% a year in 1980. But Paul Volcker was already on the job, raising interest rates to bring inflation under control.

And it survived the “credit crunch” of 2008-09. Ben Bernanke dropped the price of credit to almost zero, by slashing short-term interest rates and buying trillions of dollars of government bonds.

But the next crisis could be very different…

Short-term interest rates are already close to zero in the U.S. (and less than zero in Switzerland, Denmark, and Sweden). And according to a recent study by McKinsey, the world’s total debt (at least as officially recorded) now stands at $200 trillion – up $57 trillion since 2007. That’s 286% of global GDP… and far in excess of what the real economy can support.

At some point, a debt correction is inevitable. Debt expansions are always – always – followed by debt contractions. There is no other way. Debt cannot increase forever.

And when it happens, ZIRP and QE will not be enough to reverse the process, because they are already running at open throttle.

What then?

The value of debt drops sharply and fast. Creditors look to their borrowers… traders look at their counterparties… bankers look at each other…

…and suddenly, no one wants to part with a penny, for fear he may never see it again. Credit stops.

It’s not just that no one wants to lend; no one wants to borrow either – except for desperate people with no choice, usually those who have no hope of paying their debts.

Just as we saw after the 2008 crisis, we can expect a quick response from the feds.

The Fed will announce unlimited new borrowing facilities. But it won’t matter….

House prices will be crashing. (Who will lend against the value of a house?) Stock prices will be crashing. (Who will be able to borrow against his stocks?) Art, collectibles, and resources – all we be in free fall.

The NEXT Crisis

In the last crisis, every major bank and investment firm on Wall Street would have gone broke had the feds not intervened. Next time it may not be so easy to save them.

The next crisis is likely to be across ALL asset classes. And with $57 trillion more in global debt than in 2007, it is likely to be much harder to stop.

Are you with us so far?

Because here is where it gets interesting…

In a gold-backed monetary system prices fall. But the money is still there. Money becomes more valuable. It doesn’t disappear. It is more valuable because you can use it to buy more stuff.

Naturally, people hold on to it. Of course, the velocity of money – the frequency at which each unit of currency is used to buy something – falls. And this makes it appear that the supply of money is falling too.

But imagine what happens to credit money. The money doesn’t just stop circulating. It vanishes. As collateral goes bad, credit is destroyed.

A bank that had an “asset” (in the form of a loan to a customer) of $100,000 in June may have zilch by July. A corporation that splurged on share buybacks one week could find those shares cut in half two weeks later. A person with a $100,000 stock market portfolio one day could find his portfolio has no value at all a few days later.

All of this is standard fare for a credit crisis. The new wrinkle – a devastating one – is that people now do what they always do, but they are forced to do it in a radically different way.

They stop spending. They hoard cash. But what cash do you hoard when most transactions are done on credit? Do you hoard a line of credit? Do you put your credit card in your vault?

No. People will hoard the kind of cash they understand… something they can put their hands on… something that is gaining value – rapidly. They’ll want dollar bills.

Also, following a well-known pattern, these paper dollars will quickly disappear. People drain cash machines. They drain credit facilities. They ask for “cash back” when they use their credit cards. They want real money – old-fashioned money that they can put in their pockets and their home safes…

Dollar Panic

Let us stop here and remind readers that we’re talking about a short time frame – days… maybe weeks… a couple of months at most. That’s all. It’s the period after the credit crisis has sucked the cash out of the system… and before the government’s inflation tsunami has hit.

As Ben Bernanke put it, “a determined central bank can always create positive consumer price inflation.” But it takes time!

And during that interval, panic will set in. A dollar panic – with people desperate to put their hands on dollars… to pay for food… for fuel…and for everything else they need.

Credit may still be available. But it will be useless. No one will want it. ATMs and banks will run out of cash. Credit facilities will be drained of real cash. Banks will put up signs, first: “Cash withdrawals limited to $500.” And then: “No Cash Withdrawals.”

You will have a credit card with a $10,000 line of credit. You have $5,000 in your debit account. But all financial institutions are staggering. And in the news you will read that your bank has defaulted and been placed in receivership. What would you rather have? Your $10,000 line of credit or a stack of $50 bills?

You will go to buy gasoline. You will take out your credit card to pay.

“Cash Only,” the sign will say. Because the machinery of the credit economy will be breaking down. The gas station… its suppliers… and its financiers do not want to get stuck with a “credit” from your bankrupt lender!

Whose credit cards are still good? Whose lines of credit are still valuable? Whose bank is ready to fail? Who can pay his mortgage? Who will honor his credit card debt? In a crisis, those questions will be as common as “Who will win an Oscar?” today.

But no one will know the answers. Quickly, they will stop guessing… and turn to cash.

Our advice: Keep some on hand. You may need it.


Janet Yellen Is Freaking Out About “Audit The Fed” :: Here Are 100 Reasons Why She Should Be

By Michael Snyder, on February 24th, 2015

Janet Yellen is very alarmed that some members of Congress want to conduct a comprehensive audit of the Federal Reserve for the first time since it was created.  If the Fed is doing everything correctly, why should Yellen be alarmed?  What does she have to hide?  During testimony before Congress on Tuesday, she made “central bank independence” sound like it was the holy grail.  Even though every other government function is debated politically in this country, Yellen insists that what the Federal Reserve does is “too important” to be influenced by the American people.  Does any other government agency ever dare to make that claim?  But of course the Federal Reserve is not a government agency.  It is a private banking cartel that has far more power over our money and our economy than anyone else does.  And later on in this article I am going to share with you dozens of reasons why Congress should shut it down.

The immense power wielded by the Federal Reserve is clearly demonstrated whenever Janet Yellen speaks publicly.  On Tuesday, her comments about interest rates sent stocks to brand new record highs

Yellen, in her semi-annual testimony before the Senate banking committee, used a word familiar to investors when she reiterated that the central bank will be “patient” on raising interest rates for the first time since the 2008 financial crisis. Traders took that as a sign that interest rates would remain unchanged until autumn.

