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Authored by Lance Roberts via RealInvestmentAdvice.com,

If you haven’t heard of Modern Monetary Theory, or “MMT,” you will soon. If you recently lost your job due to the economic shut down, and received a stimulus check, you are already a beneficiary. As we will discuss in Part-1 of this two-part series, MMT’s theory falls flat when faced with reality.

With economic growth sluggish, unemployment high, and the wealth gap widening, politicians will be increasing pressure to delve deeper into MMT to cure our economic woes. However, to understand more about the premise of MMT, economist Stephanie Kelton, recently produced a video explaining the concept.

The Government Isn’t A Household

“MMT starts with a simple observation, and that is that the US dollar is a simple public monopoly. In other words, the United States currency comes from the United States government; it can’t come from anywhere else. So, what that means is that the federal government is nothing like a household.

For households or private businesses to be able to spend they’ve got to come up with the money, right? And the federal government can never run out of money. It cannot face a solvency problem with bills coming due that it can’t afford to pay. It never has to worry about finding the money to be able to spend.”

There is nothing untrue about that statement. While the Government can indeed “print money to meet all obligations,” it does NOT mean there are not consequences. The chart below really tells you all you need to know.

In reality, just like households, debt matters. When debt is used for “non-productive” purposes, the debt diverts dollars from productive purposes into servicing of the debt. The concept of “productive investments” is critically important to understanding why MMT fails the “litmus” test.

American Gridlock

Dr. Woody Brock, in American Gridlock, explained the importance of the productive use of debt. To wit:

“The word ‘deficit’ has no real meaning. 

‘Country A spends $4 Trillion with receipts of $3 Trillion. This leaves Country A with a $1 Trillion deficit. To make up the difference between the spending and the income, the Treasury must issue $1 Trillion in new debt. That new debt is used to cover the excess expenditures, but generates no income leaving a future hole that must be filled.

Country B spends $4 Trillion and receives $3 Trillion income. However, the $1 Trillion of excess, which was financed by debt, was invested into projects and infrastructure that produced a positive return rate. There is no deficit as the return rate on the investment funds the ‘deficit’ over time.’

There is no disagreement about the need for government spending. The argument is with the abuse and waste of it.

For government “deficit” spending to be effective, the “payback” from investments being made through debt must yield a higher return rate than the interest rate on the debt used to fund it.

MMT’s Root Problem

For MMT, the problem is government spending has shifted away from productive investments. Instead of things like the Hoover Dam, which creates jobs (infrastructure and development), spending shifted to social welfare, defense, and debt service, which have a negative rate of return.

According to the Center On Budget & Policy Priorities, nearly 75% of every tax dollar goes to non-productive spending. 

In other words, the U.S. is “Country A.” 

To clarify, in 2019, the Federal Government spent $4.8 Trillion, which was equivalent to 22% of the nation’s entire nominal GDP. Of that total spending, ONLY $3.6 Trillion came from Federal revenues, the remaining$1.1 trillion came from debt.

If 75% of all expenditures go to social welfare and interest on the debt, those payments required $3.6 Trillion, or roughly 99% of the total revenue coming in. 

Measuring With The Wrong Yardstick

“So, the deficit definitely matters; it’s just that it matters in ways that we’re not normally taught to understand. Normally I think people tend to hear deficit and think it’s something that we should strive to eliminate; that we shouldn’t be running budget deficits; that there is evidence of fiscal irresponsibility. And the truth is the deficit can be too big. Evidence of a deficit that’s too big would be inflation.” – Kelton

Yes, Ms. Kelton does acknowledge the deficit can be too big, and the consequence would be inflation.

There are two problems with her argument. The first is that if the Government was running a massive deficit funding productive investments, then “inflation” would indeed be a problem. However, increasing deficits for non-productive purposes slows economic growth and is deflationary. Even a cursory glance at GDP, the deficit, and inflation show the error in MMT’s premise.

The second, and more important problem is the measure of inflation.

How Should MMT Measure Inflation?

Prior to 1998, inflation was measured on a basket of goods. However, during the Clinton Administration, the Boskin Commission was brought in to recalculate how inflation was measured. Their objective was simple – lower the rate of inflation to reduce the amount of money being paid out in Social Security.

Since then, inflation measures have been tortured, mangled, and abused to the point where it scarcely equates to the inflation that consumers deal with. For example, home prices were substituted for “homeowners equivalent rent,” which was falling at the time, and lowered inflationary pressures, despite rising house prices.

Since 1998, homeowners equivalent rent has risen 72% while house prices, as measured by the Shiller U.S. National Home Price Index has almost doubled the rate at 136%. House prices which currently comprise almost 25% of CPI has been grossly under-accounted for. In fact, since 1998, CPI has been under-reported by .40% a year on average. Considering that official CPI has run at a 2.20% annual rate since 1998, .40% is a big misrepresentation.

Innovation, technology, and the exportation of labor has lowered stated inflation rates. The chart below compares inflation today measured with both the 1990 computations and current ones.

