The 2 Million People Who Will Elect the Next President

“Politics should be peer-to-peer, it shouldn’t be a top-down lecture,” says Hot Air’s Ed Morrissey, whose new book is titled Going Red: The Two Million Voters Who Will Elect the Next President—and How Conservatives Can Win Them.

 Morrissey recent sat down with Reason’s Nick Gillespie for an extended interview.

Click below to watch the video, or here for the original writeup.

from Hit & Run

CSX Freight Train Derails In Washington D.C., 9 Cars Overturned, Hazardous Material Leaking

A CSX freight train has derailed in Washington D.C.., near the Rhode Island Avenue Metro station Sunday morning leaving several cars overturned and resulting in a leak of hazardous materials.

Doug Buchannan, a spokesman for the D.C fire department, said as many as nine cars have derailed and at least three are leaking hazardous material. The incident happened at 6:40 a.m. Sunday.

According to WTOP, Rhode Island Avenue was closed in both directions from 4th to 10th streets in Northeast as of 7:30 a.m.  The Red Line’s Rhode Island Station is also closed. Metro said it would establish bus shuttle service between the NoMa and Brookland stations. No injuries were immediately reported.

D.C. Fire officials told WTOP they do not know what kind of substance is leaking, however News4’s Mark Segraves reported multiple sources at the scene said at least one of the chemicals is sodium hydroxide. Also known as lye and caustic soda, the odorless chemical may generate substantial heat when dissolved in water, which may be sufficient to ignite combustible materials, according to the Center for Disease Control.

The CDC said it can create eye and skin irritation and burns when exposed. It is also damaging to the respiratory system if the fumes are inhaled.

According to a CSX statement, the train was traveling from Cumberland, Maryland to Hamlet, North Carolina, when it derailed near 9th Stree and Rhode Island Avenue. The train has three locomotives and 175 total cars, including 94 cars loaded with frieght and 81 empty cars.

This is a developing story.

via Tyler Durden

Is The USA Really Just Another Greece?


The non-European countries always enjoy themselves by pointing fingers at the weaker European countries as the main culprits of the current economic crisis and Greece, Spain and Portugal are always being targeted as ‘worrisome’ countries. Even China, which is still experiencing a growth rate of 6% is being used as a reason for the weak world economy. However, the situation of the US economy isn’t that great at all.

In fact, the Federal Reserve has practically no other choice but to keep the interest rates at a very low level, as a following a path with increasing interest rates would be disastrous for the country’s budget. A lot of people seem to be forgetting the government/GDP ratio of the USA has increased to in excess of 100% and that already is quite an alarming level. Whereas the ratio was just 64% right before the crisis, the net debt has just exploded under the reign of the current president.


Source: tradingeconomics

But what would this result in, if the Federal Reserve would indeed continue to increase the interest rates? Well, the impact would be devastating as a higher benchmark rate would also force the USA to pay a higher interest rate on its government debt, and every 1% increase of the cost of debt results in an additional deficit of $180B per year. David Wessel, a director of the Hutchins Center on Fiscal and Monetary Policy has used an interesting chart. Even though the starting point is showing a flaw (the official government debt/GDP ratio is already 100%), the government debt will only increase.

USA Interest

Source: David Wessel presentation

You can clearly see the total debt/GDP ratio will increase to 160% within two decades and if we adjust the starting point of the calculation to make sure the current ratio is being used, the net debt/GDP ratio will reach 200% within 25 years from now. Assuming a GDP growth rate of 1.5% in the next 20 years, this would result in a total debt of 50 trillion dollar. That’s right, 50,000 billion dollar. If we would assume the USA will have 375 million inhabitants by then, the total government debt will be in excess of $130,000 per person (so roughly half a million dollar for a family of four). Throw in the traditional household debt, and you’ll understand why we aren’t too optimistic about the future!

And oh, yes, if the long-term interest rate would be 3%, the $50T in debt would cost you, the taxpayer, $1.5T per year to service it. Again, using 375M citizens and 275M tax payers, the interest expense per tax payer would be $500/month, and that means not a single additional dollar would/could be spent on anything else!

USA 10Y yield


There’s only one solution for this, and that’s a prolonged period of low interest rates, and that’s exactly what the previous chairman of the Federal Reserve has been talking about. Bernanke claims this probably is the easiest and most clean approach to try to pull one last trick before the music stops.