The Dow Jones Industrial Average rose 92.35 points (0.5%) to 18,209.19, while the Standard & Poors 500 gained 5.82 points (0.3%) to 2,115.48, both eclipsing Friday’s record closes.

But Yellen was also unusually defensive on Tuesday.  The “Audit the Fed” bill that is being sponsored by Rand Paul (among others) has her really freaked out.  The following comes from the Hill

Appearing before the Senate Banking Committee, Yellen was on the defensive, as Republicans questioned how the Fed conducts monetary policy and Democrats put forward ideas for getting tougher on Wall Street.

In the midst of all of it, Yellen generally argued the Fed was designed as an independent entity for a reason — and it would be best not to change it.

“Central bank independence in conducting monetary policy is considered a best practice for central banks around the world,” she said. “Academic studies, I think, establish beyond the shadow of a doubt that independent central banks perform better.”

In fact, she went so far as to mention the “Audit the Fed” bill by name

A GOP-controlled Congress has given the bill its best chances yet of passage, and that renewed interest led Yellen to deliver her most spirited opposition yet.

“I want to be completely clear,” she said. “I strongly oppose Audit the Fed.”

Yellen argued the audit measure would allow politicians to second-guess the Fed’s decisions, which, in turn, would weaken the central bank. And the ultimate victim of that process, she said, would be the U.S. economy.

So what is she so concerned about?

We are all accountable to someone.

What is so wrong about the Federal Reserve being accountable to Congress?

Why can’t we find out what is really going on inside the Fed?

And of course it isn’t just Yellen that is freaking out.  Just consider these comments from Richard Fisher, the president of the Federal Reserve Bank of Dallas…

“It is always politically convenient to make something sound mysterious, if not malevolent, by claiming it is opaque,” Fisher said in a speech to the Economic Club of New York that is part of an effort by Fed officials to fight the legislation.

“My suspicion is that many of those in Congress calling for ‘auditing’ the Fed are really sheep in wolves’ clothing,” he said. “Having proven themselves unable to cobble together with colleagues a working fiscal policy or to construct a regulatory regime that incentivizes rather than discourages investment and job creation — in other words, failed at their own job — they simply find it convenient to create a bogeyman out of an entity that does its job efficiently.”

Obviously this is a very, very touchy subject over at the Fed.

It is quite clear that they do not want the rest of us to be able to see what they are really up to.

And the truth is that if the American people really did know how the Federal Reserve works and what it has been doing behind closed doors, most Americans would want it shut down tomorrow.

At the end of the day, the reality of the matter is that we don’t even need a Federal Reserve.  I really like how David Stockman made this point the other day…

At the end of the day, American capitalism does not need recycled political hacks like Jerome H. Powell or clueless school marms like Janet Yellen to thrive. If we need a Fed at all, it is the one designed by Carter Glass 100 years ago. That is, a “bankers bank” that was intended to provide standby liquidity at a penalty spread above the free market interest rate in consideration for good collateral originating from inventory and receivables in the real economy.

Under that arrangement, there would be no monetary central planning or pointless attempts to manage the level of GDP, the number of new jobs, the rate of housing starts, the fluctuations of the CPI or the amplitudes of the business cycle. There would also be no pegging of the money market rate, no helping hand for Wall Street gamblers, no cheap debt to enable profligate politicians to kick-the-can down the road indefinitely.

In short, what the nation really needs is not an “independent” Fed, but one that is shackled to a narrow and market-driven liquidity function. The rest of its current remit is nothing more than the self-serving aggrandizement of the apparatchiks who run it; and who have now managed to turn the nation’s vital money and capital markets into dangerous, unstable casinos, and the nations savers into indentured servants of a bloated and wasteful banking system.

The Federal Reserve has been around for just over a hundred years, and it has done an absolutely abysmal job for the American people.

I want to share with you some facts and figures that I have shared before, but they bear repeating.  Please share this list of 100 reasons why the Federal Reserve should be shut down with everyone that you know…

#1 We like to think that we have a government “of the people, by the people, for the people”, but the truth is that an unelected, unaccountable group of central planners has far more power over our economy than anyone else in our society does.

#2 The Federal Reserve is actually “independent” of the government.  In fact, the Federal Reserve has argued vehemently in federal court that it is “not an agency” of the federal government and therefore not subject to the Freedom of Information Act.

#3 The Federal Reserve openly admits that the 12 regional Federal Reserve banks are organized “much like private corporations“.

#4 The regional Federal Reserve banks issue shares of stock to the “member banks” that own them.

#5 100% of the shareholders of the Federal Reserve are private banks.  The U.S. government owns zero shares.

#6 The Federal Reserve is not an agency of the federal government, but it has been given power to regulate our banks and financial institutions.  This should not be happening.

#7 According to Article I, Section 8 of the U.S. Constitution, the U.S. Congress is the one that is supposed to have the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.  So why is the Federal Reserve doing it?

#8 If you look at a “U.S. dollar”, it actually says “Federal Reserve note” at the top.  In the financial world, a “note” is an instrument of debt.

#9 In 1963, President John F. Kennedy issued Executive Order 11110 which authorized the U.S. Treasury to issue “United States notes” which were created by the U.S. government directly and not by the Federal Reserve.  He was assassinated shortly thereafter.

#10 Many of the debt-free United States notes issued under President Kennedy are still in circulation today.

#11 The Federal Reserve determines what levels some of the most important interest rates in our system are going to be set at.  In a free market system, the free market would determine those interest rates.

#12 The Federal Reserve has become so powerful that it is now known as “the fourth branch of government“.

#13 The greatest period of economic growth in U.S. history was when there was no central bank.

#14 The Federal Reserve was designed to be a perpetual debt machine.  The bankers that designed it intended to trap the U.S. government in a perpetual debt spiral from which it could never possibly escape.  Since the Federal Reserve was established 100 years ago, the U.S. national debt has gotten more than 5000 times larger.

