Tag: finance

While the distractions of the Japanese currency collapse, the resultant nominal offsetting surge in the value of the Japanese stock market, the doubling of the Japanese monetary base and the BOJ’s monetization of 70% of Japan’s gross issuance have all been a welcome diversion in a society struggling with the catastrophic aftermath of the Fukushima explosion on one hand, imploding demographics on the other, and an unsustainable debt overhang on the third mutant hand, the reality is that Japan, despite the best intentions of Keynesian alchemists everywhere, is doomed. 

One can see as much in the following two charts from a seminal 2012 research piece by Takeo Hoshi and Tatakoshi Ito titled “Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?” and which begins with the following pessimistic sentence: “Recent studies have shown that the Japanese debt situation is not sustainable.” Its conclusion is just as pessimistic, and while we urge readers to read the full paper at their liesure, here are just two charts which largely cover the severity of the situation.

Presenting the countdown to Japan’s D-Day. 

Exhibit A.

The technical details of what is shown below are present in the appendix but the bottom line is this: assuming three different interest rates on Japan’s debt, and a max debt ceiling which happens to be the private saving ceiling, as well as assuming a 1.05% increase in private sector labor productivity (average of the past two decades), Japan runs out of time some time between 2019 and 2024, beyond which it can no longer self-fund itself, and the Japan central bank will have no choice but to monetize debt indefinitely.

and Exhibit B.

Figure 12 shows the increase in the interest rate that would make the interest payment exceed the 35% of the total revenue for each year under each of the specific interest scenarios noted in the chart above (for more details see below). The 35% number is arbitrary, but it is consistent with the range of the numbers that the authors observed during the recent cases of sovereign defaults. In short: once interest rates start rising, Japan has between 4 and 6 years before it hits a default threshold.

The paradox, of course, is that should Japan’s economy indeed accelerate, and inflation rise, rates will rise alongside as we saw in mid 2013, when the JGB market would be halted almost daily on volatility circuit breakers as financial institutions rushed to dump their bond holdings.

In other words, the reason why Japan is desperate to inject epic amounts of debt in order to inflate away the debt – without any real plan B – is because, all else equal, it has about 8 years before it’s all over.

Here is how the authors summarize the dead-end situation.

Without any substantial changes in fiscal consolidation efforts, the debt is expected to hit the ceiling of the private sector financial assets soon. There is also downside risk, which brings the ultimate crisis earlier. Economic recovery may raise the interest rates and make it harder for the government to roll over the debt. Finally, the expectations can change without warning. Failure in passing the bill to raise the consumption tax, for example, may change the public perception on realization of tax increases. When the crisis happens, the Japanese financial institutions that holds large amount of government bonds sustain losses and the economy will suffer from fiscal austerity and financial instability. There may be negative spillovers for trading partners. If Japan wants to avoid such crisis, the government has to make a credible commitment and quick implementation of fiscal consolidation.

…

 

A crisis will happen if the government ignores the current fiscal situation or fails to act. Then, the crisis forces the government to choose from two options. First, the Japanese government may default on JGBs. Second, the Bank of Japan may monetize debts. The first option would not have much benefit because bond holders are almost all domestic. Monetization is the second option. Although that may result in high inflation, monetization may be the least disruptive scenario.

Finally, this is how the BOJ’s epic monetization was seen by the paper’s authors back in March 2012.

Bank of Japan could help rolling over the government debt by purchasing JGBs directly from the government. The Bank of Japan, or any other central bank with legal independence, has been clear that they do not endorse such a monetization policy because it undermines the fiscal discipline. However, at the time of crisis, the central bank may find it as the option that is least destructive to the financial system. If such money financing is used to respond to the liquidity crisis, this will create high inflation.

 

The prospect for high inflation will depreciate yen. This will partially stimulate the economy via export boom, provided that Japan does not suffer a major banking crisis at the same time.

 

An unexpected inflation will result in redistribution of wealth from the lenders to the borrowers. This is also redistribution from the old generations to the young generations, since the older generation has much higher financial assets whose value might decline, or would not rise at the same pace with inflation rate. This may not have such detrimental impacts on the economy, since many who participate in production and innovation (corporations and entrepreneurs) are borrowers rather than lenders.

For now monetization is indeed less disruptive. The question is for how much longer, since both Japan and the US are already monetizing 70% of their respective gross debt issuance. And once the last bastion of Keynesian and Monetarist stability fails, well then…

Once the crisis starts, the policy has to shift to crisis management. As we saw above, the crisis is likely to impair the financial system and slow down consumption and investment. Thus, the government faces a difficult tradeoff. If it tries to achieve a fiscal balance by reducing the expenditures and raising the taxes, the economy will sink further into a recession. If it intervenes by expansionary fiscal policy and financial support for the financial system, that would make the fiscal crisis more serious. This is a well-known dilemma for the government that is hit by debt crisis…. If not helped by the government, the banking system will be destroyed, and the economy will further fall into a crisis. Rational depositors will flee from deposits in Japanese banks to cash, foreign assets or gold.