Whether you agree with the calculations, weightings, and hedonics, the measure of inflation MUST be defined if it is the governor of economic policy.

It currently isn’t.

Deficits Are Others Surpluses

“In other words their deficits become our surpluses and so when we talk about the government having all this red ink, we have to remind ourselves that their red ink becomes our black ink and their deficits are our surpluses and the question is then should you expand fiscal policy? Should you run bigger budget deficits in order to boost growth?” – Kelton

In theory, the concept is correct; in economic reality, it hasn’t functioned that way.

If used for productive investments, debt can be a solution to stimulating economic growth in the short-term and providing a long-term benefit. The current surge in deficit spending only succeeds in giving a temporary illusion of economic growth by “pulling forward” future consumption, leaving a void to fill continually.

Jerome Powell previously stated the economy should grow faster than the debt. Yet, each year, the debt continues to grow faster than the economy.

Economy Can’t Grow Faster Than Debt

The relevance of debt growth versus economic growth is all too evident, as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt must continue to maintain current economic growth.

However, merely looking at Federal debt levels is misleading.

It is the total debt that weighs on the economy.

It now requires nearly $3.00 of debt to create $1 of economic growth.

Another way to view the impact of debt on the economy is to look at what “debt-free” economic growth would be. In other words, without debt, there has actually been no organic economic growth.

The economic deficit has never been more enormous. For the 30 years from 1952 to 1982, the economic surplus fostered a rising economic growth rate, which averaged roughly 8% during that period. With the economy expected to grow below 2% over the long-term, the economic deficit has never been greater.

Such is why MMT will ultimately fails. 

Interest rates and inflation MUST remain low, and debt MUST grow faster than the economy, just to keep the economy from stalling out.

The current environment is the very essence of a “liquidity trap.”

Productivity Loss

“So, what is the objective, what is the proper policy goal, and I think the right policy goal is to maintain a balanced economy where you’re at full employment. You’re guarding against an acceleration and inflation risk. And economists tend to understand that the kinds of things that you can do to boost longer term growth are investments in things like education, infrastructure, R&D. Those are the sorts of things that tend to accelerate productivity growth so that longer term real GDP growth can be higher.

So, there are ways in which the government can make investments today that increase deficits today that produce higher growth tomorrow and build in the extra capacity to absorb those higher deficits.” Kelton

There is clear evidence that increasing debts and deficits DO NOT lead to either stronger economic growth or increasing productivity. As Michael Lebowitz recently showed:

“Since 1980, the long term average growth rate of productivity has stagnated in a range of 0 to 2% annually, a sharp decline from the 30 years following WWII when productivity growth averaged 4 to 6%. While there is no exact measure of productivity, total factor productivity (TFP) is considered one of the best measures. Data for TFP can found here.

The graph below plots a simple index we created based on total factor productivity (TFP) versus the ten-year average growth rate of TFP. The TFP index line is separated into green and red segments to highlight the change in the trend of productivity growth rate that occurred in the early 1970’s. The green dotted line extrapolates the trend of the pre-1972 era forward.”

“The graph below plots 10-year average productivity growth (black line) against the ratio of total U.S. credit outstanding to GDP (green line).”

“This reinforces the message from the other debt related graphs – over the last 30 years the economy has relied more upon debt growth and less on productivity to generate economic activity.

Ill-conceived policies, like MMT, which impose an over-reliance on debt and demographics, have mostly run their course and failed.

Let’s Be Like Japan

“So, it’s impossible really to put a number on it. Nobody can know how much debt is too much debt. If you look at Japan today you see a country where the debt to GDP ratio is something like 240%, orders of magnitude above where the US is today or even where the US is forecast to be in the future. And so the question is how is Japan able to sustain a debt of that size.

Wouldn’t it have an inflation problem? Would it lead to rising interest rates? Wouldn’t this be destructive in some way? The answer to all those questions as Japan has demonstrated now for years is simply, no. Japan’s debt is close to 240% of GDP, almost a quadrillion. That’s a very big number. Again, long term interest rates are very close to zero. There’s no inflation problem and so despite the size of the debt there are no negative consequences as a result. I think Japan teaches us a really import lesson.” – Kelton

Ms. Kelton is correct. Japan does indeed teach us that running massive debts and deficits have not fostered stronger economic growth, beneficial inflation, or prosperity.

There Is More To The Story

Japan has been running a massive “quantitative easing” program stating in 2008, which is more than 3-times the size of that in the U.S. While stock markets did rise with ongoing Central Bank interventions, long-term performance has remained muted.

More importantly, economic prosperity is only slightly higher than it was before the turn of the century.

Despite the Bank of Japan consuming 80% of the ETF market and a sizable chunk of the corporate and government debt market, Japan has been plagued by rolling recessions, low inflation, and low-interest rates. (Japan’s 10-year Treasury rate fell into negative territory for the second time in recent years.)