But let’s face it, there is no way out of this. The Fed is almost out of ammunition and the only ace up its sleeve (apart from helicopter money) is to try to reduce the longer term interest rates resulting in a vicious circle of decreasing interest rates. And ask Japan how that worked out for them…

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via Secular Investor

State-Sanctioned Theft – The Failed War On Drugs And Cops’ Abuse Of Civil Forfeiture

Submitted by Lorelei McFly via,

One of the biggest lies our government tells us is that it wages the War on Drugs to keep us safe. More than 40 years after it was started, we know that it has been a colossally-expensive epic failure on its stated goals, was intentionally designed to further disenfranchise marginalized groups, and has become a full-fledged assault on our civil liberties.

Even with all the billions of tax dollars it spends each year, and all the flashy photo ops of seized drugs stacked on tables, the Drug Enforcement Agency only stops 1% of the illegal drug supply from being distributed in America, according to the video below. Not only is law enforcement pathetically inept at stemming the flow of drugs, they are active participants in the illicit drug trade at both the federal and local level:

That drug prohibition causes far more harm than it supposedly prevents would not even be a question of debate were it not for the fact that so many people’s livelihoods now depend on waging it. The ugly unspoken truth is that the War on Drugs is a massive jobs and funding program for law enforcement that is operated under the guise of saving people from the evils of substance abuse.

State-Sanctioned Theft

Everything we do is suspect, and everything we own is subject to seizure— take cash for an example. The saying used to be that “cash is king,’ however these days it’s “cash is criminal” since cash transactions and even withdrawing or carrying “large amounts,” basically more than a few dollars, of your own money is now considered an indication of criminal activity (see here).  Section 31 U.S.C. 5103 states, “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues,” so why does the government that prints that same money have such a problem with its citizens using it?

How Cash Became Criminal

Cash transactions are anonymous, so it is assumed that people who make cash transactions are trying to avoid leaving records of their activities. And if any aspect of your life is not a traceable, verifiable open book for the government, obviously you must be hiding something.  Never mind that the case is often that people simply find using cash allows them to manage their finances more responsibly without risking overdraft or interest fees, or are making a purchase that requires cash, such as buying a used car, or that they simply do not have access to bank accounts due to low income or poor credit history.

According to the FDIC, “7.7 percent (1 in 13) of households in the United States were unbanked in 2013. This proportion represented approximately 16.7 million adults.”  20.0 percent of U.S. households, approximately 50.9 million adults, were underbanked in 2013, “meaning that they had a bank account but also used alternative financial services (AFS) outside of the banking system,” such as money orders, check cashing, remittances, payday loans, refund anticipation loans, rent-to-own services, pawn shops, or auto title loans.

The FDIC report also states “In many cases, financial life events, such as job loss, significant income loss or a new job, appear to be important reasons why households leave or enter the banking system.” The documentary Spent: Looking for Change, highlights the struggles of the unbanked and underbanked using the personal stories of several individuals.

While using cash out of preference or necessity is a perfectly legal activity, it is politically expedient for law enforcement agencies to pretend otherwise because they have incentives to do so. Civil asset forfeiture allows law enforcement agencies to take money, cars, houses, and other property that they suspect of being purchased with the proceeds from criminal activity or of being used in connection with criminal activity. The agencies then either keep or sell the property and use it or the proceeds for their own purposes. It’s such a huge cash cow for law enforcement that in 2014, the amount federal agencies netted through civil asset forfeiture, $5 billion, exceeded the amount Americans lost through burglaries, $3.5 billion. The actual amount seized is even higher than this, since this figure does not include the amounts taken by state and local law enforcement agencies.

Taking money from bad guys, sounds great, right? Oh, there’s a catch.  Cops don’t have to actually prove you committed any crime. They don’t even have to charge you with one. You, on the other hand, need to go to court and jump through whatever hoops the government requires to prove your innocence and get your property back. See How police took $53,000 from a Christian band, an orphanage and a church for a recent example of how police use civil forfeiture to knowingly steal from innocent citizens who have no involvement in the drug trade.

Cops and prosecutors also intimidate people into giving up their property by threatening to pursue criminal charges if they try get it back.From Taken, New Yorker Magazine’s investigation into one Texas town’s massively corrupt civil asset forfeiture program:

“The eye-opening event was pulling those files,” Guillory told me. One of the first cases that caught his attention was titled State of Texas vs. One Gold Crucifix. The police had confiscated a simple gold cross that a woman wore around her neck after pulling her over for a minor traffic violation. No contraband was reported, no criminal charges were filed, and no traffic ticket was issued. That’s how it went in dozens more cases involving cash, cars, and jewelry. A number of files contained slips of paper of a sort he’d never seen before. These were roadside property waivers, improvised by the district attorney, which threatened criminal charges unless drivers agreed to hand over valuables.