Ah..
. rational.

* * *

Appendix:

The private saving ceiling is the absolute maximum of the domestic demand for the government debt, but the demand for JGBs will start falling well before the saving ceiling is ever reached. One potential trigger for such a change is that the financial institutions find alternative and more lucrative ways to invest the funds. In general, when the economic environment changes to increase the returns from alternatives to the JGBs, the interest rate on JGBs may start to increase. If this suddenly happens, this can trigger a crisis. Increases in the rate of returns may be caused by favorable changes in the economic growth prospect. The end of deflation and the zero interest rate policy would also lead to higher interest rates.

…

In Figure 6 , the authors calculate Japan’s debt’GDP over the next three decades using the following assumptions on the interest rate:

• R1: Interest rate is equal to the largest of the growth rate (?t) or the level at 2010 (1.3%).
• R2: Interest rate rises by 2 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%).
• R3: Interest rate rises by 3.5 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%) .

R1 is motivated by the fact that the average yield on 10 year JGBs over the last several years has been about the same as the GDP growth rate during the same time interval, but constrains the interest rate to be much lower than the current rate even when the GDP growth declines further. R2 and R3 assume that the interest rate rises as the government accumulates more debt. Many empirical studies have demonstrated such relation. R2 (2.0 basis points increase) uses the finding of Tokuoka (2010) for Japan. R3 (3.5 basis points increase) assumes the coefficient estimate used by Gagnon (2010). It is the median estimate from studies of various advanced economies

…

A more reasonable scenario is to assume the growth rate of GDP per-working-age person (or an increase in labor productivity) to be similar to that of the 1990s and 2000s. We consider two alternative growth rates per-working-age population. The low growth scenario is that the increase in labor productivity at 1.05% (average of 1994-2010) and the high growth scenario is at 2.09% (average of 2001-2007, the “Koizumi years”).12 Table 6 shows the growth decomposition on the assumption of the 1.05% growth rate of GDP per-working-age person…. The upper bound for the debt accumulation is reached by 2024 at the latest.

Full paper

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8NuME7zSM7o/story01.htm Tyler Durden

While the distractions of the Japanese currency collapse, the resultant nominal offsetting surge in the value of the Japanese stock market, the doubling of the Japanese monetary base and the BOJ’s monetization of 70% of Japan’s gross issuance have all been a welcome diversion in a society struggling with the catastrophic aftermath of the Fukushima explosion on one hand, imploding demographics on the other, and an unsustainable debt overhang on the third mutant hand, the reality is that Japan, despite the best intentions of Keynesian alchemists everywhere, is doomed. 

One can see as much in the following two charts from a seminal 2012 research piece by Takeo Hoshi and Tatakoshi Ito titled “Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?” and which begins with the following pessimistic sentence: “Recent studies have shown that the Japanese debt situation is not sustainable.” Its conclusion is just as pessimistic, and while we urge readers to read the full paper at their liesure, here are just two charts which largely cover the severity of the situation.

Presenting the countdown to Japan’s D-Day. 

Exhibit A.

The technical details of what is shown below are present in the appendix but the bottom line is this: assuming three different interest rates on Japan’s debt, and a max debt ceiling which happens to be the private saving ceiling, as well as assuming a 1.05% increase in private sector labor productivity (average of the past two decades), Japan runs out of time some time between 2019 and 2024, beyond which it can no longer self-fund itself, and the Japan central bank will have no choice but to monetize debt indefinitely.

and Exhibit B.

Figure 12 shows the increase in the interest rate that would make the interest payment exceed the 35% of the total revenue for each year under each of the specific interest scenarios noted in the chart above (for more details see below). The 35% number is arbitrary, but it is consistent with the range of the numbers that the authors observed during the recent cases of sovereign defaults. In short: once interest rates start rising, Japan has between 4 and 6 years before it hits a default threshold.

The paradox, of course, is that should Japan’s economy indeed accelerate, and inflation rise, rates will rise alongside as we saw in mid 2013, when the JGB market would be halted almost daily on volatility circuit breakers as financial institutions rushed to dump their bond holdings.

In other words, the reason why Japan is desperate to inject epic amounts of debt in order to inflate away the debt – without any real plan B – is because, all else equal, it has about 8 years before it’s all over.

Here is how the authors summarize the dead-end situation.

Without any substantial changes in fiscal consolidation efforts, the debt is expected to hit the ceiling of the private sector financial assets soon. There is also downside risk, which brings the ultimate crisis earlier. Economic recovery may raise the interest rates and make it harder for the government to roll over the debt. Finally, the expectations can change without warning. Failure in passing the bill to raise the consumption tax, for example, may change the public perception on realization of tax increases. When the crisis happens, the Japanese financial institutions that holds large amount of government bonds sustain losses and the economy will suffer from fiscal austerity and financial instability. There may be negative spillovers for trading partners. If Japan wants to avoid such crisis, the government has to make a credible commitment and quick implementation of fiscal consolidation.