#15 A permanent federal income tax was established the exact same year that the Federal Reserve was created.  This was not a coincidence.  In order to pay for all of the government debt that the Federal Reserve would create, a federal income tax was necessary.  The whole idea was to transfer wealth from our pockets to the federal government and from the federal government to the bankers.

#16 The period prior to 1913 (when there was no income tax) was the greatest period of economic growth in U.S. history.

#17 Today, the U.S. tax code is about 13 miles long.

#18 From the time that the Federal Reserve was created until now, the U.S. dollar has lost 98 percent of its value.

#19 From the time that President Nixon took us off the gold standard until now, the U.S. dollar has lost 83 percent of its value.

#20 During the 100 years before the Federal Reserve was created, the U.S. economy rarely had any problems with inflation.  But since the Federal Reserve was established, the U.S. economy has experienced constant and never ending inflation.

#21 In the century before the Federal Reserve was created, the average annual rate of inflation was about half a percent.  In the century since the Federal Reserve was created, the average annual rate of inflation has been about 3.5 percent.

#22 The Federal Reserve has stripped the middle class of trillions of dollars of wealth through the hidden tax of inflation.

#23 The size of M1 has nearly doubled since 2008 thanks to the reckless money printing that the Federal Reserve has been doing.

#24 The Federal Reserve has been starting to behave like the Weimar Republic, and we all remember how that ended.

#25 The Federal Reserve has been consistently lying to us about the level of inflation in our economy.  If the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.

#26 Since the Federal Reserve was created, there have been 18 distinct recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

#27 Within 20 years of the creation of the Federal Reserve, the U.S. economy was plunged into the Great Depression.

#28 The Federal Reserve created the conditions that caused the stock market crash of 1929, and even Ben Bernanke admits that the response by the Fed to that crisis made the Great Depression even worse than it should have been.

#29 The “easy money” policies of former Fed Chairman Alan Greenspan set the stage for the great financial crisis of 2008.

#30 Without the Federal Reserve, the “subprime mortgage meltdown” would probably never have happened.

#31 If you can believe it, there have been 10 different economic recessions since 1950.  The Federal Reserve created the “dotcom bubble”, the Federal Reserve created the “housing bubble” and now it has created the largest bond bubble in the history of the planet.

#32 According to an official government report, the Federal Reserve made 16.1 trillion dollars in secret loans to the big banks during the last financial crisis.  The following is a list of loan recipients that was taken directly from page 131 of the report…

Citigroup – $2.513 trillion
Morgan Stanley – $2.041 trillion
Merrill Lynch – $1.949 trillion
Bank of America – $1.344 trillion
Barclays PLC – $868 billion
Bear Sterns – $853 billion
Goldman Sachs – $814 billion
Royal Bank of Scotland – $541 billion
JP Morgan Chase – $391 billion
Deutsche Bank – $354 billion
UBS – $287 billion
Credit Suisse – $262 billion
Lehman Brothers – $183 billion
Bank of Scotland – $181 billion
BNP Paribas – $175 billion
Wells Fargo – $159 billion
Dexia – $159 billion
Wachovia – $142 billion
Dresdner Bank – $135 billion
Societe Generale – $124 billion
“All Other Borrowers” – $2.639 trillion

#33 The Federal Reserve also paid those big banks $659.4 million in “fees” to help “administer” those secret loans.

#34 During the last financial crisis, big European banks were allowed to borrow an “unlimited” amount of money from the Federal Reserve at ultra-low interest rates.

#35 The “easy money” policies of Federal Reserve Chairman Ben Bernanke have created the largest financial bubble this nation has ever seen, and this has set the stage for the great financial crisis that we are rapidly approaching.

#36 Since late 2008, the size of the Federal Reserve balance sheet has grown from less than a trillion dollars to more than 4 trillion dollars.  This is complete and utter insanity.

#37 During the quantitative easing era, the value of the financial securities that the Fed has accumulated is greater than the total amount of publicly held debt that the U.S. government accumulated from the presidency of George Washington through the end of the presidency of Bill Clinton.

#38 Overall, the Federal Reserve now holds more than 32 percent of all 10 year equivalents.

#39 Quantitative easing creates financial bubbles, and when quantitative easing ends those bubbles tend to deflate rapidly.

#40 Most of the new money created by quantitative easing has ended up in the hands of the very wealthy.

#41 According to a prominent Federal Reserve insider, quantitative easing has been one giant “subsidy” for Wall Street banks.

#42 As one CNBC article stated, we are seeing absolutely rampant inflation in “stocks and bonds and art and Ferraris“.

#43 Donald Trump once made the following statement about quantitative easing: “People like me will benefit from this.

#44 Most people have never heard about this, but a very interesting study conducted for the Bank of England shows that quantitative easing actually increases the gap between the wealthy and the poor.

#45 The gap between the top one percent and the rest of the country is now the greatest that it has been since the 1920s.

#46 The mainstream media has sold quantitative easing to the American public as an “economic stimulus program”, but the truth is that the percentage of Americans that have a job has actually gone down since quantitative easing first began.

#47 The Federal Reserve is supposed to be able to guide the nation toward “full employment”, but the reality of the matter is that an all-time record 102 million working age Americans do not have a job right now.  That number has risen by about 27 million since the year 2000.

#48 For years, the projections of economic growth by the Federal Reserve have consistently overstated the strength of the U.S. economy.  But every single time, the mainstream media continues to report that these numbers are “reliable” even though all they actually represent is wishful thinking.

#49 The Federal Reserve system fuels the growth of government, and the growth of government fuels the growth of the Federal Reserve system.  Since 1970, federal spending has grown nearly 12 times as rapidly as median household income has.

#50 The Federal Reserve is supposed to look out for the health of all U.S. banks, but the truth is that they only seem to be concerned about the big ones.  In 1985, there were more than 18,000 banks in the United States.  Today, there are only 6,891 left.