Law enforcement agencies say this is a vital tactic for battling drug kingpins and vast criminal enterprises, but the typical value of property seized tends to be low, victimizing citizens who usually have the least resources, and the least ability to fight back.

The Institute for Justice, an organization at the forefront of the battle against abusive forfeiture practices, “was able to obtain property-level forfeiture data for 2012 from 10 states, allowing median property values to be calculated. In those states, the median value of forfeited property ranged from $451 in Minnesota to $2,048 in Utah, not much more than an American’s average annual cell phone bill.”

Meanwhile what happens to the criminal masterminds who actually are involved in nefarious activities on a grand scale? They get a slap on the wrist. From the Rolling Stone article,Outrageous HSBC Settlement Proves the Drug War is a Joke:

[Assistant Attorney General] Breuer this week signed off on a settlement deal with the British banking giant HSBC that is the ultimate insult to every ordinary person who’s ever had his life altered by a narcotics charge. Despite the fact that HSBC admitted to laundering billions of dollars for Colombian and Mexican drug cartels (among others) and violating a host of important banking laws (from the Bank Secrecy Act to the Trading With the Enemy Act), Breuer and his Justice Department elected not to pursue criminal prosecutions of the bank, opting instead for a“record” financial settlement of $1.9 billion, which as one analyst noted is about five weeks of income for the bank.


The banks’ laundering transactions were so brazen that the NSA probably could have spotted them from space. Breuer admitted that drug dealers would sometimes come to HSBC’s Mexican branches and “deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows.”

The article continues:

Even more shocking, the Justice Department’s response to learning about all of this was to do exactly the same thing that the HSBC executives did in the first place to get themselves in trouble – they took money to look the other way.


And not only did they sell out to drug dealers, they sold out cheap. You’ll hear bragging this week by the Obama administration that they wrested a record penalty from HSBC, but it’s a joke. Some of the penalties involved will literally make you laugh out loud. This is from Breuer’s announcement:


As a result of the government’s investigation, HSBC has . . . “clawed back” deferred compensation bonuses given to some of its most senior U.S. anti-money laundering and compliance officers, and agreed to partially defer bonus compensation for its most senior officials during the five-year period of the deferred prosecution agreement.


Wow. So the executives who spent a decade laundering billions of dollars will have to partially defer their bonuses during the five-year deferred prosecution agreement? Are you fucking kidding me? That’s the punishment? The government’s negotiators couldn’t hold firm on forcing HSBC officials to completely wait to receive their ill-gotten bonuses? They had to settle on making them “partially” wait? Every honest prosecutor in America has to be puking his guts out at such bargaining tactics. What was the Justice Department’s opening offer – asking executives to restrict their Caribbean vacation time to nine weeks a year?

However there is some good news! Last year Montana and New Mexico passed reform measures that require a criminal conviction before assets can be stolen by state agents, and Nebraska just did, too.  Of course, several cities in New Mexico refuse to abide by the law andare now being sued by the Institute for Justice as a result, but it’s still progress, right? Also, the Department of Justice announced last year that it was drastically scaling back its equitable-sharing program, which state and local agencies have used to undermine local ordinances restricting forfeiture activities. Well, the impact wasn’t really as big as they first made it out to be, and that doesn’t matter anyway because DOJ already reinstated the program last month.

via Tyler Durden

Visualizing The Market Cycle

Is it possible to time the market cycle to capture big gains?

Like many controversial topics in investing, there is no real professional consensus on market timing. Academics claim that it’s not possible, while traders and chartists swear by the idea.

That said, as VisualCapitalist's Jeff Desjardins notes, one thing that everyone can probably agree on is that markets are cyclical and that securities do have recurring chart patterns. They aren’t predictable all of the time, but learning the fundamentals around market cycles can only help an investor in furthering their understanding of how things work.

The following infographic explains the four important phases of market trends, based on the methodology of the famous stock market authority Richard Wyckoff. The theory is: the better an investor can identify these phases of the market cycle, the more profits can be made on the ride upwards of a buying opportunity.