Clearly, Ms. Kelton has not studied the impacts of MMT on Japan. The consequences for its citizens has been less than beneficial.

Japan Is A Template

Should we worry about the debt? If Japan is indeed a template of what we will eventually face, the simple answer is “yes.”

As global growth continues to slow, the negative impact of debt expands economic instability and wealth inequality. Likewise, the hope Central Bank’s monetary ammunition can foster economic growth, or inflation has been misplaced.

“The fact is that financial engineering does not help an economy, it probably hurts it. If it helped, after mega-doses of the stuff in every imaginable form, the Japanese economy would be humming. But the Japanese economy is doing the opposite. Japan tried to substitute monetary policy for sound fiscal and economic policy. And the result is terrible.” – Doug Kass

Japan is a microcosm of what the U.S. will face in the coming years as the “3-D’s” of debt, deflation, and the inevitability of demographics continue to widen the wealth gap. What Japan has shown us is that financial engineering doesn’t create prosperity, and over the medium to longer-term, it has negative consequences.

Such is a key point.

What is missed by those promoting the use of more debt, is the underlying flawed logic of using debt to solve a debt problem.

At some point, you simply have to stop digging.

Over the years, we have periodically reported of the occasional gold bar discovered as counterfeit in Manhattan’s Diamond District which instead of containing the yellow precious metal would be filled with gold-plated tungsten or in some cases copper. The news would spark a brief wave of outrage, prompting physical gold holders to run ultrasound spot checks of their inventory, at which point interest would wane and why not: buyer, after all, beware in gold as in every other market, and if someone is spending thousands to buy fake gold, well that’s Darwinism in action.

Yet one market which seemed stubbornly immune to any counterfeiting was that of physical gold in China, which was odd considering that over the past decade China had emerged as the world’s biggest counterfeiter of various, mostly industrial metals used to secure bank loans, better known as “ghost collateral“, and which adding insult to injury, would frequently  be rehypothecated meaning often several banks would have claims to the same (fake) asset.

All that is about to change with the discovery of what may be one of the biggest gold counterfeiting scandal in recent history. And yes, not only does it involve China, but it emerges from a city that has become synonymous for all that is scandalous about China: Wuhan itself.

With that preamble in mind, we introduce readers to Wuhan Kingold Jewelry Inc., a company which as the name implies was founded and operates out of Wuhan, and which describes itself on its website as “A Company with a Golden future.”

In retrospect, it probably meant “copper” future, because as a remarkable expose by Caixin has found, more than a dozen Chinese financial institutions, mainly trust companies (i.e., shadow banks) loaned 20 billion yuan ($2.8 billion) over the past five years to Wuhan Kingold Jewelry with pure gold as collateral and insurance policies to cover any losses. There was just one problem: the “gold” turned out to be gold-plated copper.

Some more background: Kingold – whose name was probably stolen from Kinross Gold, one of the world’s largest gold miners – is the largest privately owned gold processor in central China’s Hubei province. Its shares are listed on the Nasdaq stock exchange in New York (although its current market cap of just $10MM is a far cry from its all time highs hit when the company IPOed on the Nasdaq around 2010) . The company is led by Chairman Jia Zhihong, an intimidating ex-military man who is the controlling shareholder.

What could go wrong?

Well, apparently everything as at least some of 83 tons of gold bars used as loan collateral turned out to be nothing but gilded copper. That has left lenders holding the bag for the remaining 16 billion yuan of loans outstanding against the bogus bars. And as Caixin adds, the loans were covered by 30 billion yuan of property insurance policies issued by state insurer PICC Property and Casualty and various other smaller insurers.

The fake gold came to light in February when Dongguan Trust (one of those infamous Chinese shadow banks) set out to liquidate Kingold collateral to cover defaulted debts. As the report continues, in late 2019 Kingold failed to repay investors in several trust products. To its shock, Dongguan Trust said it discovered that the gleaming gold bars were actually gilded copper alloy.

The news sent shockwaves through Kingold’s creditors. China Minsheng Trust – another shadow banking company and one of Kingold’s largest creditors – obtained a court order to test collateral before Kingold’s debts came due. On May 22, the test result returned saying the bars sealed in Minsheng Trust’s coffers are also copper alloy.

And with authorities investigating how this happened, Kingold chief Jia flatly denies that anything is wrong with the collateral his company put up. Well, what else could he say…

As Caxin notes, the Kingold counterfeiting case echoes China’s largest gold-loan fraud case, unfolding since 2016 in the northwest Shaanxi province and neighboring Hunan, where regulators found adulterated gold bars in 19 lenders’ coffers backing 19 billion yuan of loans, or about USD $2.5 billion. In that case, a lender seeking to melt gold collateral found black tungsten plate in the middle of the bars.

In the case of Kingold, the company said it took out loans against gold to supplement its cash holdings, support business operations and expand gold reserves, according to public records. It then appears to have decided to apply a gold-layer to tons of copper and pretend it was money-good gold collateral. And even more shocking, for years nobody checked the authenticity of the pledged collateral!

