Month: June 2014

Submitted by David Stockman of Contra Corner blog,

One hundred years ago today the world was shook loose of its moorings. Every school boy knows that the assassination of the archduke of Austria at Sarajevo was the trigger that incited the bloody, destructive conflagration of the world’s nations known as the Great War. But this senseless eruption of unprecedented industrial state violence did not end with the armistice four years later.

In fact, 1914 is the fulcrum of modern history. It is the year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money. So it was the Great War’s terrible aftermath – a century of drift toward statism, militarism and fiat money – that was actually triggered by the events at Sarajevo.

Unfortunately, modern historiography wants to keep the Great War sequestered in a four-year span of archival curiosities about battles, mustard gas and monuments to the fallen. But the opposite historiography is more nearly the truth. The assassins at Sarajevo triggered the very warp and woof of the hundred years which followed.

The Great War was self-evidently an epochal calamity, especially for the 20 million combatants and civilians who perished for no reason that is discernible in any fair reading of history, or even unfair one. Yet the far greater calamity is that  Europe’s senseless fratricide of 1914-1918 gave birth to all the great evils of the 20^th century— the Great Depression, totalitarian genocides, Keynesian economics,  permanent  warfare states, rampaging central banks and the exceptionalist-rooted follies of America’s global imperialism.

Indeed, in Old Testament fashion, one begat the next and the next and still the next. This chain of calamity originated in the Great War’s destruction of sound money, that is, in the post-war demise of the pound sterling which previously had not experienced a peacetime change in its gold content for nearly two hundred years.

Not unreasonably, the world’s financial system had become anchored on the London money markets where the other currencies traded at fixed exchange rates to the rock steady pound sterling—which, in turn, meant that prices and wages throughout Europe were expressed in common money and tended toward transparency and equilibrium.

This liberal international economic order—that is, honest money, relatively free trade, rising international capital flows and rapidly growing global economic integration—-resulted in  a 40-year span between 1870 and 1914 of rising living standards, stable prices, massive capital investment and prolific  technological progress that was never equaled—either before or since.

During intervals of war, of course, 19^th century governments had usually suspended gold convertibility and open trade in the heat of combat.  But when the cannons fell silent, they had also endured the trauma of post-war depression until wartime debts had been liquidated and inflationary currency expedients had been wrung out of the circulation. This was called “resumption” and restoring convertibility at the peacetime parities was the great challenge of post-war normalizations.

The Great War, however, involved a scale of total industrial mobilization and financial mayhem that was unlike any that had gone before.  In the case of Great Britain, for example, its national debt increased 14-fold, its price level doubled, its capital stock was depleted, most off-shore investments were liquidated and universal wartime conscription left it with a massive overhang of human and financial liabilities.

Yet England was the least devastated. In France, the price level inflated by 300 percent, its extensive Russian investments were confiscated by the Bolsheviks and its debts in New York and London catapulted to more than 100 percent of GDP.

Among the defeated powers, currencies emerged nearly worthless with the German mark at five cents on the pre-war dollar, while wartime debts—especially after the Carthaginian peace of Versailles—–soared to crushing, unrepayable heights.

In short, the bow-wave of debt, currency inflation and financial disorder from the Great War was so immense and unprecedented that the classical project of post-war liquidation and “resumption” of convertibility was destined to fail.  In fact, the 1920s were a grinding, sometimes inspired but eventually failed struggle to resume the international gold standard, fixed parities, open world trade and unrestricted international capital flows.

Only in the final demise of these efforts after 1929 did the Great Depression, which had been lurking all along in the post-war shadows, come bounding onto the stage of history.

America’s Needless Intervention In The Great War And The Ensuing Chain of  20th Century Calamities

The Great Depression’s tardy, thoroughly misunderstood and deeply traumatic arrival happened compliments of the United States. In the first place, America’s wholly unwarranted intervention in April 1917 prolonged the slaughter, doubled the financial due bill and generated a cockamamie peace, giving rise to totalitarianism among the defeated powers and Keynesianism among the victors. Choose your poison.

Even conventional historians like Niall Ferguson admit as much. Had Woodrow Wilson not misled America on a messianic crusade, the Great War would have ended in mutual exhaustion in 1917 and both sides would have gone home battered and bankrupt but no danger to the rest of mankind. Indeed, absent Wilson’s crusade there would have been no allied victory, no punitive peace, and no war reparations; nor would there have been a Leninist coup in Petrograd or Stalin’s barbaric regime.

Likewise, Churchill’s starvation blockade would not have devastated post-Armistice Germany, nor would there have been the humiliating signing of the war guilt clause by German officials at Versailles. And the subsequent financial chaos of 1919-1923 would not have happened either—-meaning no “stab in the back” myth, no Hitler, no Nazi dystopia, no Munich, no Sudetenland and Danzig corridor crises, no British war to save Poland, no final solution and holocaust, no global war against Germany and Japan and no incineration of 200,000 civilians at Hiroshima and Nagasaki.

Nor would there have followed a Cold War with the Soviets or CIA sponsored coups and assassinations in Iran, Guatemala, Indonesia, Brazil, Chile and the Congo, to name a few. Surely there would have been no CIA plot to assassinate Castro, or Russian missiles in Cuba or a crisis that took the world to the brink of annihilation. There would have been no Dulles brothers, no domino theory and no Vietnam slaughter, either.

Nor would we have launched Charlie Wilson’s War to arouse the mujahedeen and train the future al Qaeda. Likewise, there would have been no shah and his Savak terror, no Khomeini-led Islamic counter-revolution, no US aid to enable Saddam’s gas attacks on Iranian boy soldiers in the 1980s.

Nor would there have been an American invasion of Arabia in 1991 to stop our erstwhile ally Hussein from looting the equally contemptible Emir of Kuwait’s ill-gotten oil plunder—or, alas, the horrific 9/11 blowback a decade later.

Most surely, the axis-of-evil—-that is, the Washington-based Cheney-Rumsfeld-neocon axis—- would not have arisen, nor would it have foisted a $1 trillion Warfare State budget on 21^st century America.

 

 The 1914-1929 Boom Was An Artifact of War And Central Banking

A second crucial point is that the Great War enabled the already rising American economy to boom and bloat in an entirely artificial and unsustainable manner for the better part of 15 years. The exigencies of war finance  also transformed the nascent Federal Reserve into an incipient central banking monster in a manner wholly opposite to the intentions of its great legislative architect—the incomparable Carter Glass of Virginia.