…

 

A crisis will happen if the government ignores the current fiscal situation or fails to act. Then, the crisis forces the government to choose from two options. First, the Japanese government may default on JGBs. Second, the Bank of Japan may monetize debts. The first option would not have much benefit because bond holders are almost all domestic. Monetization is the second option. Although that may result in high inflation, monetization may be the least disruptive scenario.

Finally, this is how the BOJ’s epic monetization was seen by the paper’s authors back in March 2012.

Bank of Japan could help rolling over the government debt by purchasing JGBs directly from the government. The Bank of Japan, or any other central bank with legal independence, has been clear that they do not endorse such a monetization policy because it undermines the fiscal discipline. However, at the time of crisis, the central bank may find it as the option that is least destructive to the financial system. If such money financing is used to respond to the liquidity crisis, this will create high inflation.

 

The prospect for high inflation will depreciate yen. This will partially stimulate the economy via export boom, provided that Japan does not suffer a major banking crisis at the same time.

 

An unexpected inflation will result in redistribution of wealth from the lenders to the borrowers. This is also redistribution from the old generations to the young generations, since the older generation has much higher financial assets whose value might decline, or would not rise at the same pace with inflation rate. This may not have such detrimental impacts on the economy, since many who participate in production and innovation (corporations and entrepreneurs) are borrowers rather than lenders.

For now monetization is indeed less disruptive. The question is for how much longer, since both Japan and the US are already monetizing 70% of their respective gross debt issuance. And once the last bastion of Keynesian and Monetarist stability fails, well then…

Once the crisis starts, the policy has to shift to crisis management. As we saw above, the crisis is likely to impair the financial system and slow down consumption and investment. Thus, the government faces a difficult tradeoff. If it tries to achieve a fiscal balance by reducing the expenditures and raising the taxes, the economy will sink further into a recession. If it intervenes by expansionary fiscal policy and financial support for the financial system, that would make the fiscal crisis more serious. This is a well-known dilemma for the government that is hit by debt crisis…. If not helped by the government, the banking system will be destroyed, and the economy will further fall into a crisis. Rational depositors will flee from deposits in Japanese banks to cash, foreign assets or gold.

Ah… rational.

* * *

Appendix:

The private saving ceiling is the absolute maximum of the domestic demand for the government debt, but the demand for JGBs will start falling well before the saving ceiling is ever reached. One potential trigger for such a change is that the financial institutions find alternative and more lucrative ways to invest the funds. In general, when the economic environment changes to increase the returns from alternatives to the JGBs, the interest rate on JGBs may start to increase. If this suddenly happens, this can trigger a crisis. Increases in the rate of returns may be caused by favorable changes in the economic growth prospect. The end of deflation and the zero interest rate policy would also lead to higher interest rates.

…

In Figure 6 , the authors calculate Japan’s debt’GDP over the next three decades using the following assumptions on the interest rate:

• R1: Interest rate is equal to the largest of the growth rate (?t) or the level at 2010 (1.3%).
• R2: Interest rate rises by 2 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%).
• R3: Interest rate rises by 3.5 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%) .

R1 is motivated by the fact that the average yield on 10 year JGBs over the last several years has been about the same as the GDP growth rate during the same time interval, but constrains the interest rate to be much lower than the current rate even when the GDP growth declines further. R2 and R3 assume that the interest rate rises as the government accumulates more debt. Many empirical studies have demonstrated such relation. R2 (2.0 basis points increase) uses the finding of Tokuoka (2010) for Japan. R3 (3.5 basis points increase) assumes the coefficient estimate used by Gagnon (2010). It is the median estimate from studies of various advanced economies

…

A more reasonable scenario is to assume the growth rate of GDP per-working-age person (or an increase in labor productivity) to be similar to that of the 1990s and 2000s. We consider two alternative growth rates per-working-age population. The low growth scenario is that the increase in labor productivity at 1.05% (average of 1994-2010) and the high growth scenario is at 2.09% (average of 2001-2007, the “Koizumi years”).12 Table 6 shows the growth decomposition on the assumption of the 1.05% growth rate of GDP per-working-age person…. The upper bound for the debt accumulation is reached by 2024 at the latest.

Full paper

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8NuME7zSM7o/story01.htm Tyler Durden

It takes the planet 1.5 years to restore what humanity burns through in a year. The silver lining, the US is #1 in something once again – consumption. In fact, it would take 4.4 Earths to sustain the planet if everyone lived like Americans. Rather disappointingly, the USA is 56th in the world for alcohol consumption per capita (though we suspect that will rise).