In 2018, the company beat a number of competitors in bidding to buy a controlling stake in state-owned auto parts maker Tri-Ring Group. Kingold offered 7 billion yuan in cash for 99.97% of Tri-Ring. The Hubei government cited the deal as a model of so-called mixed-ownership reform, which seeks to invite private shareholders into state-owned enterprises. But Kingold has faced problems taking over Tri-Ring’s assets amid a series of corruption probes and disputes involving Tri-Ring.

After obtaining the test results, Minsheng Trust executive said the company asked Jia whether the company fabricated the gold bars: “He flatly denied it and said it was because some of the gold the company acquired in early days had low purity,” the executive said. In a telephone interview with Caixin in early June, Jia denied that the gold pledged by his company was faked.

“How could it be fake if insurance companies agreed to cover it?” he said and refused to comment further. Well, the answer is simple: the insurance companies were in on the scam, but that’s a story for another day.

In early June, Minsheng Trust, Dongguan Trust and a smaller creditor Chang’An Trust filed lawsuits against Kingold and demanded that PICC P&C cover their losses. PICC P&C declined to comment to Caixin on the matter but said the case is in judicial procedure. A source from PICC P&C told Caixin that the claim procedure should be initiated by Kingold as the insured party rather than financial institutions as beneficiaries. Kingold hasn’t made a claim, the Caixin source said.

In total, Kingold pledge tens of thousands of kilograms of gold to no less than 14 creditors amounting to just under 20 billion yuan.

Caixin learned that the Hubei provincial government set up a special task force to oversee the matter and that the public security department launched an investigation. The Shanghai Gold Exchange, a gold industry self-regulatory organization, disqualified Kingold as a member as of last week.

Following Dongguan Trust and Minsheng Trust, two other Kingold creditors also tested pledged gold bars and found they were fake, Caixin learned. A Dongguan Trust employee said his company reported the case to police Feb. 27, the day after the testing result was delivered, and demanded 1.3 billion yuan of compensation from PICC P&C’s Hubei branch.

Meanwhile, Kingold defaulted on 1.8 billion yuan of loans from Dongguan Trust with an additional 1.6 billion yuan due in July.

The 83 tons of purportedly pure gold stored in creditors’ coffers by Kingold as of June, backing the 16 billion yuan of loans, would be equivalent to 22% of China’s annual gold production and 4.2% of the state gold reserve as of 2019.

In short, more than 4% of China’s official gold reserves may be fake. And this assume that no other Chinese gold producers and jewelry makers are engaging in similar fraud (spoiler alert: they are.)

* * *

Founded in 2002 by Jia, Kingold was previously a gold factory in Hubei affiliated with the People’s Bank of China that was split off from the central bank during a restructuring. With businesses ranging from gold jewelry design, manufacturing and trading, Kingold is one of China’s largest gold jewelry manufacturers, according to the company website.

The company debuted on Nasdaq in 2010. The stock currently trades around $1 apiece, giving Kingold a market value of $12 million, down 70% from a year ago. A company financial report showed that Kingold had $3.3 billion of total assets as of the end of September 2019, with liabilities of $2.4 billion.

Jia, now 59, served in the military in Wuhan and Guangzhou and spent six years living in Hong Kong. He once managed gold mines owned by the People’s Liberation Army, which means he likely has connections all the way to the very top.

“Jia is tall and strong,” one financial industry source familiar with Jia told Caixin. “He’s an imposing figure and speaks loudly. He is bold, reckless and eloquent, always making you feel he knows better than you.”

Several trust company sources said Jia is well connected in Hubei – the epicenter of the coronavirus pandemic – which may explain Kingold’s surprise victory in the Tri-Ring deal. But a financial industry source in Hubei said Jia’s business is not as solid as it may appear.

“We knew for years that he doesn’t have much gold ― all he has is copper,” said the source, who declined to be named.

Local financial institutions in Hubei have avoided doing business with Kingold, but they don’t want to offend him publicly, the source said. Why? Because of his extnesive connections with the Chinese army.

“Almost none of Hubei’s local trust companies and banks has been involved in (Kingold’s) financing,” he said.

That explains why most of Kingold’s creditors are from outside Hubei. Caixin learned from regulatory sources that Minsheng Trust is the largest creditor of Kingold with nearly 4.1 billion yuan of outstanding loans, followed by Hengfeng Bank’s 3.9 billion yuan, Dongguan Trust’s 3.4 billion yuan, Anxin Trust & Investment Co.’s 1.9 billion yuan and Sichuan Trust Co.’s 1.8 billion yuan.

But wait, counterfeiting gold is just the tip of the company’s fraud iceberg: several industry sources told Caixin that the institutions were willing to offer loans to Kingold because Jia promised to help them dispose of bad loans.