During the Great War America became the granary and arsenal to the European Allies—-triggering an eruption of domestic investment and production that transformed the nation into a massive global creditor and powerhouse exporter virtually overnight.

American farm exports quadrupled, farm income surged from $3 billion to $9 billion, land prices soared, country banks proliferated like locusts and the same was true of industry. Steel production, for example, rose from 30 million tons annually to nearly 50 million tons during the war.

Altogether, in six short years $40 billion of money GDP became $92 billion in 1920—a sizzling 15 percent annual rate of gain.

Needless to say, these fantastic figures reflected an inflationary, war-swollen economy—-a phenomena that prudent finance men of the age knew was wholly artificial and destined for a thumping post-war depression. This was especially so because America had loaned the Allies massive amounts of money to purchase grain, pork, wool, steel, munitions and ships. This transfer amounted to nearly 15 percent of GDP or $2 trillion equivalent in today’s economy, but it also amounted to a form of vendor finance that was destined to vanish at war’s end.

Carter Glass’ Bankers’ Bank: The Antithesis Of Monetary Central Planning

As it happened, the nation did experience a brief but deep recession in 1920, but this did not represent a thorough-going end-of-war “de-tox” of the historical variety.  The reason is that America’s newly erected Warfare State had hijacked Carter Glass “banker’s bank” to finance Wilson’s crusade.

Here’s the crucial background: When Congress acted on Christmas Eve 1913, just six months before Archduke Ferdinand’s assassination, it had provided no legal authority whatsoever for the Fed to buy government bonds or undertake so-called “open market operations” to finance the public debt.  In part this was due to the fact that there were precious few Federal bonds to buy. The  public debt then stood at just $1.5 billion, which is the same figure that had pertained 51 years earlier at the battle of Gettysburg, and amounted to just 4 percent of GDP or $11 per capita.

Thus, in an age of balanced budgets and bipartisan fiscal rectitude, the Fed’s legislative architects had not even considered the possibility of central bank monetization of the public debt, and, in any event, had a totally different mission in mind.

The new Fed system was to operate decentralized “reserve banks” in 12 regions—most of them far from Wall Street in places like San Francisco, Dallas, Kansas City and Cleveland.  Their job was to provide a passive “rediscount window” where national banks within each region could bring sound, self-liquidating commercial notes and receivables to post as collateral in return for cash to meet depositor withdrawals or to maintain an approximate 15 percent cash reserve.

Accordingly, the assets of the 12 reserve banks were to consist entirely of short-term commercial paper arising out of the ebb and flow of commerce and trade on the free market, not the debt emissions of Washington.  In this context, the humble task of the reserve banks was to don green eyeshades and examine the commercial collateral brought by member banks, not to grandly manage the macro economy through targets for interest rates, money growth or credit expansion—to say nothing of targeting jobs, GDP, housing starts or the Russell 2000, as per today’s fashion.

Even the rediscount rate charged to member banks for cash loans was to float at a penalty spread above money market rates set by supply and demand for funds on the free market.

The big point here is that Carter Glass’ “banker’s bank” was an instrument of the market, not an agency of state policy. The so-called economic aggregates of the later Keynesian models—-GDP, employment, consumption and investment—were to remain an unmanaged outcome on the free market, reflecting the interaction of millions of producers, consumers, savers, investors, entrepreneurs and even speculators.

In short, the Fed as “banker’s bank” had no dog in the GDP hunt. Its narrow banking system liquidity mission would not vary whether the aggregates were growing at 3 percent or contracting at 3 percent.

What would vary dramatically, however, was the free market interest rate in response to shifts in the demand for loans or supply of savings.  In general this meant that investment booms and speculative bubbles were self-limiting: When the demand for credit sharply out-ran the community’s savings pool, interest rates would soar—thereby rationing demand and inducing higher cash savings out of current income.

This market clearing function of money market interest rates was especially crucial with respect to leveraged financial speculation—such as margin trading in the stock market.  Indeed, the panic of 1907 had powerfully demonstrated that when speculative bubbles built up a powerful head of steam the free market had a ready cure.

In that pre-Fed episode, money market rates soared to 20, 30 and even 90 percent at the peak of the bubble. In short order, of course, speculators in copper, real estate, railroads, trust banks and all manner of over-hyped stock were carried out on their shields—-even as JPMorgan’s men, who were gathered as a de facto central bank in his library on Madison Avenue, selectively rescued only the solvent banks with their own money at-risk.

Needless to say, these very same free market interest rates were a mortal enemy of deficit finance because they rationed the supply of savings to the highest bidder. Thus, the ancient republican moral verity of balanced budgets was powerfully reinforced by the visible hand of rising interest rates: deficit spending by the public sector automatically and quickly crowded out borrowing by private households and business.

How The Bankers’ Bank Got Hijacked To Fund War Bonds

And this brings us to the Rubicon of modern Warfare State finance.  During World War I the US public debt rose from $1.5 billion to $27 billion—an eruption that would have been virtually impossible without wartime amendments which allowed the Fed to own or finance U.S. Treasury debt.  These “emergency” amendments—it’s always an emergency in wartime—enabled a fiscal scheme that was ingenious, but turned the Fed’s modus operandi upside down and paved the way for today’s monetary central planning.

As is well known, the Wilson war crusaders conducted massive nationwide campaigns to sell Liberty Bonds to the patriotic masses. What is far less understood is that Uncle Sam’s bond drives were the original case of no savings? No credit? No problem!

What happened was that every national bank in America conducted a land office business advancing loans for virtually 100 percent of the war bond purchase price—with such loans collateralized by Uncle Sam’s guarantee. Accordingly, any patriotic American with enough pulse to sign the loan papers could buy some Liberty Bonds.

And where did the commercial banks obtain the billions they loaned out to patriotic citizens to buy Liberty Bonds?  Why the Federal Reserve banks opened their discount loan windows to the now eligible collateral of war bonds.

Additionally, Washington pegged the rates on these loans below the rates on its treasury bonds, thereby providing a no-brainer arbitrage profit to bankers.