 

Source: InternationalBusinessGuide.org

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/uBDJnNNqljQ/story01.htm Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

This past Friday the Bureau of Labor Statistics released the November jobs report which sent the mainstream analysts and economists into an ecstatic state as the numbers were substantially stronger than estimates.  However, in reality, the employment report continues to show that employment is being driven almost entirely by population growth rather than real economic strength.  I have discussed this previously stating:

"However, the reality is that, despite better than expected numbers in the report, employment gains to this point have been nothing more than a function of population growth.  The chart below shows the 12 month average of the net change in both employment and population.   As you can see, there have been very few months since the turn of the century where employment has exceeded population growth."

"This explains two things:

1) Why the employment to population ratio has plunged along with the labor force participation rate; and

2) That employment gains, so far, have been a function of businesses hiring only to meet the demand increases caused by an increase in population rather than from a growing economy.

The latter point is very important and relates directly to an issue that has been lurking silently in the background called 'labor hoarding.'"

Louis Woodhill reiterated this point recently in his column entitled "Curb Your Enthusiasm" stating:

"All that happened in November was that the labor market (as reported by the BLS Household Survey) made up most, but not all, of the ground that it lost in October. During the past two months, America moved 3,000 full-time-equivalent (FTE)* jobs farther away from full employment.

 

During those 61 days, our working age population increased by 399,000, but 265,000 Americans fled the labor force, continuing the unprecedented exodus from the world of work overseen by President Obama. While the "headline" (U-3) unemployment rate fell by 0.2 percentage points to 7.0%, the "true" unemployment rate, adjusted to the labor force participation rate of December 2008, rose from 10.9% to 11.0%.

 

President Obama's so-called 'economic recovery' is now 53 months old. During that time, America has moved 1.3 million FTE jobs farther away from full employment, the adjusted unemployment rate has increased from 9.7% to 11.0%, and real household income has fallen by 4.4%." 

The problem, as Woodhill so correctly states, is that the "real" economy is not growing and is only, at best, treading water.  While mainstream economists and analysts continue to jump on a monthly data point as a sure sign of economic recovery – the reality is quite different. 

The solution to solving this problem is something that I have addressed many times in the past when analyzing the monthly National Federation of Independent Small Business Survey which continues to point to government regulations, taxes and poor sales as the top three concerns of small businesses around the country.

"The uncertainty surrounding the economy that currently exists limits the ability for businesses to plan.  While the country can continue to run without a budget, as long as there is 'ink for the printing press,' small businesses do not have that luxury.  For businesses, their outlook is driven by those silly little economic factors like supply, demand and profits.  While it may currently seem to be a statement by businesses on the results of the election – it is more of an outlook on the future of the economy and how their personal livelihoods are going to be affected."

Importantly, Woodhill addresses this issue with his formula for a return to a strong economic America.

"So, what can the government do to encourage capital investment? Well, it can stop discouraging it. Here is the formula for prosperity:

 

Prosperity = Rule of Law + Economic Freedom + Stable Money + Low Tax Rates + Sane Regulations + Free Trade."

This formula, while not a revolutionary solution to solving the economic mystery, is simply a point of logic.  However, it clearly represents the detachment of the current Administration which has little real world experience, along with the bulk of the ivory tower academics advising them, from the issues impeding the economic recovery. However, as I stated previously:

"Business owners are some of the best allocators of capital and resources.  They spend money to increase production, expand facilities and hire employees to meet increasing demand.  They operate within the confines of the real economic environ
ment, rather than theory, and the results of the recent election point to a tougher economic climate ahead.  Until there is improvement in the uncertainty that surrounds the economy, there is likely to be little headway that will be made in the months to come.  While further stimulative programs may boost asset markets in the near term it is unlikely that the engines of economic growth will kick in until debt levels are reduced, tax policies are clarified and the regulatory environment is cleared."

Woodhill's formula reiterates what small business owners across this country have been clamoring for over the past five years.  Business owners inherently want to grow, employ more people and achieve greater profitability which in turn creates economic growth.  It is simply in their best interest to do so.  However, the current Administration continues to intervene with more regulations, threats of higher taxes, increased costs and uncertainty about the economic future.  Subsequently, business owners continue to fight back against the current fiscal and monetary policy makeup by reducing costs, increasing productivity and suppressing employment and wage growth.  As Niall Ferguson noted:

"23 years ago the world seemed much simpler. Francis Fukuyama wrote that the West had won the war of Capitalism. However, 23 years later things have changed. By 2016, the economy of China will exceed that of the U.S. This is not what Fukuyama expected in 1989. It should not be possible that a communistic society could poised to overtake a capitalistic economy. It is quite an amazing turn of events.

 

The explosion of public debt in Western economies is a symptom of the more profound economic malaise. The argument between stimulus and austerity is very futile. The reality is that by 2050 interest payments on government debt will be above 100% of federal revenues; according to the Alternative Fiscal Scenario (AFS) of the CBO. The AFS are the more realistic of the two assumptions that the CBO produces.

 

There were '6 Killer Apps' that defined the U.S. during its great economic growth cycle – Competition, Scientific Revolution, Modern Medicine, Consumer Society, Work Ethic and Property Rights

 

Those issues allowed for growth, innovation and rising economic prosperity during the 20th century. Today, while the rest of the world has slowly been adopting these 'killer apps' the U.S. is slowly losing them.