Hengfeng Bank is the only commercial bank involved in the Kingold affair. The bank in 2017 provided an 8 billion yuan loan to Kingold, which in return agreed to help the bank write off 500 million yuan of bad loans, bank sources said. Kingold repaid half of the debts in 2018. But the loan issuance involved many irregularities as access to the pledged gold and testing procedures was controlled by Kingold, one Hengfeng employee said.

The loan was pushed forward by Song Hao, former head of Hengfeng’s Yantai branch. Song was placed under graft investigation in March 2018 in connection with the bank’s disgraced former Chairman Cai Guohua, whose downfall led to a major revamp in the bank’s management. In 2019, Hengfeng’s new management sued Kingold for the unpaid loans and moved to dispose the collateral. But a test of the gold bars found they are “all copper,” the bank source said.

It is still unclear whether the collateral was faked in the first place or replaced afterward. Sources from Minsheng Trust and Dongguan Trust confirmed that the collateral was examined by third-party testing institutions and strictly monitored by representatives from Kingold, lenders and insurers during the process of delivery.

“I still can’t understand which part went wrong,” a Minsheng Trust source said. Bank records showed that the vault where the collateral was stored was never opened, the source told Caixin.

The falling dominos

Public records showed that Kingold’s first gold-backed borrowing can be traced back to 2013, when it reached an agreement for 200 million yuan of loans from Chang’An Trust, with 1,000 kilograms of gold pledged. The two-year loan was to fund a property project in Wuhan and was repaid on time. Before this, Kingold’s financing mainly came from bank loans with property and equipment as collateral.

It appears that one way or another, the company realized that it could fabricate gold ownership and receive money in exchange for what were basically worthless copper bricks painted as gold; and thanks to Jia’s military connections nobody would ask any other questions.

As a result, starting in 2015, Kingold rapidly increased its reliance on gold-backed borrowing and started working with PICC P&C to cover the loans. In 2016, Kingold borrowed 11 billion yuan, nearly 16 times higher than the previous year’s figure. Its debt-to asset ratio surged to 87.5% from 43.4%, according to a company financial report. That year, Kingold pledged 54.7 tons of gold for loans, 7.5 times higher than the previous year.

It is now safe to assume that most of that gold never existed.

A person close to Jia said the surge of borrowing was partly due to Kingold’s pursuit of Tri-Ring. In 2016, the Hubei provincial government announced a plan to sell Tri-Ring stakes to private investors as a major revamp of the Hubei government-controlled auto parts manufacturer.

In 2018, Kingold was selected as the investor in a deal worth 7 billion yuan. According to the investment plan, Kingold’s purchase of Tri-Ring was part of a strategy to expand into the hydrogen fuel cell business, which is obviously a “logical” fit for a company involved in gold jewelry. Sources close to the deal said Kingold was attracted by Tri-Ring for its rich holding of industrial land that could be converted for commercial development.

Yes, at the very bottom of the fraud we finally get to the one true and endless Chinese asset bubble: real estate.

A Dongguan Trust investment document showed that Tri-Ring owns land blocks in Wuhan and Shenzhen that are worth nearly 40 billion yuan.

The deal drew immediate controversy as some rival bidders questioned the transparency of the bidding process and Kingold’s qualifications.

And here things get even crazier: according to Kingold’s financial reports, the company had only 100 million yuan of net assets in 2016 and 2 billion yuan in 2017, sparking doubts over its capacity to pay for the deal. Despite the fuss, Kingold paid 2.8 billion yuan for the first installment shortly after the announcement of the deal. The second installment of 2.4 billion yuan was paid several months later with funds raised from Dongguan Trust.

In December, Tri-Ring completed its business registration change, marking completion of Kingold’s takeover. However, the new owner has since faced troubles mobilizing Tri-Ring’s assets because of a series of corruption probes surrounding the auto parts maker since early 2019 that brought down Tri-Ring’s former chairman. As Caixin the notes, a majority of Tri-Ring’s assets were frozen amid the investigation and subsequent debt disputes, limiting Jia’s access to the assets.

The fraud is finally exposed

Hobbled by the Tri-Ring deal, which cost billions of yuan but has yet to make any return, Jia’s capital chain was eventually broken when Hengfeng Bank pushed for repayment, triggering a series of events that brought the fake gold to light, said a person close to the matter. Insurers’ involvement was key to the success of Kingold’s gold-backed loan deals. The insurance policies provided by leading state-owned insurers like PICC P&C were a major factor defusing lenders’ risk concerns, several trust company sources said.

“Without the insurance coverage from PICC P&C, (we) wouldn’t issue loans to Kingold as the collateral can only be tested through random picked samples,” one person told Caixin.

PICC P&C’s Hubei branch provided coverage for most of Kingold’s loans, Caixin learned. All the policies will expire by October. As of June 11, 60 policies were still valid or involved in lawsuits.

PICC P&C faces multiple lawsuits filed by Kingold’s creditors demanding compensation. But a PICC P&C spokesperson said the policies cover only collateral losses caused by accident, disasters, robbery and theft. Not fraud, and certainly not losses when the collateral never even existed!