Through this backdoor maneuver, the war debt was thus massively monetized.  Washington learned that it could unplug the free market interest rate in favor of state administered prices for money, and that credit could be massively expanded without the inconvenience of higher savings out of deferred consumption.  Effectively, Washington financed Woodrow Wilson’s crusade with its newly discovered printing press—-turning the innocent “banker’s bank” legislated in 1913 into a dangerously potent new arm of the state.

Bubbles Ben 1.0

It was this wartime transformation of the Fed into an activist central bank that postponed the normal post-war liquidation—-moving the world’s scheduled depression down the road to the 1930s. The Fed’s role in this startling feat is in plain sight in the history books, but its significance has been obfuscated by Keynesian and monetarist doctrinal blinders—that is, the presumption that the state must continuously manage the business cycle and macro-economy.

Having learned during the war that it could arbitrarily peg the price of money, the Fed next discovered it could manage the growth of bank reserves and thereby the expansion of credit and the activity rate of the wider macro-economy. This was accomplished through the conduct of “open market operations” under its new authority to buy and sell government bonds and bills—something which sounds innocuous by today’s lights but was actually the fatal inflection point. It transferred the process of credit creation from the free market to an agency of the state.

As it happened, the patriotic war bond buyers across the land did steadily pay-down their Liberty loans, and, in turn, the banking system liquidated its discount window borrowings—-with a $2.7 billion balance in 1920 plunging 80 percent by 1927. In classic fashion, this should have caused the banking system to shrink drastically as war debts were liquidated and war-time inflation and malinvestments were wrung out of the economy.

But big-time mission creep had already set in.  The legendary Benjamin Strong had now taken control of the system and on repeated occasions orchestrated giant open market bond buying campaigns to offset the natural liquidation of war time credit.

Accordingly, treasury bonds and bills owned by the Fed approximately doubled during the same 7-year period. Strong justified his Bernanke-like bond buying campaigns of 1924 and 1927 as helpful actions to off-set “deflation” in the domestic economy and to facilitate the return of England and Europe to convertibility under the gold standard.

But in truth the actions of Bubbles Ben 1.0 were every bit as destructive as those of Bubbles Ben 2.0.

In the first place, deflation was a good thing that was supposed to happen after a great war. Invariably, the rampant expansion of war time debt and paper money caused massive speculations and malinvestments that needed to be liquidated.

The Bank of England’s Perfidy

Likewise, the barrier to normalization globally was that England was unwilling to fully liquidate its vast wartime inflation of wage, prices and debts. Instead, it had come-up with a painless way to achieve “resumption” at the age-old parity of $4.86 per pound; namely, the so-called gold exchange standard that it peddled assiduously through the League of Nations.

The short of it was that the British convinced France, Holland, Sweden and most of Europe to keep their excess holdings of sterling exchange on deposit in the London money markets, rather than convert it to gold as under the classic, pre-war gold standard.

This amounted to a large-scale loan to the faltering British economy, but when Chancellor of the Exchequer Winston Churchill did resume convertibility in April 1925 a huge problem soon emerged.  Churchill’s splendid war had so debilitated the British economy that markets did not believe its government had the resolve and financial discipline to maintain the old $4.86 parity. This, in turn, resulted in a considerable outflow of gold from the London exchange markets, putting powerful contractionary pressures on the British banking system and economy.

 Real Cause of the Great Depression: Collapse of the Artificial 1914-1929 Boom

In this setting, Bubbles Ben 1.0  (New York Fed Governor Benjamin Strong) stormed in with a rescue plan that will sound familiar to contemporary ears. By means of his bond buying campaigns he sought to drive-down interest rates in New York relative to London, thereby encouraging British creditors to keep their money in higher yielding sterling rather than converting their claims to gold or dollars.

The British economy was thus given an option to keep rolling-over its debts and to continue living beyond its means. For a few years these proto-Keynesian “Lords of Finance” —- principally Ben Strong of the Fed and Montague Norman of the BOE—-managed to kick the can down the road.

But after the Credit Anstalt crisis in spring 1931, when creditors of shaky banks in central Europe demanded gold, England’s precarious mountain of sterling debts came into the cross-hairs.  In short order, the money printing scheme of Bubbles Ben 1.0 designed to keep the Brits in cheap interest rates and big debts came violently unwound.

In late September a weak British government defaulted on its gold exchange standard duty to convert sterling to gold, causing the French, Dutch and other central banks to absorb massive overnight losses. The global depression then to took another lurch downward.

Inventing  Bubble Finance : The Call Money Market Explosion Before 1929

But central bankers tamper with free market interest rates only at their peril—-so the domestic malinvestments and deformations which flowed from the monetary machinations of Bubbles Ben 1.0 were also monumental.

Owing to the splendid tax-cuts and budgetary surpluses of Secretary Andrew Mellon, the American economy was flush with cash, and due to the gold inflows from Europe the US banking system was extraordinarily liquid. The last thing that was needed in Roaring Twenties America was the cheap interest rates—-at 3 percent and under—that resulted from Strong’s meddling in the money markets.

At length, Strong’s ultra-low interest rates did cause credit growth to explode, but it did not end-up funding new steel mills or auto assembly plants.  Instead, the Fed’s cheap debt flooded into the Wall Street call money market where it fueled that greatest margin debt driven stock market bubble the world had ever seen. By 1929, margin debt on Wall Street had soared to 12 percent of GDP or the equivalent of $2 trillion in today’s economy (compared to $450 billion at present).

The Original Sub-Prime: Wall Street’s 1920s Foreign Bond Mania

As is well known, much economic carnage resulted from the Great Crash of 1929. But what is less well understood is that the great stock market bubble also spawned a parallel boom in foreign bonds—-a specie of Wall Street paper that soon proved to be the sub-prime of its day. Indeed, Bubbles Ben 1.0 triggered a veritable cascade of speculative borrowing that soon spread to the far corners of the globe, including places like municipality of Rio de Janeiro, the Kingdom of Denmark and the free city of Danzig, among countless others.

It seems that the margin debt fueled stock market drove equity prices so high that big American corporations with no needs for cash were impelled to sell bundles of new stock anyway in order to feed the insatiable appetites of retail speculators. They then used the proceeds to buy Wall Street’s high yielding “foreign bonds”, thereby goosing their own reported earnings, levitating their stock prices even higher and causing the cycle to be repeated again and again.

