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Ron Paul Knows “The Longer QE Lasts, The Worse It Will End”

In this exclusive interview with Birch Gold Group, former Congressman Ron Paul shares his opinions on a number of topics, including investing in physical gold and silver, the future of the U.S. dollar and the role of the Federal Reserve.

Full audio if the following interview is available here.

Rachel Mills for Birch Gold Group (BGG): This is Rachel Mills for Birch Gold Group. I am speaking with Ron Paul today. How are you, Ron Paul?

Ron Paul (RP): I am doing very well. Nice to talk to you Rachel.

BGG: It’s good to talk to you again, and by the way of information for Birch’s audience, I was your last press secretary on Capitol Hill in Congress and I worked for you for the 5 years. So I may be cheating a little bit because a lot of your answers to my questions I maybe have a pretty good guess at what you might say.

RP: Okay!

BGG: But, just really quick – today with you I’d like to go over several things. But I’d like to ask your opinion on things like Janet Yellen as the next Fed Chair, about debt ceiling and shutdown issues. I want to get into, briefly, if you are still a buyer of gold even though it is so “expensive”. But first I wanted to introduce Birch Gold’s listeners to your background a little bit because I think it’s fascinating. In 1971, Nixon closed the gold window which led to the end of the Bretton Woods agreement. That was very important event for you, I know for sure, because you knew at the time that it would eventually destroy the currency, which we are still experiencing. And you said that that was what got you into politics to begin with. Had you been reading Austrian economists before that?

RP: Yes, for a good while. As a matter of fact, it was 1971, there was confirmation of the Austrian economic writers who had been predicting that would happen as early as Henry Hazlitt said when the IMF was set up in 1945. He said it wouldn’t work and Bretton Woods would break down. And by the 50′s and the 60′s people were rejecting it and it was so artificial and it was fragile. So people did know that it was coming, and mainly it was coming because the governments pretended that the dollar would be as good as gold at $35 an ounce forever, yet they kept printing dollars and it was pretty simple logic to figure out there’ll be a limit. The governments worked real hard to convince the people that there was no problem, that the dollar would always be valued at $35 an ounce.

But finally the market overwhelmed. The politicians and Congresses, and Central Banks can manipulate things for a while but eventually if they are out of sync with the market, the market will overwhelm. And even if the government won’t permit it legally to do it, it just drives the whole system into the underground economy. So fixed exchange rates and different things don’t work, they just hide the fact. But in 1971, it was confirmation that everything that the Austrians were saying as far back as the beginning of the Bretton Woods, that was true. And of course we’ve been suffering the consequences from that ever since.

BGG: Yeah and I’ve heard people argue that the dollar is doing well against other currencies. But I know for Austrians and for people who understand gold, like you and me, that’s not much solace because it’s all on a race to the bottom.

RP: Right and the ultimate measure of the value of the currency is what it purchases, so gold is a good indicator long term, I don’t think it’s a good indicator short term, because there are a lot of factors, just like in the 50′s and 60′s, they were able to hold gold at $35 an ounce when it should have been $235 an ounce! But anyway, overall in the long term it’s what the dollar will purchase. And even though our government tells us today there is no inflation, they are trying to get prices to rise at at least 2% a year, yet there are some things in our economy, the prices are soaring: the price of a bond, the price of education, the price of medical care – all of these things are going up.

So there is a lot of price inflation, but that’s the ultimate tests. You can measure one currency against another, gold is a long-term indicator. But if none of the prices were affected by printing money, it would be no big deal. But they are and of course the major problem is not only the price increases, it’s the malinvestment, the overinvestment, the bubbles that form and the corrections that have to come. That’s where the real problem is, in addition to the cost of living going up and hurting the poor and the middle class, much more so than it will the wealthy.

BGG: Right, which leads nicely to Janet Yellen as the next Fed Chair, as recently has been announced. What do you think of Janet Yellen? Do you think she’s going to solve all our problems?

RP: No, she’ll make them worse. She’s inherited a mess, although she was a participant in the mess and she always argued for more inflation. One thing I find a little bit interesting is that she has a reputation for transparency. She wants to tell the markets exactly what their decisions are early on and let the markets know what they are doing. But if it comes true transparency, like allowing an audit of the Federal Reserve, and letting us know who they bail out and when they bail out and what they did in ’09 with their trillions of dollars, and all the international transactions, there’s no way that’s going to be permissible. Because that’s where all the power and control is accomplished, it’s behind the scenes with the Fed on international transactions.

“The longer [Quantitative Easing] lasts, the worse the correction will be when eventually people give up on our dollar and give up on our debt.”

But if anything, she takes a position, not only did she endorse what Bernanke was doing, she was always much more dovish on trying to prevent prices from going up and having, you know, price inflation. She was arguing the case for even more, so the odds of her having the guts or the wisdom to start backing off the purchase of debt, it’s slim to none. So that will certainly continue and it’s still working on the surface. The longer it lasts, the worse the correction will be when eventually people give up on our dollar and give up on our debt.