#51 The six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger over the past five years.

#52 The U.S. banking system has 14.4 trillion dollars in total assets.  The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.

#53 The five largest banks now account for 42 percent of all loans in the United States.

#54 We were told that the purpose of quantitative easing is to help “stimulate the economy”, but today the Federal Reserve is actually paying the big banks not to lend out 1.8 trillion dollars in “excess reserves” that they have parked at the Fed.

#55 The Federal Reserve has allowed an absolutely gigantic derivatives bubble to inflate which could destroy our financial system at any moment.  Right now, four of the “too big to fail” banks each have total exposure to derivatives that is well in excess of 40 trillion dollars.

#56 The total exposure that Goldman Sachs has to derivatives contracts is more than 381 times greater than their total assets.

#57 Federal Reserve Chairman Ben Bernanke has a track record of failure that would make the Chicago Cubs look good.

#58 The secret November 1910 gathering at Jekyll Island, Georgia during which the plan for the Federal Reserve was hatched was attended by U.S. Senator Nelson W. Aldrich, Assistant Secretary of the Treasury Department A.P. Andrews and a whole host of representatives from the upper crust of the Wall Street banking establishment.

#59 The Federal Reserve was created by the big Wall Street banks and for the benefit of the big Wall Street banks.

#60 In 1913, Congress was promised that if the Federal Reserve Act was passed that it would eliminate the business cycle.

#61 There has never been a true comprehensive audit of the Federal Reserve since it was created back in 1913.

#62 The Federal Reserve system has been described as “the biggest Ponzi scheme in the history of the world“.

#63 The following comes directly from the Fed’s official mission statement: “To provide the nation with a safer, more flexible, and more stable monetary and financial system.”  Without a doubt, the Federal Reserve has failed in those tasks dramatically.

#64 The Fed decides what the target rate of inflation should be, what the target rate of unemployment should be and what the size of the money supply is going to be.  This is quite similar to the “central planning” that goes on in communist nations, but very few people in our government seem upset by this.

#65 A couple of years ago, Federal Reserve officials walked into one bank in Oklahoma and demanded that they take down all the Bible verses and all the Christmas buttons that the bank had been displaying.

#66 The Federal Reserve has taken some other very frightening steps in recent years.  For example, back in 2011 the Federal Reserve announced plans to identify “key bloggers” and to monitor “billions of conversations” about the Fed on Facebook, Twitter, forums and blogs.  Someone at the Fed will almost certainly end up reading this article.

#67 Thanks to this endless debt spiral that we are trapped in, a massive amount of money is transferred out of our pockets and into the pockets of the ultra-wealthy each year.  Incredibly, the U.S. government spent more than 415 billion dollars just on interest on the national debt in 2013.

#68 In January 2000, the average rate of interest on the government’s marketable debt was 6.620 percent.  If we got back to that level today, we would be paying more than a trillion dollars a year just in interest on the national debt and it would collapse our entire financial system.

#69 The American people are being killed by compound interest but most of them don’t even understand what it is.  Albert Einstein once made the following statement about compound interest…

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

#70 Most Americans have absolutely no idea where money comes from.  The truth is that the Federal Reserve just creates it out of thin air.  The following is how I have previously described how money is normally created by the Fed in our system…

When the U.S. government decides that it wants to spend another billion dollars that it does not have, it does not print up a billion dollars.

Rather, the U.S. government creates a bunch of U.S. Treasury bonds (debt) and takes them over to the Federal Reserve.

The Federal Reserve creates a billion dollars out of thin air and exchanges them for the U.S. Treasury bonds.

#71 What does the Federal Reserve do with those U.S. Treasury bonds?  They end up getting auctioned off to the highest bidder.  But this entire process actually creates more debt than it does money…

The U.S. Treasury bonds that the Federal Reserve receives in exchange for the money it has created out of nothing are auctioned off through the Federal Reserve system.

But wait.

There is a problem.

Because the U.S. government must pay interest on the Treasury bonds, the amount of debt that has been created by this transaction is greater than the amount of money that has been created.

So where will the U.S. government get the money to pay that debt?

Well, the theory is that we can get money to circulate through the economy really, really fast and tax it at a high enough rate that the government will be able to collect enough taxes to pay the debt.

But that never actually happens, does it?

And the creators of the Federal Reserve understood this as well.  They understood that the U.S. government would not have enough money to both run the government and service the national debt.  They knew that the U.S. government would have to keep borrowing even more money in an attempt to keep up with the game.

#72 Of course the U.S. government could actually create money and spend it directly into the economy without the Federal Reserve being involved at all.  But then we wouldn’t be 17 trillion dollars in debt and that wouldn’t serve the interests of the bankers at all.

#73 The following is what Thomas Edison once had to say about our absolutely insane debt-based financial system…

That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.

Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost.

But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good.

#74 The United States now has the largest national debt in the history of the world, and we are stealing roughly 100 million dollars from our children and our grandchildren every single hour of every single day in a desperate attempt to keep the debt spiral going.

#75 Thomas Jefferson once stated that if he could add just one more amendment to the U.S. Constitution it would be a ban on all government borrowing

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing.

#76 At this moment, the U.S. national debt is sitting at $18,141,409,083,212.36.  If we had followed the advice of Thomas Jefferson, it would be sitting at zero.

#77 When the Federal Reserve was first established, the U.S. national debt was sitting at about 2.9 billion dollars.  On average, we have been adding more than that to the national debt every single day since Obama has been in the White House.

#78 We are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in all of U.S. history combined.

#79 If all of the new debt that has been accumulated since John Boehner became Speaker of the House had been given directly to the American people instead, every household in America would have been able to buy a new truck.

#80 Between 2008 and 2012, U.S. government debt grew by 60.7 percent, but U.S. GDP only grew by a total of about 8.5 percent during that entire time period.

#81 Since 2007, the U.S. debt to GDP ratio has increased from 66.6 percent to 101.6 percent.