As the Nikkei roared to 50,000 in the late 1980s, the Japanese were pleased to call this madness “zaitech”, and it didn’t work any better the second time around. But the 1920s version of zaitech did generate prodigious sums of cash that foreign borrowers cycled right back to exports from America’s farms, mines and factories.  Over the eight years ending in 1929, the present day equivalent of $1.5 trillion was raised on Wall Street’s red hot foreign bond market, meaning that the US economy simply doubled-down on the vendor finance driven export boom that had been originally sparked by the massive war loans to the Allies.

In fact, over the period 1914-1929 the U. S. loaned overseas customers—-from the coffee plantations of Brazil to the factories of the Ruhr—-the modern day equivalent of $3.5 trillion to prop-up demand for American exports. The impact was remarkable. In the 15 years before the war American exports had crept up slowly from $1.6 billion to $2.4 billion per year, and totaled $35 billion over the entire period.  By contrast, shipments from American farms and factors soared to nearly $11 billion annually by 1919 and totaled $100 billion—three times more—over the 15 years through 1929.

So this was vendor finance on a vast scale——reflecting the exact mercantilist playbook that Mr. Deng chanced upon 60 years later when he opened the export factories of East China, and then ordered the People’s Bank to finance China’s exports of T-shirts, sneakers, plastic extrusions, zinc castings and mini-backhoes via the continuous massive purchases of Uncle Sam’s bonds, bills and guaranteed housing paper.

Our present day Keynesian witch doctors antiseptically label the $3.8 trillion that China has accumulated through this massive currency manipulation and repression as “foreign exchange reserves”, but they are nothing of the kind. If China had honest exchange rates, it reserves would be a tiny sliver of today’s level.

In truth, China’s $3.8 trillion of reserves are a gigantic vendor loan to its customers. This is a financial clone of the $3.5 trillion equivalent that the great American creditor and export powerhouse loaned to the rest of the world between 1914 and 1929.

Needless to say, after the October 1929 crash, the Wall Street foreign bond market went stone cold, with issuance volume dropping by 95 percent within a year or two. Thereupon foreign bond default rates suddenly soared because sub-prime borrowers all over the world had been engaged in a Ponzi—-tapping new money on Wall Street to pay interest on the old loans.

By 1931 foreign bonds were trading at 8 cents on the dollar—-not coincidentally in the same busted zip code where sub-prime mortgage bonds ended up in 2008-2009.

Still, busted bonds always mean a busted economic cycle until the malinvestments they initially fund can be liquidated or repurposed. Thus, the 1929 Wall Street bust generated a devastating crash in US exports as the massive vendor financed foreign demand for American farm and factory goods literally vanished.  By 1933 exports had slipped all the way back to the $2.4 billion level of 1914.

1929-1933 Foreign Bond and US Export Bust: True Source of the Great Depression

That’s not all. As US export shipments crashed by 70 percent between 1929 and 1933, there were ricochet effect throughout the domestic economy.

This artificial 15-year export boom had caused the production capacity of American farms and factories to become dramatically oversized, meaning that during this interval there had occurred a domestic capital spending boom of monumental proportions.  While estimated GDP grew by a factor of 2.5X during 1914-1929, capital spending by manufacturers rose by 7X.  Auto production capacity, for example, increased from 2 million vehicles annually in 1920 to more than 6 million by 1929.

Needless to say, when world export markets collapsed, the US economy was suddenly drowning in excess capacity. In short order, the decade-long capital spending boom came to a screeching halt, with annual outlays for plant and equipment tumbling by 80 percent in the four years after 1929, and shipments of items like machine tools plummeting by 95 percent.

Not surprisingly, in the wake of this drastic downshift in output, American business also found itself drowning in excess inventories.  Accordingly, nearly half of all production inventories extant in 1929 were liquidated by 1933, resulting in a shocking 20 percent hit to GDP—a blow that would amount to a $3 trillion drop in today’s economy.

Finally, Bubbles Ben 1.0 had induced vast but temporary “wealth effects” just like his present day successor.  Stock prices surged by 150 percent in the final three years of the mania. There was also an explosion of consumer installment loans for durable goods and mortgages for homes.  Indeed, mortgage debt soared by nearly 4X during the decade before the crash, while boom-time sales of autos, appliances and radios nearly tripled durable goods sales in the eight years ending in 1929.

All of this debt and wealth effects induced spending came to an abrupt halt when stock prices came tumbling back to earth.  Durable goods and housing plummeted by 80 percent during the next four years. In the case of automobiles, where stock market lottery winners had been buying new cars hand over fist, the impact was especially far reaching. After sales peaked at 5.3 million units in 1929, they dropped like a stone to 1.4 million vehicles in 1932, meaning that this 75 percent shrinkage of auto sales cascaded through the entire auto supply chain including metal working equipment, steel, glass, rubber, electricals and foundry products.

Thus, the Great Depression was born in the extraordinary but unsustainable boom of 1914-1929 that was, in turn, an artificial and bloated project of the warfare and central banking branches of the state, not the free market. Nominal GDP, which had been deformed and bloated to $103 billion by 1929, contracted massively, dropping to only $56 billion by 1933.

Crucially, the overwhelming portion of this unprecedented contraction was in exports, inventories, fixed plant and durable goods—the very sectors that had been artificially hyped.  These components declined by $33 billion during the four year contraction and accounted for fully 70 percent of the entire drop in nominal GDP.

So there was no mysterious loss of that Keynesian economic ether called “aggregate demand”, but only the inevitable shrinkage of a state induced boom. It was not the depression bottom of 1933 that was too low, but the wartime debt and speculation bloated peak in 1929 that had been unsustainably too high.

via Zero Hedge http://ift.tt/1mqKK6K Tyler Durden

The constructive outlook for the US dollar was predicated on two beliefs. First that growth and interest rate differentials favored the US over the euro area and Japan. Second that this would be the key driver in the foreign exchange market.

 

The nearly 3% contraction of the US economy in Q1 (at an annualized pace) is simply shocking. It has shaken the faith. The US 10-year bond yield fell back under the downtrend line drawn off the January and June highs.

 

This news was followed by disappointing consumption data (contraction in real terms for the second consecutive month in May). Some economists revised down their estimates for Q2 GDP and some even talked of the probability that with more than 2/3 of the economy contracting for 2/3 of the second quarter, the entire economy probably contracted.