Whose fault

Wang Guangming, a lawyer at Dacheng Law Offices, said the key issue is what happened to the pledged gold and which party was aware of the falsification. If Kingold faked the gold bars and both the insurers and creditors were unaware, the insurers should compensate the lenders and sue Kingold for insurance fraud, Wang said. Insurers are also responsible to compensate if they knew of Kingold’s scam but creditors didn’t, Wang said.

If Kingold and creditors were both aware of the fake collateral, insurers could terminate the policies and sue the parties for fraud. But if insurers were also involved in the scam, then all the contracts are invalid and every party should assume their own legal responsibilities, Wang said.

A financial regulatory official told Caixin that previous investigations of loan fraud cases involving fake gold pledges found there was often collusion between borrowers and financial institutions.

Earlier this year, PICC P&C removed its Hubei branch party head and general manager Liu Fangming. Sources said staff members involved in business with Kingold were also dismissed. PICC P&C said Liu’s removal was due to internal management issues. It didn’t answer Caixin’s question about whether Liu was involved in the Kingold scandal.

* * *

The above story is shocking in exposing just how multi-faceted fraud is in China: capitalizing on pre-existing cronyism and connections with China’s powerful army, the founder of Kingold was allowed to basically do anything he wanted, no questions asked, including counterfeiting over 83 tons of gold bars to get billions in funds to participate in China’s housing bubble, only for a series of unexpected events to unwind the frauds one after another and expose the type of sordid scandal that is at the heart of most Chinese “enterprises” and business ventures.

As for the gold, yes – several billion in gold bars never existed and yet resulted in a cascade of subsequent cash flow events allowing tens of billions in funds to be released, “benefiting” not only founder Jia, but China’s broader economy. Which is, needless to say, terrifying: because whereas just after the financial crisis China was engaged in building ghost cities, everyone knew these were a symbol of demand that would never materialize, even if the cities themselves did exist. However, it now appears that a major part of China’s subsequent economic boom has been predicated on tens of billions in hard assets – such as gold – which simply do not exist.

As for what this means for the price of gold… well, Kingold is certainly not the only Chinese company engaging in such blatant fraud, and the consequences are clear: once Chinese creditors or insurance companies start testing the “collateral” they have received in exchange for tens of billions in loans and discover, to their “amazement”, that instead of gold they are proud owners of tungsten or copper, they have two choices: reveal the fraud, risking tremendous adverse consequences and/or prison time, or quietly buy up all the gold needed to literally fill the void from years of gold counterfeiting.

Something tells us option two will be far more palatable to China’s kleptoculture where one domino cold trigger a collapse of the entire financial system. What happens next: a panicked scramble to procure physical gold, one which even our friends at the BIS will be powerless to stop from sending the price of the precious metal to all time highs.

Authored by Jonathan Turley,

Below is my column in USA Today on the D.C. Circuit ordering Judge Emmet Sullivan to dismiss the case of former National Security Adviser Michael Flynn.  After this column ran, new evidence emerged that further undermined the FBI and the targeting of Flynn, as discussed in another recent column.  Notes from fired FBI Special Agent Peter Strzok show that former FBI Director James Comey told President Barack Obama and Vice President Joe Biden that Flynn’s call to the Russian diplomat “appear legit.” 

Nevertheless, Biden (who denied having anything to do with the case) is noted as raising the idea of a charge under the facially unconstitutional Logan Act, a law that has never been used successfully to charge a single person since the beginning of this Republic. 

Comey of course was the one who later bragged that he “probably wouldn’t have … gotten away with it” in other administrations, but he sent “a couple guys over” to question Flynn, who was settling into his new office as national security adviser. We now know that, when Comey broke protocols and sent the agents, he thought the calls were legitimate ant that agents wanted to dismiss the investigation in December for lack of evidence. They were prevented from doing so as Strzok, Biden, and others discussed other crimes, any crime, to nail Flynn just before the start of the Trump Administration.

If all of that seems “illegitimate” and “irregular,” it pales in comparison to how two judges on the D.C. panel reviewed the handling of the Flynn case by Judge Emmet Sullivan.  It seems that everyone from the President to the Vice President to the FBI Director to ultimately the federal judge have engaged in a dangerous form of improvisational law when it came to Michael Flynn.  That will now hopefully end though many questions still remain.

It is possible for Judge Sullivan to appeal, though the upcoming hearing on Flynn has been removed from the docket.

Here is the column:

The dismissal of the case against former National Security Adviser Michael Flynn sent shock waves across Washington, including Congress which was hours away from a hearing addressing the case. Any appellate decision taking unprecedented measures to stop “irreparable harms” and “irregular” conduct is newsworthy. However, those admonishments were not describing Flynn’s conduct but that of his trial judge, U.S. District Judge Emmet Sullivan. The D.C. Circuit panel took the exceptionally rare step of ordering Sullivan to stop further proceedings and dismiss the case to avoid further damage caused by his prior orders.