#82 According to the U.S. Treasury, foreigners hold approximately 5.6 trillion dollars of our debt.

#83 The amount of U.S. government debt held by foreigners is about 5 times larger than it was just a decade ago.

#84 As I have written about previously, if the U.S. national debt was reduced to a stack of one dollar bills it would circle the earth at the equator 45 times.

#85 If Bill Gates gave every single penny of his entire fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.

#86 Sometimes we forget just how much money a trillion dollars is.  If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.

#87 If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

#88 In addition to all of our debt, the U.S. government has also accumulated more than 200 trillion dollars in unfunded liabilities.  So where in the world will all of that money come from?

#89 The greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.  If the rest of the world stops using our dollars and stops buying our debt, we are going to be in a massive amount of trouble.

#90 Over the past several years, the Federal Reserve has been monetizing a staggering amount of U.S. government debt even though Ben Bernanke once promised that he would never do this.

#91 China recently announced that they are going to quit stockpiling more U.S. dollars.  If the Federal Reserve was not recklessly printing money, this would probably not have happened.

#92 Most Americans have no idea that one of our most famous presidents was absolutely obsessed with getting rid of central banking in the United States.  The following is a February 1834 quote by President Andrew Jackson about the evils of central banking…

I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, (bringing his fist down on the table) I will rout you out.

#93 There are plenty of possible alternative financial systems, but at this point all 187 nations that belong to the IMF have a central bank.  Are we supposed to believe that this is just some sort of a bizarre coincidence?

#94 The capstone of the global central banking system is an organization known as the Bank for International Settlements.  The following is how I described this organization in a previous article

An immensely powerful international organization that most people have never even heard of secretly controls the money supply of the entire globe.  It is called the Bank for International Settlements, and it is the central bank of central banks.  It is located in Basel, Switzerland, but it also has branches in Hong Kong and Mexico City.  It is essentially an unelected, unaccountable central bank of the world that has complete immunity from taxation and from national laws.  Even Wikipedia admits that “it is not accountable to any single national government.”  The Bank for International Settlements was used to launder money for the Nazis during World War II, but these days the main purpose of the BIS is to guide and direct the centrally-planned global financial system.  Today, 58 global central banks belong to the BIS, and it has far more power over how the U.S. economy (or any other economy for that matter) will perform over the course of the next year than any politician does.  Every two months, the central bankers of the world gather in Basel for another “Global Economy Meeting”.  During those meetings, decisions are made which affect every man, woman and child on the planet, and yet none of us have any say in what goes on.  The Bank for International Settlements is an organization that was founded by the global elite and it operates for the benefit of the global elite, and it is intended to be one of the key cornerstones of the emerging one world economic system.

#95 The borrower is the servant of the lender, and the Federal Reserve has turned all of us into debt slaves.

#96 Debt is a form of social control, and the global elite use all of this debt to dominate all the rest of us.  40 years ago, the total amount of debt in our system (all government debt, all business debt, all consumer debt, etc.) was sitting at about 2 trillion dollars.  Today, the grand total exceeds 56 trillion dollars.

#97 Unless something dramatic is done, our children and our grandchildren will be debt slaves for their entire lives as they service our debts and pay for our mistakes.

#98 Now that you know this information, you are responsible for doing something about it.

#99 Congress has the power to shut down the Federal Reserve any time that it would like.  But right now most of our politicians fully endorse the current system, and nothing is ever going to happen until the American people start demanding change.

#100 The design of the Federal Reserve system was flawed from the very beginning.  If something is not done very rapidly, it is inevitable that our entire financial system is going to suffer an absolutely nightmarish collapse.


RUSSIA: A New Financial System INDEPENDENT From Wall Street

Thursday, April 3, 2014
The 4th Media News

Putin Flushes the US Dollar: Russia’s Gold Ruble Payments System Delinked from Dollar?

A New Financial System independent from Wall Street and City of London begins to take shape concretely in Russia?

Russia “forced” by the sanctions to create a currency system which is independent from the US dollar.

Russia announces that it will sell (and buy) products and commodities – including oil – in rubles rather than in dollars. The move is towards the development of bilateral.

Putin has been preparing this move — the creation of a payment system in rubles completely independent and protected from the Dollar and the “killer speculations” (e.g. short-selling) of the big Western financial institutions — for a long time.

After sanctioning several Russian banks to punish Russia for Crimea, the Washington politicians were told by the financial power-to-be to step back because obviously, the Wall Street vampires understand that putting Russian banks outside the reach of their blood sucking teeth is never a good idea.

For Wall Street and the city’s financial services, countries like Russia should always have an open financial door through which their real economy can be periodically looted.

So Washington announced that it was a mistake to enforce sanctions on all Russian banks; only one, the Rossiya bank shall be hit by sanctions, just for propaganda reasons and to make an example out of it.

It is what Putin needed. Since at least 2007, he was trying to launch an independent Ruble System, a financial system that would be based on Russia’s real economy and resources and guaranteed by its gold reserves.

No tolerance for looting and financial speculation: A peaceful move, but at the same time a declaration of independence that Wall Street will consider as a “declaration of war”.

According to the Judo strategy, the sanction attack created the ideal situation for a “defensive” move that would redirect the brute force of the adversary against him.

And now it’s happening. Bank Rossiya will be the first Russian bank to use exclusively the Russian ruble.

The move has not been done in secret. On the contrary. A huge golden ruble symbol will be set up in front of bank Rossiya headquarters in Perevedensky Pereulok in Moscow “to symbolize the ruble’s stability and its backing by the country’s gold reserves,” the official agency Itar-Tass explains quoting the bank officials.

In fact, the officials  are very clear on their intention to punish the western speculators that have been looting their country for a long time:

“Russia, at its present stage of development, should not be dependent on foreign currencies; its internal resources will make its own economy invulnerable to political wheeler dealers.”