 

The decline in the US 10-year yield did seem to be a critical factor behind the dollar’s fall below its 200-day moving average against the yen on a weekly basis, for the first time in more than a year and a half,  but monetary policy is still diverging. The BOJ is buying two times the amount of assets the Federal Reserve will until August when it will be buying nearly three times more. Moreover, the Japanese economy is about a third of the size of the US (on both nominal and PPP terms, according to IMF data).

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Similarly, the ECB has just cut its deposit rate to zero and warned investors its balance sheet may expanded by as much as 400 bln euros by the of the year (assuming full take down of the TLTROs) The euro has shown itself to be fairly resilient and finished last week in the upper end of its recent trading range.

 

The euro is close its best level since Draghi announced the ECB’s new initiatives (just shy of $1.3680). The 200-day moving average comes in near there and does the top of the Bollinger Band. The 5-day moving average is above the 20-day average. The RSI is neutral, though the MACDs have turned up. The record low volatility means that sustained upticks may still be hard to come by. The $1.3735 area may be the most that can be reasonably hoped for ahead of the ECB meeting and US jobs data (Thursday, July 3rd for each as the US Independence Day brings forward by a day the employment report). Above there, $1.3800 may prove formidable and, if it is approached, look for official rhetoric to be dialed back up.

 

Just as telling of the deterioration of the dollar’s tone is the heaviness of the Dollar Index. Important technical support is seen between 79.70-80.00. A break of this would signal losses toward 79.00.  The 200-day moving average, just below 80.30, offers initial resistance.

 

Although the Dollar Index is mostly the euro and currencies that move within its orbit, a little more than a fifth of is accounted for by the Japanese yen and Canadian dollar. They were two of the strongest major currencies last week, appreciating about 0.65% and 0.85% against the greenback respectively. Indeed, this quarter the Canadian dollar is the strongest, advancing 3.6% and the yen is in third place with a 1.8% gain (after sterling’s 2.25% rise).

 

The technical indicators for dollar-yen, like the RSI and MACDs are not generating particularly strong signals, but the break of the 200-day moving average (~JPY101.70) is notable, and if it sustained in the coming days, more yen shorts might be forced to cover. The dollar also finished the week just below the lower Bollinger Band (~JPY101.44). While the JPY101.00 may offer some support, the May low was set closer to JPY100.80 and the year’s low has, thus far, been set just below there in early February.

 

The Canadian dollar has been on a run since early June. On June 5, the US dollar was testing CAD1.0960, and it is now testing support near CAD1.0650. It is below its 200-day moving average for the first time since the Q3 13-Q1 13 period. The recent CPI and retail sales reports provided extra fundamental impetus behind the move that was already underway. The next level of support is seen near CAD1.06, which was a congestion area last December and into early January. The market is a bit over-extended, and that support area may not be easily violated on the first attempts.

 

Sterling is looking a bit tired, and BOE Governor Carney is giving investors indigestion. Still, investors believe that the BOE will be the first of the G7 to hike rates and the market still appears to be more inclined to buy dips. Initial support is seen in the $1.6950 area and then $1.6900-20. It may require a break of the $1.6850 area to spur talk of a top in the $1.7050-60 area.

 

The Australian dollar seems stuck around $0.9400. Support is seen in the band between $0.9350 and $0.9370. The RBA can be expected to try some more jawboning at the policy meeting next week, but clearly it has marginal impact at best. On the other hand, weak retail sales data may provide fodder for those who are not convinced that Australia will make the transition away from mining very smoothly, especially, with the tightening of fiscal policy.

 

The Mexican peso is particularly interesting from a technical point of view. The dollar appears to have carved out a head and shoulders pattern this month, and it finished last week at the neckline (~MXN12.9660). The head was formed by the spike to MXN13.12 on June 17-18. A convincing break of the MXN12.96 area would project dollar losses back toward MXN12.80.

 

Ahead of expectations for another 200k rise in non-farm payrolls, it may be difficult to justify a move below the 2.50% level in the 10-year US Treasury. Some consolidation is likely ahead of the report, with the downtrend line capping the upticks in the 2.56%-2.58% area.

 

Observations from the speculative positioning in the futures market:

 

1.  Position adjustment in the reporting period ending June 24 were mostly minor.  Only the gross short Canadian dollar positions were adjusted by more than 10k contacts and just barely at that.  Some 10.2k short contracts were bought back, leaving a still substantial 45.9k contracts.  At the same time, gross longs rose by 6k contracts to 40.6k, which is the largest of the year.  The gross short position of 5.3k contracts ist the smallest since last October.  

 

2.  The net long Swiss franc position swung back to the short side (5.4k contracts).  This was a reflection of 6.2k contract reduction of gross long positions to 9.1k contracts, and the addition of 2.7k short contracts to 14.4k.  

 

3.  The euro, Australian dollar and Canadian dollar futures saw a similar pattern of speculators adding to longs and reducing shorts.  The yen and peso saw both long and shorts reduced.  Sterling and the franc saw longs cut and shorts grown.  

 

4.  The net short speculative position in the 10-year Treasury futures fell to 27.3k contracts from 85.8k in the previous week.  The longs were feeling their oats and this was before the GDP shocker.  They added 37k contracts  to 402.7k.  The shorts may have gotten nervous and cut 21.5k contracts (to 430k). 

via Zero Hedge http://ift.tt/1qVtluo Marc To Market

Late last week, Mexico appears to have taken the US “border-crossing” issue to a whole new level even if it was really a case of a drug bust gone horribly wrong,  when as AP reported, on Thursday Mexican law enforcement crossed into Arizona by helicopter and fired two shots at U.S. border agents, a border patrol union leader says.

According to the Customs and Border Protection: “At approximately 5:45 a.m. Thursday morning, a Mexican law-enforcement helicopter crossed approximately 100 yards north into Arizona nearly 8 miles southwest of the Village of San Miguel on the Tohono O’odham Indian Nation while on a law-enforcement operation near the border. Two shots were fired from the helicopter, but no injuries or damage to U.S. property were reported. The incident is currently under investigation.“

Andy Adame, a spokesperson for US Border Patrol, said in a statement issued soon afterward that the incident had indeed occurred and that the two government agents targeted were not injured.

Art del Cueto, president of the local border patrol union, said four agents were in a marked patrol vehicle when they were shot at.

“They could say they didn’t fire at the agents intentionally. But for them to say that they were no shots fired within the United States, toward the United States Border Patrol, is a lie. They got in contact with our managers and apologized for the incident,” del Cueto said.