The case should have been dismissed

One month ago, I wrote a column criticizing the handling of the Flynn case by Judge Sullivan after the government moved to dismiss its own prosecution.

The law in this case is clear and the case should have been dismissed. Instead, Sullivan took the extraordinary action of appointing a retired judge, John Gleeson, to argue positions that neither of the actual parties supported. Gleeson not only had publicly denounced the administration over its handling of the case but, as a judge, was reversed for “irregular” conduct in usurping the authority of prosecutors. In addition, Sullivan suggested that he might charge Flynn with perjury for alleging that he was wrongly charged despite the support of the Justice Department in finding abuses in his case.

Criticizing Sullivan, who I have appeared before for years as counsel and previously complimented for his demeanor, was not popular. Legal analysts in The Washington Post, CNN and other outlets insisted that his actions were entirely appropriate and justified. Yet, another letter from “former prosecutors” was given unquestioning media coverage to show that Sullivan should deny the motion in the case.

In an opinion piece, UCLA Law Professor and former U.S. Attorney under Bill Clinton, Harry Litman even explained how Sullivan could “make trouble” for the Trump administration in these hearings. Litman insisted that I was “a very lonely voice in the wilderness” of academia in contesting the use of an outside lawyer to make arguments in a criminal trial case that neither the defense nor the prosecution supported.

The wilderness now appears to include at least two other voices from the D.C. Circuit. The panel specifically denounced the “irregular” use of Gleeson and his hyperbolic arguments in the case. Gleeson suggested that the court should actually send Flynn to jail despite prosecutors raising evidence of misconduct and abuse as the basis for dismissal. He also argued that, rather than give Flynn a trial on a new charge from Sullivan of perjury, Flynn should just be sentenced in light of such perjury as part of his prior non-perjury charge.

Even for those of us who believed that Sullivan was operating well outside of the navigational beacons for a court in such case, the decision was breathtaking. Most of us expected that the appellate court would remand the case to allow Sullivan a face-saving hearing with an inevitable order to dismiss. The panel, however, clearly had little trust in the plans for this hearing or any true judicial purpose. Indeed, it may have been convinced that the primary purpose was indeed to “make trouble” for the administration.

As some of us wrote previously, the appellate court was particularly alarmed by the implications of Sullivan’s orders, including noting that the “invitation to members of the general public to appear as amici…” The panel said that such an invitation by Sullivan “suggests anything but a circumscribed review.” Moreover, it noted that the Justice Department had submitted troubling evidence of possible misconduct. And that “each of our three coequal branches should be encouraged to self-correct when it errs.”

Gleeson, wrong appointment

The greatest irony is that Sullivan’s unwise decision to appoint Gleeson to make the case was perhaps too successful. Gleeson ultimately proved not the case against Flynn but against Sullivan. In reviewing Gleeson’s brief, the panel declared “we need not guess if this irregular and searching scrutiny will continue; it already has.”  The panel noted that Sullivan’s appointed counsel “relied on news stories, tweets, and other facts outside the record to contrast the government’s grounds for dismissal here with its rationales for prosecution in other cases.”

The panel was also aware of past concerns raised in the case, including the rather bizarre first sentencing hearing held in December 2018. In that hearing, Sullivan suggested that Flynn might be guilty of treason in a case involving comparatively minor charges of false statements to federal investigators. Sullivan dramatically used the flag in the courtroom as a prop and accused Flynn of being “an unregistered agent of a foreign country while serving as the national security adviser to the president of the United States. Arguably, that undermines everything this flag over here stands for. Arguably, you sold your country out.” (He later apologized for his comments.)

The irony, however, is that Sullivan proved the best thing that could have happened to Flynn. After that unnerving exchange, Sullivan asked if Flynn still wanted him to sentence him or wait. He indicated that he might go substantially beyond what Special Counsel Robert Mueller’s team had demanded. Flynn wisely decided to wait. The resulting delay allowed the damaging evidence from his case to be review and released. Had Sullivan simply sentenced Flynn last December, it would have been much more difficult for Flynn to have raised these issues.

Sullivan then handed down his novel orders including appointing his own counsel to argue for prosecution against the actual prosecutors.

This record proved too much for the appellate court. Rather than order Sullivan off the case, it decided to order Sullivan to dismiss the case. Short of an order of actual recusal of a judge, a mandamus order is the most stinging indictment of the handling of a case that can come from an appellate court.

The ruling in this case is unlikely to force any real circumspection by legal analysts or the media in the prior coverage. Nuanced legal questions quickly evaporate in this age of rage. Conflicting case law is dismissed in favor of the clarity demanded by echo journalism. The law however brings its own clarity and the message of this opinion could not be clearer.

Sullivan’s actions in the case did not spell “trouble” for the Trump administration, but rather, they spelled trouble for the administration of justice in our court system.

Headlines like “Houston facing ‘apocalyptic’ July 4” sparked fear and panic across most of America’s media over the weekend as talk of max’d out ICUs and soaring case-numbers dominated every pixel (with very few able to see any link to this resurgence in cases and the riots and protests that began to take place a few weeks ago).