This is only the first step, declared Andrei Kostin, the president of VTB, another bank previously sanctioned:

“We have been moving towards wider use of the Russian rouble as the currency of settlement for a long time. The ruble became fully convertible quite a long time ago.

Unfortunately, we have seen predominantly negative consequences of this step so far revealed in the outflow of capital from this country. The influx of foreign investments into Russia has been speculative and considerably destabilizing to our stock markets.”

According to Itar-Tass, Kostin was very precise and concrete:

“Russia should sell domestic products – from weapons to gas and oil – abroad for roubles and buy foreign goods also for rubles….Only then are we going to use the advantages of the rouble being a foreign currency in full measure.”

Putin himself lobbied for the new siystem in meetings with members of the Upper House of the Duma, the parliament, on March 28, overcoming the last doubts and indecisions:“

“Why do we not do this? This definitely should be done, we need to protect our interests, and we will do it. These systems work, and work very successfully in such countries as Japan and China. They originally started as exclusively national [systems] confined to their own market and territory and their own population, but have gradually become more and more popular…”

Alea Iacta Est!

By Umberto Pascali, Information Clearing House


A Small President on the World Stage

At the U.N., leaders hope for a return of American greatness.

The world misses the old America, the one before the crash—the crashes—of the past dozen years.


That is the takeaway from conversations the past week in New York, where world leaders gathered for the annual U.N. General Assembly session. Our friends, and we have many, speak almost poignantly of the dynamism, excellence, exuberance and leadership of the nation they had, for so many years, judged themselves against, been inspired by, attempted to emulate, resented.

As for those who are not America’s friends, some seem still confused, even concussed, by the new power shift. What is their exact place in it? Will it last? Will America come roaring back? Can she? Does she have the political will, the human capital, the old capability?

It is a world in a new kind of flux, one that doesn’t know what to make of America anymore. In part because of our president.

“We want American leadership,” said a member of a diplomatic delegation of a major U.S. ally. He said it softly, as if confiding he missed an old friend.

“In the past we have seen some America overreach,” said the prime minister of a Western democracy, in a conversation. “Now I think we are seeing America underreach.” He was referring not only to foreign policy but to economic policies, to the limits America has imposed on itself. He missed its old economic dynamism, its crazy, pioneering spirit toward wealth creation—the old belief that every American could invent something, get it to market, make a bundle, rise.

The prime minister spoke of a great anxiety and his particular hope. The anxiety: “The biggest risk is not political but social. Wealthy societies with people who think wealth is a given, a birthright—they do not understand that we are in the fight of our lives with countries and nations set on displacing us. Wealth is earned. It is far from being a given. It cannot be taken for granted. The recession reminded us how quickly circumstances can change.” His hope? That the things that made America a giant—”so much entrepreneurialism and vision”—will, in time, fully re-emerge and jolt the country from the doldrums.

The second takeaway of the week has to do with a continued decline in admiration for the American president. Barack Obama‘s reputation among his fellow international players has deflated, his stature almost collapsed. In diplomatic circles, attitudes toward his leadership have been declining for some time, but this week you could hear the disappointment, and something more dangerous: the sense that he is no longer, perhaps, all that relevant. Part of this is due, obviously, to his handling of the Syria crisis. If you draw a line and it is crossed and then you dodge, deflect, disappear and call it diplomacy, the world will notice, and not think better of you. Some of it is connected to the historical moment America is in.

But some of it, surely, is just five years of Mr. Obama. World leaders do not understand what his higher strategic aims are, have doubts about his seriousness and judgment, and read him as unsure and covering up his unsureness with ringing words.

A scorching assessment of the president as foreign-policy actor came from a former senior U.S. diplomat, a low-key and sophisticated man who spent the week at many U.N.-related functions. “World leaders are very negative about Obama,” he said. They are “disappointed, feeling he’s not really in charge. . . . The Western Europeans don’t pay that much attention to him anymore.”

The diplomat was one of more than a dozen U.S. foreign-policy hands who met this week with the new president of Iran, Hasan Rouhani. What did he think of the American president? “He didn’t mention Obama, not once,” said the former envoy, who added: “We have to accept the fact that the president is rather insignificant at the moment, and rely on our diplomats.” John Kerry, he said, is doing a good job.

Had he ever seen an American president treated as if he were so insignificant? “I really never have. It’s unusual.” What does he make of the president’s strategy: “He doesn’t know what to do so he stays out of it [and] hopes for the best.” The diplomat added: “Slim hope.”

This reminded me of a talk a few weeks ago, with another veteran diplomat who often confers with leaders with whom Mr. Obama meets. I had asked: When Obama enters a room with other leaders, is there a sense that America has entered the room? I mentioned de Gaulle—when he was there, France was there. When Reagan came into a room, people stood: America just walked in. Does Mr. Obama bring that kind of mystique?

“No,” he said. “It’s not like that.”

When the president spoke to the General Assembly, his speech was dignified and had, at certain points, a certain sternness of tone. But after a while, as he spoke, it took on the flavor of re-enactment. He had impressed these men and women once. In the cutaways on C-Span, some delegates in attendance seemed distracted, not alert, not sitting as if they were witnessing something important. One delegate seemed to be scrolling down on a BlackBerry, one rifled through notes. Two officials seated behind the president as he spoke seemed engaged in humorous banter. At the end, the applause was polite, appropriate and brief.

The president spoke of Iran and nuclear weapons—”we should be able to achieve a resolution” of the question. “We are encouraged” by signs of a more moderate course. “I am directing John Kerry to pursue this effort.”

But his spokesmen had suggested the possibility of a brief meeting or handshake between Messrs. Obama and Rouhani. When that didn’t happen there was a sense the American president had been snubbed. For all the world to see.

Which, if you are an American, is embarrassing.

While Mr. Rouhani could not meet with the American president, he did make time for journalists, diplomats and businessmen brought together by the Asia Society and the Council on Foreign Relations. Early Thursday evening in a hotel ballroom, Mr. Rouhani spoke about U.S.-Iranian relations.