Courtesy of: Visual Capitalist


Here are the descriptions of each major phase of the market cycle:

Accumulation: Occurs after a drop in prices. Process of buyers gaining control from sellers which leads to markup.


Markup: Bullish phase of a stock’s life is defined by higher highs and higher lows. This is where you want to get long on breakouts and after short-term pullbacks. Rallies are “innocent until proven guilty”.


Distribution: Occurs after a prolonged price advance. Sellers gain control of prices, which leads to decline.


Decline: Bearish phase of a stock’s life. This is where you want to be short, so look to sell short fresh breakdowns after minor rallies have exhausted themselves. Rally attempts are “guilty until proven innocent”.

The basic strategy is to pay close attention during the accumulation and distribution phases as the market shifts from buyers to sellers, or vice versa. Then, by recognizing the markup and decline phases, an investor can be appropriately long or short to make solid returns.

Original graphic by: AlphaTrends

via Tyler Durden

Deutsche Bank Unveils The Next Step: “QE Has Run Its Course, It’s Time To Tax Wealth”

Helicopter money may be on the horizon, but if Deutsche Bank has its way, there is at least one intermediate step.

According to DB’s Dominic Konstam, now that the benefits QE “have run their course”, it is time for the next, and far more drastic step: “the ECB and BoJ should move more strongly toward penalizing savings via negative retail deposit rates or perhaps wealth taxes. With this stick would also come a carrot – for example, negative mortgage rates.”

Here is the big picture unveiling of what is coming next from Deutsche Bank’s Dominic Konstam, who is also buying the Treasury long end hand over fist:

  • The G3 central banks all stood pat, continuing the move away from the beggar-thy-neighbor paradigm. However, the adverse market reaction to the BoJ’s inaction suggests that the benefits of QE (or QQE) in its present form might have run their course.
  • It is becoming increasingly clear to us that the level of yields at which credit expansion in Europe and Japan will pick up in earnest is probably negative, and substantially so. Therefore, the ECB and BoJ should move more strongly toward penalizing savings via negative retail deposit rates or perhaps wealth taxes. With this stick would also come a carrot – for example, negative mortgage rates.
  • Until then, bank NIM compression will continue to drive elevated demand for dollar-denominated assets, which manifests itself in suppressed UST term premia and wide cross-currency bases.
  • What this means for the US is that policy rates and longer bond yields are unlikely to go up until global growth accelerates materially. Until such time, it is critical for the Fed to continue to relent, allowing real yields to keep falling while breakevens rise and nominal yields remain roughly static.
  • If the Fed were to turn hawkish, there is perhaps even less scope for long-end yields to rise as breakevens would likely collapse on policy error fears.

Some of the troubling detail:

QE as implemented in major economies since the crisis has operated through two shocks: a demand shock whereby real yields are forced lower through lower nominal yields and static – or even falling – breakevens, and a shock to inflation expectations, whereby real yields ultimately continue to fall but due to rising BEI and static to lower nominal yields. In the case of the Anglo-Saxon economies, the demand shock quickly gave way to the shock (higher) to inflation expectations and actually allowed nominal yields to rise, if fleetingly.


The second shock, to inflation expectations, has thus far remained stubbornly elusive in Europe and more so in Japan, and ephemeral in the Anglo-Saxon economies. That said, this dynamic appears to have re-emerged in the US post Fed relent and has been an important driver of the recovery in risk assets and, more generally, the easing of financial conditions.


This week’s BoJ announcement disappointed, and as a result the yen appreciated sharply. This outcome does not bode well for the future efficacy of QE, at least while that is the primary policy tool in use. Breakevens have been drifting lower and real yields have been drifting higher since last summer. In other words, financial conditions in Japan are tightening, suggesting the need for more stimulus. However, the BoJ already holds a significant proportion of the assets that would be available for purchase, and the gains from additional QE activity – higher breakevens, lower real yields, and a weaker yen – are likely on the margin to be fleeting. It appears that the markets doubt the BoJ’s willingness or ability to carry on with larger and broader asset purchases, or worse yet they do not believe that such asset purchases will have their desired stimulative effect


Further QE should be viewed as an experiment in real time, where the point of inquiry is the level of real or nominal yields at which credit will begin to expand more strongly with loan-to-deposit ratios increasing. What seems increasingly clear to us is that this level is likely at negative yields, and probably substantially so. If this is true, it would suggest to us that the equilibrium level of rates in the economy is probably negative. This in turn would strongly suggest a significant re-think to short-rate policy. In this case, central banks should move more strongly toward penalizing savings, rather than just the institutions that “house” those savings – the banks. This would mean allowing significantly negative retail deposit rates or perhaps even wealth taxes. With this stick would also come a carrot – one example being that while deposit rates penalize savings (the whole point), banks might also pay borrowers to buy houses via negative mortgage rates.