 

A critical point is the Rule of Law. In order to have a strong, and prosperous, economic environment the participants in the system must be able to rely on a stable and fair legal system. In the U.S., the rule of law has been under continuous attack over the last 30 years. The decline in the rule of law has been evident in the shift of prosperity in the U.S. economy. If you look at 15 different measures of the rule of law, as they exist in countries all around the world today, unfortunately the U.S. does not rank at the top it any category. However, Hong Kong beats the US on every single rule of law and ranks in the top levels on every single measure.

The problem is that the U.S. has a 'rule of lawyers'. As an example 'Dodd-Frank' is the largest single employment scheme for lawyers in the history of the U.S.  However, when it comes to the private sector, which has to live with the implications of the bill, it massively increases costs, reduces competition and impacts future prosperity."

The long term implications of these secular shifts are crucially important to the future of everything from investing, to living and the future of our economy.  It is not too late to change our future, but it eventually will be if we do not begin to make changes soon.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/XkM0mM-XmVc/story01.htm Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

This past Friday the Bureau of Labor Statistics released the November jobs report which sent the mainstream analysts and economists into an ecstatic state as the numbers were substantially stronger than estimates.  However, in reality, the employment report continues to show that employment is being driven almost entirely by population growth rather than real economic strength.  I have discussed this previously stating:

"However, the reality is that, despite better than expected numbers in the report, employment gains to this point have been nothing more than a function of population growth.  The chart below shows the 12 month average of the net change in both employment and population.   As you can see, there have been very few months since the turn of the century where employment has exceeded population growth."

"This explains two things:

1) Why the employment to population ratio has plunged along with the labor force participation rate; and

2) That employment gains, so far, have been a function of businesses hiring only to meet the demand increases caused by an increase in population rather than from a growing economy.

The latter point is very important and relates directly to an issue that has been lurking silently in the background called 'labor hoarding.'"

Louis Woodhill reiterated this point recently in his column entitled "Curb Your Enthusiasm" stating:

"All that happened in November was that the labor market (as reported by the BLS Household Survey) made up most, but not all, of the ground that it lost in October. During the past two months, America moved 3,000 full-time-equivalent (FTE)* jobs farther away from full employment.

 

During those 61 days, our working age population increased by 399,000, but 265,000 Americans fled the labor force, continuing the unprecedented exodus from the world of work overseen by President Obama. While the "headline" (U-3) unemployment rate fell by 0.2 percentage points to 7.0%, the "true" unemployment rate, adjusted to the labor force participation rate of December 2008, rose from 10.9% to 11.0%.

 

President Obama's so-called 'economic recovery' is now 53 months old. During that time, America has moved 1.3 million FTE jobs farther away from full employment, the adjusted unemployment rate has increased from 9.7% to 11.0%, and real household income has fallen by 4.4%." 

The problem, as Woodhill so correctly states, is that the "real" economy is not growing and is only, at best, treading water.  While mainstream economists and analysts continue to jump on a monthly data point as a sure sign of economic recovery – the reality is quite different. 

The solution to solving this problem is something that I have addressed many times in the past when analyzing the monthly National Federation of Independent Small Business Survey which continues to point to government regulations, taxes and poor sales as the top three concerns of small businesses around the country.

"The uncertainty surrounding the economy that currently exists limits the ability for businesses to plan.  While the country can continue to run without a budget, as long as there is 'ink for the printing press,' small businesses do not have that luxury.  For businesses, their outlook is driven by those silly little economic factors like supply, demand and profits.  While it may currently seem to be a statement by businesses on the results of the election – it is more of an outlook on the future of the economy and how their personal livelihoods are going to be affected."

Importantly, Woodhill addresses this issue with his formula for a return to a strong economic America.

"So, what can the government do to encourage capital investment? Well, it can stop discouraging it. Here is the formula for prosperity:

 

Prosperity = Rule of Law + Economic Freedom + Stable Money + Low Tax Rates + Sane Regulations + Free Trade."

This formula, while not a revolutionary solution to solving the economic mystery, is simply a point of logic.  However, it clearly represents the detachment of the current Administration which has little real world experience, along with the bulk of the ivory tower academics advising them, from the issues impeding the economic recovery. However, as I stated previously:

"Business owners are some of the best allocators of capital and resources.  They spend money to increase production, expand facilities and hire employees to meet increasing demand.  They operate within the confines of the real economic environment, rather than theory, and the results of the recent election point to a tougher economic climate ahead.  Until there is improvement in the uncertainty that surrounds the economy, there is likely to be little headway that will be made in the months to come.  While further stimulative programs may boost asset markets in the near term it is unlikely that the engines of economic growth will kick in until debt levels are reduced, tax policies are clarified and the regulatory environment is cleared."