He appears to be intelligent, smooth, and he said all the right things—”moderation and wisdom” will guide his government, “global challenges require collective responses.” He will likely prove a tough negotiator, perhaps a particularly wily one. He is eloquent when speaking of the “haunted” nature of some of his countrymen’s memories when they consider the past 60 years of U.S.-Iranian relations.

Well, we have that in common.

He seemed to use his eloquence to bring a certain freshness, and therefore force, to perceived grievances. That’s one negotiating tactic. He added that we must “rise above petty politics,” and focus on our nations’ common interests and concerns. He called it “counterproductive” to view Iran as a threat; this charge is whipped up by “alarmists.” He vowed again that Iran will not develop a nuclear bomb, saying this would be “contrary to Islamic norms.”

I wondered, as he spoke, how he sized up our president. In roughly 90 minutes of a speech followed by questions, he didn’t say, and nobody thought to ask him.


A spectacle to behold: Markets usurp central banks

Thu, Jun 13 2013, 09:04 GMT
by Peter Baxter Jr. |

K Winter Endgame now playing out in Japan

Mark May 23rd of 2013 as a potential key date in the unfolding of this fourth Kondratieff Winter of the modern era. In the afternoon session of trading in Tokyo that night, at approximately 7:30 PM EST, everything suddenly changed. The juggernaut that had propelled the Nikkei average up almost 90% since early November took a bit of a breather by plunging almost 10% from its peak hours earlier, settling down over 1140 points from the previous close. As of yesterday it had declined 2343 points (15%) in just one week. With one more day like Thursday the Nikkei would have achieved the impossible- a 90% gain in six months that turned into a bear market (20% down) in just one week. Ho, hum, just another day in the life of a world distorted with tens of trillions of central bank intervention.

I suspect this will become the new normal going forward in the next few years that will mark the twilight of the winter cycle phase of this present Kondratieff cycle that began in 1949. Our theory holds that paper assets have never been more overpriced because there’s too much unpayable global debt that will default. Is there a day in our future when our Dow will also plunge over 1000 points in a grand mal seizure from too much debt?

What was so transformative that occurred in that Thursday session in Japan, one that was preceded hours earlier by a sudden whipsaw in US markets? Simple- too much volatility. This grand experiment by central banks is much like a ponzi scheme because it has absolutely no room for error that could undermine confidence. Yet that is what is occurring right before us. Could this be the beginning of the endgame scenario I have promised here for over two years- a dreaded deflationary bust caused not by an economic slowdown but instead by rising yields?

It’s very possible this may be the case given the scale and speed of the move higher in yields all across the globe. Don’t forget here that the entire premise of these massive QE programs by all the global central banks is to keep rates DOWN, not up. They are failing miserably in their primary objective and I implore our readers and all investors to sit up and take notice. It seems the bond vigilantes have now finally emerged from many years of hibernation.

Remember the Apple bonds floated a few weeks ago in the biggest corporate offering in world history? It was way oversubscribed as everyone wanted them so badly. They are now down over 4% in a matter of days losing investors around $700 million in no time on this “safe” investment. Given that global bond markets are 4-5 times larger than stocks the potential for even a small rise in rates would be very devastating. Few may appreciate that nothing could cause more wealth destruction than a large and sustained rise in interest rates.

It seems that peak euphoria was being tested in the US last Wednesday as unfettered exuberance mid-morning gave way in the afternoon to discontent and outright scorn over Fed policy by the end of the session, one that saw the indexes plunge more than 2% on a single day after making an intra-day all-time high that same day. That has only happened twice before and both times (2000 and 2007) marked major cycle peaks in the markets. Could this be true again?

Cycle theory and common sense both say yes in prohibitive terms. Why can we advance this notion? Because if one were to peel back the layers of what has been unfolding recently in many other financial markets you could only come to one conclusion: global central banks have lost control of their mandates. The end must be near when the confusion over the meaning of one or two words from Chief Bernanke could cause such an uproar in the financial markets. Has it really come to this? Valuations are determined through hyper-parsing of nuanced words that are so carefully prescribed as to not achieve that effect?

The unintended consequences caused by policy decisions that could be called quite extraordinary has caused many individual asset classes to have a mid life crisis recently. They have seen explosive moves in all directions in degrees several standard deviations removed from their historic benchmarks. In other words, all hell is breaking loose just about everywhere. Everywhere except in the US, of course, where investors from Japan to Timbuktu have blindly reallocated so much capital since last November.

The action resulting from these audacious central bank moves has been dramatic across the board. The third largest stock market in the world (Nikkei in Japan) has rallied almost 90% in just over six months while their currency has declined against the USD by over 25% in the same period. Both of these moves are so enormous they can hardly be explained in a cogent manner without an overload of superlatives that would understate their true meaning. In the month of May we saw many strange events- gold plunging over $200 in a matter of hours, no fewer than 17 mini flash crashes in five NYSE stocks and silver halted four times in one session due to a lack of bids in a disorderly marketplace to say the least. And as of Thursday the Nikkei had plunged over 15% in just one week. Just another day in the parallel universe created by the global central banks.

These moves are alarming at best and who knows at worst. They are the best evidence yet of true parabolic moves one could expect to see at the end of grand super-cycles of credit such as the tail end of a Kondratieff Winter. And much like the geometric explosion of global debt, they are just not sustainable. My gut tells me two things- 1) markets are out of control,; and 2) very few investors agree these markets are out of control. This can be seen by tame levels of the VIX index and the release this week showing that margin debt had reached an all-time high. It all sounds a bit frothy to me and could signal the end of an era.

But the ludicrous nature of the these awesome moves in certain paper assets just keeps coming. Greek bonds sure to default have tripled in the past year. The Dow Industrials as of the end of May 2013 will not have seen a three day decline for the longest period since 1900 and that defies all sensibilities. It seems to many that there is some force or entity out there (the Fed ?) that’s not willing to allow such an event to occur, perhaps to create a myth that the markets will nudge ever higher. Incredibly, many now think that is the case as they believe the Federal Reserve and other central banks are in complete control. Or so it seems.