The Mexican helicopter was 15 yards from the border agents when they were came under fire, Del Cueto said. He’s also concerned that Tucson sector officials didn’t notify the next shift of border agents that there had been a shooting, he said.

“… I think our managers within the area should have definitely informed the oncoming shift this had happened. We’re always on high alert, but I think it would raise a fear level for our agents,” del Cueto said.

RT adds that the personnel on board the Mexican military chopper were in the midst of a drug interdiction operation at the time of the event.

Also this week, del Cuerto told KVOA that law enforcement officials on the border are in the midst of dealing with “probably the most notorious, dangerous, drug organizations to ever walk this earth.”

“They’re dealing with the criminal element; they’re dealing with somebody who is accustomed to violence,” Adame told KVOA. “Those are the people the parents are putting their children’s lives into the hands of.”

Mexico was quick to deny the US version and said its authorities did not shoot at US agents but instead were under attack during a mission to find smugglers on the border. Tomás Zerón, the director of the Mexican attorney general’s office investigative office, said that Mexican military and federal police who were conducting an operation on a ranch in Altar, Sonora, were shot at by criminals. Mexican authorities never fired any weapons and in fact never crossed into the U.S. side of the border, he said.

From USA Today:

Tomas Zeron de Lucio, senior director of the Criminal Investigation Agency of the Mexican Attorney General’s Office, said in a statement that the helicopter was taking part in a raid on a ranch near the border being used by a criminal organization to smuggle drugs and illegal immigrants across the border into the United States.

 

“I don’t believe we crossed the border, because we had our (navigation devices), but it was exactly 100 meters from the border,” he said, according to a transcript of a conference he held with reporters in Mexico City. He also said the operation was coordinated beforehand with the CBP.

 

He said Mexican authorities believe the ranch was being used to smuggle 400 migrants per day into the U.S during the summer season.

 

Mexican authorities apprehended 27 migrants from Mexico and 13 from Central America. The manager of the ranch was also arrested, he said.

 

“With the seizure of the La Sierrita ranch, the flow of a large quantity of migrants and drugs crossing from Mexico to the United States has been stopped,” Zeron de Lucio said. “These actions by the Mexican government reaffirm our commitment to combating organized crime.”

 

Earlier Friday, the CBP issued a statement saying that two shots had been fired at its agents.

 

The CBP report said the Mexican agents were conducting a mission on the southern side of the border Thursday morning when they crossed 100 yards into Arizona on the Tohono O’odham Reservation.

There have been more than 300 border incursions by Mexican military and law-enforcement authorities in the past decade, according to figures released recently by Rep. Duncan Hunter, R-Calif. Hunter said in a news release last week that the figures were provided by the Department of Homeland Security. The DHS did not respond to a request for confirmation. Hunter’s data indicated that 152 of the incidents involved armed subjects. Of those, 81 incidents involved physical or verbal contact.

In January, two Mexican soldiers crossed into the U.S. near Sasabe and drew weapons on Border Patrol agents. The soldiers claimed they were in pursuit of three suspects, according to an incident report from the CBP. They lowered their weapons after speaking with U.S. agents and returned to Mexico about 45 minutes after the incident began. The CBP declined to comment beyond its statement.

Well, if Obama’s attempts to spark a regional war in Syria, Iraq, Iran, Ukraine and so one fail, there is always Mexico.

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Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Networks are not planned by a single authority; they are the main source of innovation but are relatively fragile. Hierarchies exist primarily because of economies of scale and scope, beginning with the imperative of self-defense. To that end, but for other reasons too, hierarchies seek to exploit the positive externalities of networks. States need networks, for no political hierarchy, no matter how powerful, can plan all the clever things that networks spontaneously generate. But if the hierarchy comes to control the networks so much as to compromise their benign self-organizing capacities, then innovation is bound to wane.

 

– From Niall Furguson’s recent article Networks and Hierarchies

I’m not always a huge fan of Niall Furguson, but his latest article in The American Interest, simply titled Networks and Hierarchies is worth reading. Readers of Liberty Blitzkrieg will be well aware that I believe the most significant battle of our era is between the forces of Decentralization vs. Centralization. Mr. Furguson takes that battle and looks at it from a historical perspective, describing it as Networks vs. Hierarchies, and posits that indeed much of our collective history has been characterized by the struggle between these two forces. In fact, he starts out the article with the following question:

“Has political hierarchy in the form of the state met its match in today’s networked world?”

Where Mr. Furguson and I agree is in the realization that modern technology has provided networks with the most powerful tool yet in their endless struggle against centralization and hierarchy. Where we disagree is the conclusion. Furguson takes a very unbiased view and essentially comes to the conclusion that he doesn’t know which of these forces will ultimately come out on top. He highlights the fact that many of our modern technological networks are owned by a very small group of people (Google, Facebook, Twitter, etc) and that the CEOs of these companies have proven themselves very willing to be complicit with NSA spying (the manifestation of pyramidical hierarchy).

While I acknowledge this truth and appreciate the threat, the fact Edward Snowden has revealed this to us has sparked a movement by some of the smartest technology minds on the planet to develop encrypted and secure systems. While we may not see all of the fruits of their labors for many years, see them we will, and I think they will help us transform human civilization in a monumental and extremely positive way.

What follows are some of my favorite excerpts from Niall’s piece. He starts off by comparing the U.S. and China:

Yet both states are republics, with roughly comparable vertical structures of administration and not wholly dissimilar concentrations of power in the hands of the central government. Economically, the two systems are certainly converging, with China looking ever more to market signals and incentives, while the United States keeps increasing the statutory and regulatory power of government over producers and consumers. And, to an extent that disturbs civil libertarians on both Left and Right, the U.S. government exerts control and practices surveillance over its citizens in ways that are functionally closer to contemporary China than to the America of the Founding Fathers.

He goes on to discuss the threats new technologies pose to centralized hierarchies:

It was not immediately obvious how big a challenge all this posed to the established state. There was a great deal of cheerful talk about the ways in which the information technology revolution would promote “smart” or “joined-up” government, enhancing the state’s ability to interact with citizens. However, the efforts of Anonymous, Wikileaks and Edward Snowden to disrupt the system of official secrecy, directed mainly against the U.S. government, have changed everything. In particular, Snowden’s revelations have exposed the extent to which Washington was seeking to establish a parasitical relationship with the key firms that operate the various electronic networks, acquiring not only metadata but sometimes also the actual content of vast numbers of phone calls and messages. Techniques of big-data mining, developed initially for commercial purposes, have been adapted to the needs of the National Security Agency.