As per usual in this highly politicized world, another leading voice has emerged to clarify that this heightened state of alarm was all for naught, since Houston actually has the situation in its hospitals well in hand.

Houston Methodist CEO Dr. Marc Boom told CNBC on Monday that the demographics of the outbreak have “flipped” and that the mostly-younger people arriving in the state’s hospitals often don’t require ICU beds, even though many do get very sick.

“Even though we have about 200 more patients in house, about double, we only have about three or four more people in the ICU, so that’s encouraging.”

Additionally, as CNBC reports, Boom says Houston Methodist has the necessary capacity to handle the Covid-19 outbreak, echoing similar comments on CNBC Friday from Dr. David Callender, CEO of Memorial Hermann Health System in Houston. 

Boom reiterated his comments from last week that the number of hospitalizations are “being misinterpreted, and, quite frankly, we’re concerned that there is a level of alarm in the community that is unwarranted right now.”

“We do have the capacity to care for many more patients, and have lots of fluidity and ability to manage,” Boom said.

He pointed out that his hospital one year ago was at 95% ICU capacity, similar to the numbers the hospital is seeing today.

“It is completely normal for us to have ICU capacities that run in the 80s and 90s,” he said.

“That’s how all hospitals operate.”

One twitter user @LWinthorpe noted that the CEO of another one of Houston’s main hospitals has issued a statement pushing back against the “unnecessarily alarm[ing]” reporting on ICU capacity in the state.

“The TMC issued a serious statement about ICU capacity that unnecessarily alarmed our community, making it inaccurately appear that hospitals are in an imminent ICU capacity crisis. The letter was released prematurely Wednesday and it had unintended consequences.

What was intended to alert the community to the critical need to change behaviors, actually panicked the community.

Capacity is often misunderstood by media and the public and it was clear that we needed to correct the misunderstanding to best serve the public.”

Does make one wonder, just what was the point of all this fearmongering?

One former NYT Op-Ed contributor reminds us…

“To whom should propaganda be addressed? To the scientifically trained intelligentsia or the less educated masses? It must be addressed always and exclusively to the masses.”

~ Adolf Hitler (1998). “Mein Kampf”, Houghton Mifflin Harcourt (Mein Kampf originally published July 18, 1925)

Finally, Texas Children’s Hospital CEO Mark Wallace added that his facility has “a lot of capacity.”

“There is not a scenario, in my opinion, where the demand for our beds … would eclipse our capability,” he continued.

“I cannot imagine that. I just cannot.”

2/ “The capacity that’s being reported is base capacity … we have the ability to go far higher than that in terms of the ICU beds….We are seeing younger patients, we are seeing a shorter length of stay, we are seeing lower immortality, and we are seeing lower ICU utilization.”

— Aaron Ginn (@aginnt) June 29, 2020

Nevertheless, fear must be fostered and control of the people taken once again.

Recall, almost one month ago to the day, we reported that Barry Ritholtz and Josh Brown’s Ritholtz wealth management had taken out an SBA-backed payroll protection loan.

“Thank you, Chase Bank! Thank you, SBA! It’s the news I needed and it came at the right time,” Josh Brown blogged at the time. He also told Financial Advisor, who asked about the loan: “It’s nobody’s business how a firm choses to finance itself.” 

But now, about one month later amidst incessant criticism…

Read this from the #WSJ
Big Josh Brown @reformedbroker took PPP
Ritholtz Wealth Management with $1.3 billion in assets with only 30 employees took it and got caught. pic.twitter.com/gs8eLCnvg8

— Rick Singa (@Rick_Singa) June 14, 2020

… damage control that started just days after they disclosed taking out the loan, the firm has decided to pay it back by replacing it with a line of credit, according to Citywire USA.

“By May, we looked into replacing the PPP loan with a line of credit. Last week, we did that, and repaid the loan in full (plus interest),” Ritholtz said. 

Nice of him to note they paid it back with interest; we can’t imagine how difficult servicing what was likely a 1% loan you had drawn on for barely a month was. 

Meanwhile, Ritholtz could still be paying (more) interest on its newly established line of credit that it replaced the PPP loan with. And the fact that they paid off one loan to draw on more expensive cash, seems to suggest that the firm had, or has, some kind of funding hole. 

This is especially odd since the market has now rebounded significantly from its March lows. Which means, hypothetically, if one was adhering to the same “patience, discipline, long only, buy value on dips” strategy one was selling to its clients, you’d expect to be almost be ahead of where you were in March at this point.

On June 5, the firm’s ADV update stated: “We intend to pay back the loan in full as per the terms of the loan.” This had replaced language suggesting the loan was forgivable “provided our firm satisfies the terms of the loan program.”

Regardless, the optics appear to be less than stellar. Perhaps the firm should just sit on its hands when it comes to doing any more “PR” or “damage control” in the future.