Our theme here today is that there is abundant exculpatory evidence hiding in plain sight that indicates the opposite- that central banks are losing control of the markets. In last month’s comments I noted the disturbing explosion of yields in the JGB’s (long term Japan bonds) that sent their prices crashing overnight, beginning a period extreme apprehension over a more serious bond crash could be looming. That worry has only worsened since then as the yield on 10 year JGB is now a whisker away from the 1 % level that is seen as crucial to hold to maintain the appearance that the world’s second largest bond market is not spinning out of control.

One thing that bulls and bears and nearly everyone can agree on this this- bad consequences will occur if global bond yields rise fast and far worse will happen if they rise too fast. The reason for this is that when volatility spikes and endures, leverage is taken off the table and that means lots of securities will be sold. So what are the chances yields could spike higher (making bonds plunge) given this universal belief of the consequences of such an outcome?

I believe the chances of such an outcome are quite underappreciated by investors today all along the the spectrum. This would include brokers, money managers, hedge fund managers, CFO’s managing billions of corporate cash coffers, pension fund managers, individual retail investors, sovereign wealth fund managers, and so many more. Their worldview could be soon shattered if global bond markets usurp the collective actions of global central banks. It would only take one of these markets to crash to induce a large global sell-off. Such an event would finally showcase the folly that rampant global central bank printing is beneficial to modern industrial economies. The central theme of Kondratieff Wave theory holds that the long term credit cycle cannot continue unabated and the excesses of this cycle must be removed. Clearly this is not the case.

Most investors and investment pros are still beholden to a worldview that puts no premium on long wave credit cycles. They insist on owning paper assets such as stock, bonds, and derivatives,etc. These instruments have on balance have been performing well since 1982 but not so well for the past 13 years. They subscribe to the same worldview that emphasizes yesterday’s metrics- PE multiples, PE expansion, cash on the sidelines, nowhere else to put your money other than stocks, and this chase for yield has pushed them into more risk and leverage than they otherwise would have deployed. Such an approach did not work too well in 2000 or 2007 when yields were still historically very low, so this mindset makes even less sense today now given the tens of trillions in global debt that has been added in the past few years.

But a closer look at the performance of money managers over that period since 1982 clearly shows a persistent underperformance by them over time even in bull markets? How can this be? Even in 2013 it is all too clear that hedge funds and professional money managers on balance are prohibitively underperforming the S&P index. Such statistics are meaningful in gleaning what could be missing from their equations. I advance that a coherent appreciation of the existence and the significance of long wave super-cycles would be a good place to start.

If they had an appreciation of the higher truths offered by the K-Wave theory perhaps they would be more likely to realize compounded gains over time from their acumen in the day to day, month to month decisions on asset allocation they are well suited to execute. Typically their lack of performance over the years can be attributed to poor decisions made during those critical inflection points in the the markets that seem to always occur when there is universal agreement upon the near term direction of the market (up in 2000, down in 2002, up in 2007, down in 2009 as recent examples). If they could only avoid the pitfalls at these junctures then I suspect most fund managers would instead outperform the broad market averages. Bubbles are not black swans, they hide in plain sight and lend themselves to distinct patterns that can be useful in making decisions.

Many are bewildered that the market has surged so much higher despite any meaningful help from retail investors. It is worth noting that a key element in the overperformance of the US market in recent years has been the collective impact of corporate stock buybacks by the healthiest US corporations. These buybacks have served to satisfy shareholders over employees or their local or national communities. The end result has been a historic drop-off in cap-ex and R&D and a dramatic increase in layoffs for even the best companies. The mandate of the modern corporation has never been more evident- making profits at any cost. Yet empirical evidence suggest these buybacks occur when stocks are relatively expensive. You wanna bet that some of them may regret this down the road? But why have they been so prevalent lately despite price levels that are so rich?

Large corporations have been for many years enduring the pitfalls of this deflationary Kondratieff winter that assures very low or negative growth rates globally that make it very difficult to grow the top line. So what to do if you are a CFO? Just resort to financial gimmicks such as stock buybacks so that your reduced operating profits during this winter period can be better cloaked with higher EPS through reduced shares outstanding. This behavior, much like the hoarding of cash by commercial banks unwilling to lend but dying to speculate in paper assets tells me the recent new highs in the S&P do not reflect a new bull market, only desperation to please investors at any price. They are creating less and less and investing less and less. Several studies have concluded that perhaps as high as 40% of the rally in recent years can be attributed to these buybacks. At any rate these buybacks I believe have cloaked more serious problems in the financial performance of corporations and their stocks. Global aggregate demand is slowing despite central banks accommodation and exponential increases in the population base. You just can’t hide from deflation.

The gains in stocks have diverged from the macroeconomic landscape for many years now and that trend has really accelerated this year. And we all know why- controversial central bank policies that range from keeping rates too low for too long during the mid- 2000’s to outright destructive ones such as printing several trillions to create a wealth effect whose benefits do not trickle down to the middle class and serves in effect to cushion political leaders from making unpopular structural reforms that are sorely needed. Today developed countries in the western world are staring down the barrel of a gun of their own making that can still be dismantled.

But sadly we have not taken the necessary steps to deconstruct our debt warheads to prevent the collateral damage they could cause. I suspect soon we will reach the brink, stare into the abyss, and determine once and for all if we can thrive in a world dominated by debt. I hope that our financial. corporate, and political leaders can find the will to reign in the central bankers before it’s too late. They may have good intentions but their approach has proven to be a failure and they should be called out on this at once. But time is running out, and several key market metrics described above are now flashing red lights. And remember the long wave chart of the US market still sports and ending diagonal bearish wedge that implies a severe plunge once key support is broken.


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