In short, the real central bank panic is about to be unleashed; who will suffer? Why everyone else. And should wealth taxes really be imminent, we foresee a lot of “boating incidents” in the immediate future.

via Tyler Durden

China Takes Drastic Measures To Save The Regime

Submitted by George Friedman via,

Chinese President Xi Jinping recently announced that he would take command of all of China’s armed forces, including the People’s Liberation Army (PLA).

Xi is already chairman of the Central Military Commission that oversees the army. He is now taking a more direct role as head of the new Joint Operations Command Center, which puts him in operational command of the PLA in times of war.

The new title in all likelihood means little in terms of actual command, but it has tremendous political significance. Officially, the Chinese are reforming their military, which is logical (read why here). The roots of this change, however, lie in China’s economic crisis and the need to preserve the regime.

The regime no longer delivers on its promises

Mao Zedong founded China as a moral project: to create a country ruled by communism. After Mao’s death, the project was replaced by another: to modernize the Chinese economy and create prosperity. 

The leadership in the new regime rotated in an orderly fashion, and government after government oversaw the generation of increasing wealth.
Mao justified the regime as a dream (or nightmare, depending on how you view Maoism), while his successors promised prosperity, and they delivered. 

Until now…

There is occasional talk that China will somehow return to a period of rapid growth and increasing wealth. But the vast outflow of money (some in the hands of private individuals, some taken from government coffers and informally privatized) is the short explanation for why China has reached a new normal

If the rule is “follow the insiders,” the insiders are saying that getting money out of China is a priority. The story is more complex, of course. If a regime justifies itself by delivering prosperity, and it stops delivering, the regime is in trouble.

China’s problem can no longer be considered primarily economic. That train has left. The economic reality is locked in and will remain in place for a long time. 

China is now in the throes of a political challenge

The coastal region will grow at a much slower rate than before, if at all. People who came from the interior for jobs will have to return to the interior. 

The interior—a vast and impoverished region—is the population heartland of China. Over 60 percent of China’s population lives there. But the coast is the country’s economic heartland, and that dichotomy defines China’s political problem.

Xi must satisfy both regions, which won’t be easy. The interior wants money for jobs, economic development, and ultimately increased consumption. The only place to get this money from is the coastal region, which obviously does not want to make the transfer.

The coast is economically tied to the United States and Europe, not to the interior. It wants to maintain those links. But the interior is where the majority of Chinese live, and it was the foundation of the Chinese revolution and the regime. 

Xi is frightened that the interior will destabilize the regime under economic pressure and that he will lose control over the coastal region, as happened in the 19th century.

These are distant yet rational fears. Xi’s mission is to ensure that the Communist Party keeps China under control. His primary challenge is the inequality among classes and regions that the post-Mao economic surge created.

Xi must have control over the wealthy

The Communist Party came to rule China by exploiting that inequality. If the party can’t solve the problem it has created, it must at least try to control it.

The first step toward control was to impose a dictatorship on the to prevent the emergence of any organized resistance. Today, further liberalization is out of the question, and suppressing any elements that demand it is essential.

The regime also wants to assert control over private assets. Such control is essential if money will be used to quell unhappiness in the interior, and the vast anti-corruption purge is designed to achieve this.

The campaign is not so much aimed at suppressing corruption, although doing so has its uses. Rather, it is designed to intimidate all those who have accumulated wealth. This class must be brought under the control of the party to prevent it from using its wealth to control the party. 

The mission set out by Deng Xioping was to “enrich yourself.” Now the fear is that the wealthy have gone too far. The somewhat random and unpredictable purges are intended to frighten the rich. 

One result is capital flight, and that is a problem. But the goal is to make wealth subordinate to political power, not the other way around. Otherwise, the party becomes fundamentally weak.

The People’s Liberation Army is the guarantor

Wealth is part of the equation, but in the end, the People’s Liberation Army is the key. It is the ultimate guarantor of the regime in two ways. 