He rightly recognizes how important Bitcoin is in this monumental struggle:

The most recent, and perhaps most important, network challenge to hierarchy comes with the advent of virtual currencies and payment systems like Bitcoin. Since ancient times, states have reaped considerable benefits from monopolizing or at least regulating the money created within their borders. It remains to be seen how big a challenge Bitcoin poses to the system of national fiat currencies that has evolved since the 1970s and, in particular, how big a challenge it poses to the “exorbitant privilege” enjoyed by the United States as the issuer of the world’s dominant reserve (and transaction) currency. But it would be unwise to assume, as some do, that it poses no challenge at all.

 

Networks are the spontaneously self-organizing, horizontal structures we form, beginning with knowledge and the various “memes” and representations we use to communicate it. These include the patterns of migration and miscegenation that have distributed our species and its DNA across the world’s surface; the markets through which we exchange goods and services; the clubs we form, as well as the myriad cults, movements, and crazes we periodically produce with minimal premeditation and leadership. And the fourth is hierarchies, vertical organizations characterized by centralized and top-down command, control, and communication. These begin with family-based clans and tribes, out of which or against which more complex hierarchical institutions evolved. They include, too, tightly regulated urban polities reliant on commerce or bigger, mostly monarchical, states based on agriculture; the centrally run cults often referred to as churches; the armies and bureaucracies within states; the autonomous corporations that, from the early modern period, sought to exploit economies of scope and scale by internalizing certain market transactions; academic corporations like universities; political parties; and the supersized transnational states that used to be called empires.

 

Networks are not planned by a single authority; they are the main source of innovation but are relatively fragile. Hierarchies exist primarily because of economies of scale and scope, beginning with the imperative of self-defense. To that end, but for other reasons too, hierarchies seek to exploit the positive externalities of networks. States need networks, for no political hierarchy, no matter how powerful, can plan all the clever things that networks spontaneously generate. But if the hierarchy comes to control the networks so much as to compromise their benign self-organizing capacities, then innovation is bound to wane.

 

European history in the 17th, 18th, and 19th centuries was characterized by a succession of network-driven waves of innovation: the Scientific Revolution, the Enlightenment, and the Industrial Revolution. In each case, the sharing of novel ideas within networks of scholars and tinkerers produced powerful and mainly positive externalities, culminating in the decisive improvements in economic efficiency and then life expectancy experienced in the British Isles, Western Europe, and North America from the late 18th century. The network effects of trade and migration were especially powerful, as European merchants and settlers exploited falling transportation costs to export their ideas, as well as their techniques and goods, to the rest of the world. Thanks to those ideas, this was also an era of political revolutions. Ideas about liberty, equality, and fraternity crossed the Atlantic as rapidly as pirated technology from the cotton mills of Lancashire. Kings were toppled, aristocracies abolished, and churches dissolved or made to compete without the support of a state.

 

Yet the 19th century saw the triumph of hierarchies over the new networks. This was partly because hierarchical corporations—which began, let us remember, as state-sponsored monopolies like the East India Company—were as important in the spread of industrial capitalism as horizontally structured markets. Firms could reduce the transaction costs of the market as well as exploit economies of scale and scope. The railways, steamships, and telegraph cables that made possible the first age of globalization had owners.

 

Not only did the period after 1918 witness the rise of the most centrally controlled states of all time (Stalin’s Soviet Union, Hitler’s Third Reich and Mao’s People’s Republic); it was also an era in which hierarchies flourished in the economic, social and cultural spheres. Central planners ruled, whether they worked for governments, armies or large corporations. In Aldous Huxley’s Brave New World (1932), the Fordist World State controls everything from eugenics to narcotics and euthanasia; the fate of the non-conformist Bernard Marx is banishment. In Orwell’s Nineteen Eighty-Four(1949) there is not the slightest chance that Winston Smith will be able to challenge Big Brother’s rule over Airstrip One; his fate is to be tortured and brainwashed. A remarkable number of the literary heroes of the high Cold War era were crushed by one system or the other: from Heller’s John Yossarian to le Carré’s Alec Leamas to Solzhenytsin’s Ivan Denisovich.

 

Kraus was right: The information technology of mid-century overwhelmingly favored the hierarchies. Though the telegraph and telephone created vast new networks, they were relatively easy to cut, tap, or control. Newsprint, radio, cinema, and television were not true network technologies because they generally involved one-way communication from the content provider to the reader or viewer. During the Cold War the superpowers were mostly able to control information flows by manufacturing or sponsoring propaganda and classifying or censoring anything deemed harmful. Sensation surrounded every spy scandal and defection; yet in most cases all that happened was that classified information was passed from one national security state to the other. Only highly trained personnel in governmental, academic, or corporate research centers used computers, and those were anything but personal computers.

 

Today, by contrast, the hierarchies seem to be in much more trouble. The most obvious challenge to established hierarchies is the flow of information unleashed by the advent of the personal computer, email, and the internet, which have allowed ordinary citizens to organize themselves into much larger and more dispersed networks than has ever been possible before. The PC has empowered the individual the way the book did after the 15th-century breakthrough in printing. Indeed, the trajectories for the production and price of PCs in the United States between 1977 and 2004 are remarkably similar to the trajectories for the production and price of printed books in England from 1490 to 1630. The differences are that our networking revolution is much faster and that it is global.

 

The challenge these new networks pose to established hierarchies is threefold. First, they vastly increase the volume of information to which citizens can have access, as well as the speed with

which they can have access to it. Second, they empower individual citizens to publicize things that might otherwise remain secret or known only to a few. Edward Snowden and Daniel Ellsberg did the same thing by making public classified documents, but Snowden has already revealed much more than Ellsberg and to vastly more people, while Julian Assange, the founder of WikiLeaks, has far out-scooped Carl Bernstein and Bob Woodward (even if he has not yet helped to bring down an American President). Third, and perhaps most importantly, the networks expose by their very performance the inefficiency of hierarchical government.