Woodhill's formula reiterates what small business owners across this country have been clamoring for over the past five years.  Business owners inherently want to grow, employ more people and achieve greater profitability which in turn creates economic growth.  It is simply in their best interest to do so.  However, the current Administration continues to intervene with more regulations, threats of higher taxes, increased costs and uncertainty about the economic future.  Subsequently, business owners continue to fight back against the current fiscal and monetary policy makeup by reducing costs, increasing productivity and suppressing employment and wage growth.  As Niall Ferguson noted:

"23 years ago the world seemed much simpler. Francis Fukuyama wrote that the West had won the war of Capitalism. However, 23 years later things have changed. By 2016, the economy of China will exceed that of the U.S. This is not what Fukuyama expected in 1989. It should not be possible that a communistic society could poised to overtake a capitalistic economy. It is quite an amazing turn of events.

 

The explosion of public debt in Western economies is a symptom of the more profound economic malaise. The argument between stimulus and austerity is very futile. The reality is that by 2050 interest payments on government debt will be above 100% of federal revenues; according to the Alternative Fiscal Scenario (AFS) of the CBO. The AFS are the more realistic of the two assumptions that the CBO produces.

 

There were '6 Killer Apps' that defined the U.S. during its great economic growth cycle – Competition, Scientific Revolution, Modern Medicine, Consumer Society, Work Ethic and Property Rights

 

Those issues allowed for growth, innovation and rising economic prosperity during the 20th century. Today, while the rest of the world has slowly been adopting these 'killer apps' the U.S. is slowly losing them.

 

A critical point is the Rule of Law. In order to have a strong, and prosperous, economic environment the participants in the system must be able to rely on a stable and fair legal system. In the U.S., the rule of law has been under continuous attack over the last 30 years. The decline in the rule of law has been evident in the shift of prosperity in the U.S. economy. If you look at 15 different measures of the rule of law, as they exist in countries all around the world today, unfortunately the U.S. does not rank at the top it any category. However, Hong Kong beats the US on every single rule of law and ranks in the top levels on every single measure.

The problem is that the U.S. has a 'rule of lawyers'. As an example 'Dodd-Frank' is the largest single employment scheme for lawyers in the history of the U.S.  However, when it comes to the private sector, which has to live with the implications of the bill, it massively increases costs, reduces competition and impacts future prosperity."

The long term implications of these secular shifts are crucially important to the future of everything from investing, to living and the future of our economy.  It is not too late to change our future, but it eventually will be if we do not begin to make changes soon.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/XkM0mM-XmVc/story01.htm Tyler Durden

The good news: there are always greater banana republics out there, somewhere, if one only looks hard enough.

With some epic, if purely unwarranted, humor here is KCNA’s account:

Pyongyang, December 13 (KCNA) — Upon hearing the report on the enlarged meeting of the Political Bureau of the Central Committee of the Workers’ Party of Korea, the service personnel and people throughout the country broke into angry shouts that a stern judgment of the revolution should be meted out to the anti-party, counter-revolutionary factional elements. Against the backdrop of these shouts rocking the country, a special military tribunal of the DPRK Ministry of State Security was held on December 12 against traitor for all ages Jang Song Thaek.

 

The accused Jang brought together undesirable forces and formed a faction as the boss of a modern day factional group for a long time and thus committed such hideous crime as attempting to overthrow the state by all sorts of intrigues and despicable methods with a wild ambition to grab the supreme power of our party and state.

 

The tribunal examined Jang’s crimes.

 

All the crimes committed by the accused were proved in the course of hearing and were admitted by him.

 

A decision of the special military tribunal of the Ministry of State Security of the DPRK was read out at the trial.

 

Every sentence of the decision served as sledge-hammer blow brought down by our angry service personnel and people on the head of Jang, an anti-party, counter-revolutionary factional element and despicable political careerist and trickster.

 

The accused is a traitor to the nation for all ages who perpetrated anti-party, counter-revolutionary factional acts in a bid to overthrow the leadership of our party and state and the socialist system.

 

Jang was appointed to responsible posts of the party and state thanks to the deep political trust of President Kim Il Sung and leader Kim Jong Il and received benevolence from them more than any others from long ago.

 

He held higher posts than before and received deeper trust from supreme leader Kim Jong Un, in particular.

 

The political trust and benevolence shown by the peerlessly great men of Mt. Paektu were something he hardly deserved.

 

It is an elementary obligation of a human being to repay trust with sense of obligation and benevolence with loyalty.

 

However, despicable human scum Jang, who was worse than a dog, perpetrated thrice-cursed acts of treachery in betrayal of such profound trust and warmest paternal love shown by the party and the leader for him.

 

From long ago, Jang had a dirty political ambition. He dared not raise his head when Kim Il Sung and Kim Jong Il were alive. But, reading their faces, Jang had an axe to grind and involved himself in double-dealing. He began revealing his true colors, thinking that it was just the time for him to realize his wild ambition in the period of historic turn when the generation of the revolution was replaced.