First, it has the power to crush opposition, as it did in Tiananmen Square. Second, the children of peasants fill its ranks, and they see enlistment as a path to upward mobility. Taken together, its makeup and power can guarantee the communist regime’s survival.

On the other hand, the PLA is also capable of undermining the regime. Its enormous size might enable it to subvert the party’s power throughout the country. 

The party and the PLA had a clear alignment in the past. Now that bond is less certain. The PLA’s officer corps has gotten deeply involved in enriching themselves. The PLA was directly involved in PLA-owned enterprises.

The enterprises have been reduced, but the PLA leadership is still intertwined with Chinese business—either directly or through relatives. The PLA’s size and influence mean that its officers’ interests are torn between the party and the wealthy, which is now under attack.

The regime, however, is reducing PLA’s massive size, which makes good military sense. It also makes political sense. This allows Xi to eliminate those involved in what is now termed corruption, to confiscate their wealth, and to intimidate others. 

This purge is similar to those going on in many institutional bureaucracies in China, except that the size and importance of the PLA outstrips all other institutions. A smaller and reconfigured PLA will pose less of a threat to the regime, even if its military efficiency increases.

This transition is dangerous for the party and for Xi. The writing is on the wall for many in the army who have accumulated wealth, but restructuring will take several years.

The PLA will have to be tightly controlled. That is why Xi set up a Discipline Inspection Commission in January specifically for the PLA, answerable directly to the Central Military Commission. 

This is also why Xi has taken direct control of military operations. He or his trusted advisors will have direct access to plans and operations. The PLA will come under Xi’s direct supervision. 

Any broad conspiracy that includes the PLA will be readily detected. You can’t hide the kinds of troop movements that would pose an existential threat to the regime.

The PLA is the center of gravity of the regime, and if Xi loses control of it, he could lose control of everything. Xi would never have appointed himself head of the Joint Operations Command Center if he hadn’t felt the move absolutely necessary. 

He moved to take control of the PLA’s operations to ensure that he could preserve the regime. He put a very different gloss on the action, positioning it as an expansion of his power… and it was. 

But it was an expansion compelled by the regime’s insecurity. At first glance, his move should succeed. But there are so many complex and competing interests involved that when Xi pushes on some, others could come loose.

via Tyler Durden

What Are The Three Signs Of A “Disorderly” Currency Market: Richard Koo Explains

One of the biggest ironies in recent months has been the Bank of Japan’s recurring insistence that it would promptly intervene in the FX market if the ongoing “disorderly” moves in the Yen do not stop. This was ironic because it was the BOJ’s own insistence in characterizing virtually every move as disorderly that ultimately led to the most disordely move of all this week when following the BOJ’s “disappointment” in failing to do anything, the Yen soared the most in years, to a level not seen since October of 2014. Now that was a truly “disorderly” move, which was only made possible by the BOJ’s constant and misguided rhetoric.


Then just yesterday, the Treasury unveiled a brand now “monitoring list”, on which it put five economies but most notably China and Japan. And once again, that word “disorderly” appeared.  This is what the Treasury said:

Economies with flexible exchange rates hold reserves in order to intervene in foreign exchange markets to prevent a disorderly depreciation of their currencies.

Not only that, but the Treasury made it clear that it would very explicitly frown on any “disorderly” currency depreciation by US trade partners going forward.

The United States has secured commitments from the G-20 member countries to move more rapidly to more market-determined exchange rates, avoid persistent exchange rate misalignments, refrain from competitive exchange rate devaluations, and not target exchange rates for competitive purposes. Through Treasury’s leadership, the G-7 member countries, including Japan, have publicly affirmed that their fiscal and monetary policies will be oriented toward domestic objectives using domestic instruments.

But if the BOJ was so perilously wrong in its characterization of what disorderly exchange rates are, then what are they? For the answer we go to Richard Koo and the following explanation.

What is meant by “orderly” exchange rate movements


At the press conference following the meeting of G20 finance ministers and central bank governors in Washington on 15 April, Treasury Secretary Jack Lew responded to Finance Minister Aso’s expression of “strong concern” about “one-sided” increases in the yen the previous day by saying that “despite recent yen appreciation, foreign exchange markets remain orderly.” This comment made it far more difficult for Japan to engage in currency intervention.


The operative term in this exchange was “orderly.” Currency authorities in the developed economies have a basic agreement to leave the determination of exchange rates up to the market. The one exception to this rule is that national authorities are allowed to intervene, even unilaterally, when markets become “disorderly.”