 

The shortcomings of the website Healthcare.gov in many ways epitomized the fundamental problem: In the age of Amazon, consumers expect basic functionality from websites.Daily Show host Jon Stewart spoke for hundreds of thousands of frustrated users when he taunted former Health and Human Services head Kathleen Sebelius: “I’m going to try and download every movie ever made, and you’re going to try to sign up for Obamacare, and we’ll see which happens first.”

 

Yet the trials and tribulations of “Obamacare” are merely a microcosm for a much more profound problem. The modern state, at least in its democratic variant, has evolved a familiar solution to the problem of increasing the provision of public goods without making proportionate increases to taxation, and that is to finance current government consumption through borrowing, while at the same time encouraging citizens to increase their own leverage by various fiscal incentives, such as the deductibility of mortgage interest payments. The vast increase of private debt that preceded the financial crisis of 2008 was succeeded by a comparably vast increase in public debt. At the same time, central banks took increasingly unorthodox steps to shore up tottering banks and plunging asset markets by purchases of securities in exchange for excess reserves. With short-term interest rates at zero, “quantitative easing” was designed to keep long-term interest rates low too. The financial world watches with bated breath to see how QE can be “tapered” and when short-term rates will be raised. Most economists nevertheless take for granted the U.S. government’s ability to print its own currency without limit. Many assume that this offers some relatively easy way out of trouble if rising interest rates threaten to make debt service intolerably burdensome. But this assumption may be wrong.

 

Since ancient times, states have exploited their ability to issue currency, whether coins stamped with the king’s likeness or electronic dollars on a screen. But if the new networks are in the process of creating an alternative form of money, such as Bitcoin purports to be, then perhaps the time-honored state privilege to debase the currency is at risk. Bitcoin offers many advantages over a fiat currency like the U.S. dollar. As a means of payment—especially for online transactions—it is faster, cheaper, and more secure than a credit card. As a store of value it has many of the key attributes of gold, notably finite supply. As a unit of account it is having teething troubles, but that is because it has become an attractive speculative object. It is too early to predict that Bitcoin will succeed as a parallel currency, but it is also too early to predict that it will fail. In any case, governments can fail, too.

 

Where governments fail most egregiously, new networks may well increase the probability of successful revolution. The revolutionary events that swept the Middle East and North Africa beginning in Tunisia in December 2010—the so-called Arab Spring—were certainly facilitated by various kinds of information technology, even if for most Arabs it was probably the television channel Al Jazeera more than Facebook or Twitter that spread the news of the revolution. Most recently, the revolutionaries in Kiev who overthrew Ukrainian President Viktor Yanukovych made effective use of social networks to organize their protests in the Maidan and to disseminate their critique of Yanukovych and his cronies.

 

The owners of the networks are also well aware that plotting jihad is not the principal use to which their technology is put, any more than plotting revolution is. They owe their security much more to network surfers’ apathy than to the NSA. Most people do not go online to participate in flash mobs. Most women seem to prefer shopping and gossiping; most men prefer sports and pornography. All those neural quirks produced by evolution make us complete suckers for the cascading stimuli of tweets, Instagrams, and Facebook pokes from members of our electronic kinship group. The networks cater to our solipsism (selfies), our short attention spans (140 characters), and our seemingly insatiable appetite for “news” about “celebrities.” In the networked world, the danger is not popular insurrection but indifference; the political challenge is not to withstand popular anger but to transmit any kind of signal through the noise. What can focus us, albeit briefly, on the tiresome business of how we are governed or, at least, by whom? When we speak of “populism” today, we mean simply a politics that is audible as well as intelligible to the man in the street. Not that the man in the street is actually in the street. Far more likely, he is the man slumped on his sofa, his attention skipping fitfully from television to laptop to tablet to smartphone and back to television. And what gets his attention? The end of history? The clash of civilizations? The answer turns out to be the narcissism of small differences.

The above is the key problem we face at the moment. People are using these amazing technologies for stupidity. However, I strongly believe this will change as the living situation on the ground becomes harder and harder for a greater and greater percentage of humanity.

Yet our own time is profoundly different from the mid-20th century. The near-autarkic, commanding and controlling states that emerged from the Depression, World War II, and the early Cold War exist only as pale shadows of their former selves. Today, the combination of technological innovation and international economic integration has created entirely new forms of organization—vast, privately owned networks—that were scarcely dreamt of by Keynes and Kennan. We must ask ourselves: Are these new networks really emancipating us from the tyranny of the hierarchical empire-states? Or will the hierarchies ultimately take over the networks as they did a century ago, in 1914, successfully subordinating them to the priorities of the national security state?

Huge issue, but that is exactly why Edward Snowden felt compelled to whistle-blow. He understood what was at stake: Everything.

A libertarian utopia of free and equal netizens—all networked together, sharing all available data with maximum transparency and minimal privacy settings—has a certain appeal, especially to the young. It is romantic to picture these netizens, like the workers in Lang’s Metropolis, spontaneously rising up against the world’s corrupt hierarchies. Yet the suspicion cannot be dismissed that, despite all the hype of the Information Age and all the brouhaha about Messrs. Snowden and Assange, the old hierarchies and new networks are in the process of reaching a quiet accommodation with one another, much as thrones and telephones did a century ago. We shall all know what it means when (as begins to be imaginable) Sheryl Sandberg leans all the way into the White House. It will mean that Metropolis lives on. It’s very interesting that he mentions Sheryl Sandberg at the very end.  She was the target of my harsh criticism earlier this year for starting a childish and idiotic campaign to ban the word “bossy.” Recall my post: The Chief Operating Officer of Facebook Wants to Ban the Word “Bossy.”As I mentioned at the beginning, I think this war will be decisively won by the forces of decentralization, but of course, it won’t be a walk in the park. I agree very much with the message in the following video which concludes that “Bitcoin will Save Capitalism.” Enjoy.

 

 

Full article here.

via Zero Hedge http://ift.tt/1qViVLw Tyler Durden

A state economy is nothing without the businesses that call it home. But, as WaPo notes, those businesses are not created equally – bigger businesses naturally have outsized influence, generating more revenue, paying more taxes and employing more people. As Bloomberg notes below, some are less surprising – GM runs Michigan, ExxonMobil runs Texas, and Berkshire Hathaway runs Nebraska but for Washington (home of Microsoft), it is CostCo that runs the state.  

 

 

So what’s the biggest business in your state?

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