 

Jang committed such an unpardonable thrice-cursed treason as overtly and covertly standing in the way of settling the issue of succession to the leadership with an axe to grind when a very important issue was under discussion to hold respected Kim Jong Un in high esteem as the only successor to Kim Jong Il in reflection of the unanimous desire and will of the entire party and army and all people.

 

When his cunning move proved futile and the decision that Kim Jong Un was elected vice-chairman of the Central Military Commission of the Workers’ Party of Korea at the Third Conference of the WPK in reflection of the unanimous will of all party members, service personnel and people was proclaimed, making all participants break into enthusiastic cheers that shook the conference hall, he behaved so arrogantly and insolently as unwillingly standing up from his seat and half-heartedly clapping, touching off towering resentment of our service personnel and people.

 

Jang confessed that he behaved so at that time as a knee-jerk reaction as he thought that if Kim Jong Un’s base and system for leading the army were consolidated, this would lay a stumbling block in the way of grabbing the power of the party and state.

 

When Kim Jong Il passed away so suddenly and untimely to our sorrow, he began working in real earnest to realize its long-cherished greed for power.

 

Abusing the honor of often accompanying Kim Jong Un during his field guidance, Jang tried hard to create illusion about him by projecting himself internally and externally as a special being on a par with the headquarters of the revolution.

 

In a bid to rally a group of reactionaries to be used by him for toppling the leadership of the party and state, he let the undesirable and alien elements including those who had been dismissed and relieved of their posts after being severely punished for disobeying the instructions of Kim Jong Il and kowtowing to him work in a department of the Central Committee of the WPK and organs under it in a crafty manner.

 

Jang did serious harm to the youth movement in our country, being part of the group of renegades and traitors in the field of youth work bribed by enemies. Even after they were disclosed and purged by the resolute measure of the party, he patronized those cat’s paws and let them hold important posts of the party and state

Bottom line: if you don’t like your uncle, you can execute your uncle.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/DamrnD6Riw4/story01.htm Tyler Durden

The good news: there are always greater banana republics out there, somewhere, if one only looks hard enough.

With some epic, if purely unwarranted, humor here is KCNA’s account:

Pyongyang, December 13 (KCNA) — Upon hearing the report on the enlarged meeting of the Political Bureau of the Central Committee of the Workers’ Party of Korea, the service personnel and people throughout the country broke into angry shouts that a stern judgment of the revolution should be meted out to the anti-party, counter-revolutionary factional elements. Against the backdrop of these shouts rocking the country, a special military tribunal of the DPRK Ministry of State Security was held on December 12 against traitor for all ages Jang Song Thaek.

 

The accused Jang brought together undesirable forces and formed a faction as the boss of a modern day factional group for a long time and thus committed such hideous crime as attempting to overthrow the state by all sorts of intrigues and despicable methods with a wild ambition to grab the supreme power of our party and state.

 

The tribunal examined Jang’s crimes.

 

All the crimes committed by the accused were proved in the course of hearing and were admitted by him.

 

A decision of the special military tribunal of the Ministry of State Security of the DPRK was read out at the trial.

 

Every sentence of the decision served as sledge-hammer blow brought down by our angry service personnel and people on the head of Jang, an anti-party, counter-revolutionary factional element and despicable political careerist and trickster.

 

The accused is a traitor to the nation for all ages who perpetrated anti-party, counter-revolutionary factional acts in a bid to overthrow the leadership of our party and state and the socialist system.

 

Jang was appointed to responsible posts of the party and state thanks to the deep political trust of President Kim Il Sung and leader Kim Jong Il and received benevolence from them more than any others from long ago.

 

He held higher posts than before and received deeper trust from supreme leader Kim Jong Un, in particular.

 

The political trust and benevolence shown by the peerlessly great men of Mt. Paektu were something he hardly deserved.

 

It is an elementary obligation of a human being to repay trust with sense of obligation and benevolence with loyalty.

 

However, despicable human scum Jang, who was worse than a dog, perpetrated thrice-cursed acts of treachery in betrayal of such profound trust and warmest paternal love shown by the party and the leader for him.

 

From long ago, Jang had a dirty political ambition. He dared not raise his head when Kim Il Sung and Kim Jong Il were alive. But, reading their faces, Jang had an axe to grind and involved himself in double-dealing. He began revealing his true colors, thinking that it was just the time for him to realize his wild ambition in the period of historic turn when the generation of the revolution was replaced.

 

Jang committed such an unpardonable thrice-cursed treason as overtly and covertly standing in the way of settling the issue of succession to the leadership with an axe to grind when a very important issue was under discussion to hold respected Kim Jong Un in high esteem as the only successor to Kim Jong Il in reflection of the unanimous desire and will of the entire party and army and all people.

 

When his cunning move proved futile and the decision that Kim Jong Un was elected vice-chairman of the Central Military Commission of the Workers’ Party of Korea at the Third Conference of the WPK in reflection of the unanimous will of all party members, service personnel and people was proclaimed, making all participants break into enthusiastic cheers that shook the conference hall, he behaved so arrogantly and insolently as unwillingly standing up from his seat and half-heartedly clapping, touching off towering resentment of our service personnel and people.