There is a proper definition for what constitutes a disorderly market. When I worked as an economist at the New York Fed’s forex desk, the definition was divided into three stages.


First sign of disorderly market: widening bid-offer spreads


The first sign that a market has grown disorderly is that forex dealers’ bid-offer spreads (the difference between the prices they are willing to buy and sell at) start to widen.


For instance, a normal bid-offer spread of 0.03 yen might rise to 0.05 or 0.10 yen as market conditions become turbulent. Spreads increase because exchange rate volatility forces dealers to provide themselves with a wider margin of safety.


Second sign: gapping


If the market turmoil continues, the next phenomenon witnessed is something called gapping. This happens when there is a discontinuity between the bid-offer quotes submitted by dealers.


For example, if one dealer says it will buy at 110.25 yen/dollar (bid) and sell at 110.30 yen/dollar (offer), the next quote will usually overlap that range. In this case, it might be 110.27–110.32 or 110.23–110.28.


But when even dealers are no longer sure what is going on in the market, the original quote of 110.25–110.30 might be followed by a non-overlapping quote of 110.35–110.40. Such moves are also likely to be accompanied by a widening of bid-offer spreads.


In extreme cases, dealers stop answering their phones


In the final stages of a disorderly market, when extreme turmoil leaves all participants unsure what to do next, dealers will simply stop answering their phones. By having traders connect to other internal extensions, the firm can keep all its phone lines busy and avoid taking any outside orders.


This is a disorderly market, and in such cases central banks are allowed to intervene in the currency market to restore order.

Now, as even Jack Lew admits, central bank intervention in a disorderly market is fine. A far bigger risk in game theoretical terms, as well as angering the global reserve currency hegemon, is when a central bank intervenes when the moves are perfectly orderly; this is precisely what the market was convinced the BOJ would do on Wednesday night… and was massively wrong.  According to Nomura’s Koo, the answer is that “Japanese intervention in orderly forex market could be seen as collapse of cooperative relationship

This sort of phenomenon has yet to be observed in the yen’s current upswing, which is why Mr. Lew went out of his way to describe forex markets as “orderly.”


If Japan were to unilaterally intervene to weaken the yen under such conditions, it would be doing so without US approval, which would signal a rift between the two countries.


Japan is, of course, a sovereign nation and is free to intervene if it so desires. The problem is how the market might react to a perceived collapse of its cooperative relationship with the US.

It happened once before under Eisuke “Mr Yen” Sakakibara., when the Japanese finance minister intervened in 1999 against US wishes. This is what happened then.

Problems [in Japan’s relationshbip with the US] surfaced late in June 1999, when then-Vice Minister of Finance Eisuke Sakakibara, perhaps seeking to celebrate his impending retirement, declared his intention to push the yen down to 122 versus the dollar from the existing level of 117 and implemented an intervention totaling several trillion yen.


This action, which was not only unilateral but was against the wishes of the US, seriously upset US Treasury Secretary Lawrence Summers, who was already jittery over the trade frictions between the two nations. Mr. Summers quickly distanced himself from Japan’s intervention in no uncertain terms.


The markets took this official exchange as evidence of a breakdown in the cooperative relationship between Japan and the US that had been in place ever since the Louvre Accord in 1987. Helped by the fact that Japan was running a large trade surplus at the time, the yen strengthened and USD/JPY, instead of heading towards 122, plummeted to 102.


Not only did Japan experience heavy foreign exchange losses, but the economy now had to deal with a sharply higher yen. The Assistant Treasury Secretary for International Affairs at the time, Timothy Geithner, is reported to have shouted at a Japanese counterpart, “Didn’t anyone try to stop him [Sakakibara]?”

Perhaps the BOJ’s January NIRP announcement was also a unilateral decision without prior approval from the US, which explains why the USDJPY instead of soaring, has tumbled to nearly 2 year lows.

One thing is increasingly certain: the US has finally put its foot down, not surprisingly at a time when the USD is rapidly sliding. Maybe the period of strong dollar generosity for the rest of the world, has come and gone, and from this point on it is time for the US to reap the benefits of a rapidly depreciation currency especially since the threat of any rate hikes is virtually gone. That said, we won’t know for sure until Goldman finally capitulates on its dollar call which has been “long and wrong” for the past six months. Only when Robin Brooks finally throws in the towel, will it be safe to once again go long the USD.

via Tyler Durden