 

Jang confessed that he behaved so at that time as a knee-jerk reaction as he thought that if Kim Jong Un’s base and system for leading the army were consolidated, this would lay a stumbling block in the way of grabbing the power of the party and state.

 

When Kim Jong Il passed away so suddenly and untimely to our sorrow, he began working in real earnest to realize its long-cherished greed for power.

 

Abusing the honor of often accompanying Kim Jong Un during his field guidance, Jang tried hard to create illusion about him by projecting himself internally and externally as a special being on a par with the headquarters of the revolution.

 

In a bid to rally a group of reactionaries to be used by him for toppling the leadership of the party and state, he let the undesirable and alien elements including those who had been dismissed and relieved of their posts after being severely punished for disobeying the instructions of Kim Jong Il and kowtowing to him work in a department of the Central Committee of the WPK and organs under it in a crafty manner.

 

Jang did serious harm to the youth movement in our country, being part of the group of renegades and traitors in the field of youth work bribed by enemies. Even after they were disclosed and purged by the resolute measure of the party, he patronized those cat’s paws and let them hold important posts of the party and state

Bottom line: if you don’t like your uncle, you can execute your uncle.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/DamrnD6Riw4/story01.htm Tyler Durden

Everyone has seen the 100-year US Dollar destruction chart; so here is the 200-year… a century without The Fed and a century with… which would you prefer?

 

Via Ralph Dillon of Global Financial Data,

Newton’s 3rd law states: To every action there is always an equal and opposite reaction. Sounds pretty simple right?

Except in Government, where for every action, the reaction seems to produce catastrophic consequences for such action. Yet inexplicably, the answer these days to everything seems to be more Government intervention and meddling. You would think that at this point we would have learned from our prior mistakes. Yet the meddling goes on and on and on….because it works so well.

Have you ever considered the true cost of all of this intervention? Think about it. Since the creation of the Federal Reserve in 1913, we have been in perpetual warfare, we introduced the New Deal which birthed Government programs, we eliminated the gold standard, we flooded the market with massive credit expansion, we accumulated massive amounts of debt and have now seen the Government take over 20% of our economy through healthcare. As if all of the prior interventions were not enough, in just the last 5 years, we have had shovel ready, bank bailouts, trillion dollar stimulus, QE 1,2,3,4, operation twist, unemployment benefits extended, car bailouts and crony capitalism that threw good money after bad. What we have gotten is more of the same. More debt, more political posturing and the complete destruction of the dollar and the purchasing power of it. With it, no one is accountable. Not the Government, not the banks, not the private companies but the citizens whose burden it has become to fund all of this intervention.

With the backdrop of other Governement ventures like the USPS and Social Security Administration, what can possibly go wrong with our latest intervention Obamacare? Whether you are for or against it, you have to recognize that this is and will be the mother of all Government interventions. With a horrific rollout, low enthusiasm and a general public that is either unaware or just ignorant to what is truly coming down the pipe, we can only hope that this time it will be different. But consider, that for every word that defines Obamacare, there are 30 more words that enforce it. With 109 new regulations and counting, you have to wonder if this monstrosity of intervention will finally be the straw that breaks the proverbial camel’s back. It surely has the making for it because we have never seen anything like it.

Cost since 1913? Well, the dollar has lost nearly 90% of its value and the purchasing power of that dollar has been eroded considerably.

Below is a chart that demonstrates the destructive quality of Government intervention to 1819:

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/93QXl9UpPpY/story01.htm Tyler Durden

From liquidity-driven perception to the Keynesian endpoint economic reality… just follow the arrows…

(click image for large legible version)

 

Or, as Bridgewater notes,

The effectiveness of quantitative easing is a function of the dollars spent and what those people do with that money.

 

If the dollars get spent on an asset that is very interchangeable with cash, then you don’t get much of an impact. You don’t get a multiplier from that.

 

If the dollar is spent on an asset that’s risky and very different from cash, then that money goes into other assets and into the real economy.

 

That’s really how you see the impact of quantitative easing.

 

Source: $hane Obata @sobata416

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Upe7K2J1YLw/story01.htm Tyler Durden

From liquidity-driven perception to the Keynesian endpoint economic reality… just follow the arrows…

(click image for large legible version)

 

Or, as Bridgewater notes,

The effectiveness of quantitative easing is a function of the dollars spent and what those people do with that money.

 

If the dollars get spent on an asset that is very interchangeable with cash, then you don’t get much of an impact. You don’t get a multiplier from that.

 

If the dollar is spent on an asset that’s risky and very different from cash, then that money goes into other assets and into the real economy.

 

That’s really how you see the impact of quantitative easing.

 

Source: $hane Obata @sobata416

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Upe7K2J1YLw/story01.htm Tyler Durden