BGG: So do you think Larry Summers would have been any better? He was rumored to be Obama’s preferred choice. What do you think?

RP: No, the policies wouldn’t be all that different, even if he had been slightly more reserved in credit creation. He was also a person that would… there is a subjective factor in markets too – and he would have added as another subjective factor because people didn’t like him. And he might be just, you know, annoying the marketplaces because that is a factor, they might trust him less. But overall they’re very much the same – both of them. Anybody who can even be considered to be Chairman of the Federal Reserve will be an endorser of Keynesian economics, that the lender of last resort is crucial for the banks and all the currencies and Central Banks of the world.

And they believe, though of course, the most important role for the Fed – and Congress never talks about it, but they secretly acknowledge it – without the Fed, who would buy the debt? And if somebody didn’t buy the debt, interest rates would soar. So even this big talk about all the arguments in Washington on the issues of war and spending and welfare and debt, they’re in total agreement with each other, and they all support the Fed’s role in being not only the lender but the printer of the last resort. Print what you need… but just common sense tells you that this can’t last.

“Since they will not work out of [Quantitative Easing] gracefully and deliberately, we will probably go on to having a major crash of the dollar.”

BGG: Who would’ve you picked?

RP: I would’ve picked nobody. I don’t think we should have a Fed, so I wouldn’t pick a Chairman. But even though in the Presidential campaign when they pushed me – “well, you’ll have to pick someone to unwind it” or something like that – I always threw out Jim Grant’s name. Because I’ve known him, he’s an Austrian economist, he knows that monetizing the debt is bad and if they were trying to work on a transition, somebody like that, you know, would move us in the right direction. But he wouldn’t last either because if he decided right now to only buy $75 billion worth of government debt per month, the markets would crash probably and then they would want to throw him out. So it’s a system that is very friable and unworkable and since they will not work out of it gracefully and deliberately, you know, we will probably go on to having a major crash of the dollar – that’s what I see happening.

BGG: Yeah, scary. Moving on, I wanted to ask you about the debt ceiling. We are up against the debt ceiling again, as we always find ourselves every few months it seems. And so, we’ve had an impending crisis if they don’t raise the debt ceiling, which everyone expects they will find a way to raise it. But then, before you know it, we will be right up against it again. So what is the point of the debt ceiling anymore?

RP: Well, it was intended to restrain government but some people don’t even like it, they want to get rid of it, just so the government never has to be hesitant in spending as much as they want. But you’re right: Once they raise it, they just go back to doing the same thing. The debt ceiling isn’t as necessary – this October 17th day isn’t as crucial as they pretend, because that’s an arbitrary date. They could have picked the 16th or the 20th or any date they wanted.

Besides, the national debt hasn’t moved since May because they’re always taking money elsewhere and spending it and paying all the bills. So they can continue to do that for a week or a month or a year if they really wanted to. Just pay the bills as the money comes in and they could always pay the interest rates. And the other thing… if, say, we were in charge and we wanted to change things to work our way out of it and we wanted to deal with this national debt, just eliminate the debt we owe to the Federal Reserve. We pay a lot of interest to the Federal Reserve and they turn this money and they use this money for all kinds of things, so I would just wipe that debt off the books. But if we did that today, that means they would have a lot of room for more debt – that would lower the national debt by $2 trillion.

BGG: Yeah but it wouldn’t solve the spending problems…

RP: This government would spend more money if we got this freebie! But I would only think that would be worthwhile thinking about it is, you know, to tide this over and work our way out of it. But when the reforms are necessary when a crash comes and if we have to pay off the debt, you don’t have to pay the debt to the Federal Reserve if you are going to eliminate it or restore confidence and quit printing and quit monetizing debt – you could eliminate that. There is no moral obligation, there is really no legal obligation either because the institution isn’t even constitutional, you know…

BGG: …institution to begin with, yeah. It seems like debt ceiling, the only purpose anymore is just to create an artificial crisis which Washington seems to thrive on.

RP: Yeah they do and then they argue which authoritarian is going to run they show. And they don’t argue over the issue, it’s just the matter of which one, and then they are always talking about compromise, but they’re never talking about compromise between two authoritarians who want to manage the economy in different ways. They always want those who believe in limited government, the Constitution and freedom to give up so much of it, and then they call it, you know, a “good” thing to sacrifice liberty for the benefit of the authoritarians. But the authoritarians are in charge and I don’t think that people who don’t believe in that system should yield anything.

I think that we all should stick to our guns and say that the rule of law is important, our privacy is important, our First Amendment is important, the way we go to war is important, and never give in. But right now these battles that we have when it comes down to shutting down government as a political stunt or the debt limit, it’s another stunt for the two variations of compulsion, you know, by government. They’re fighting over who has the power. And I think the American people are sick and tired of it, and rightfully so, but I don’t think they fully understand that it’s actually where the divisions are. They keep thinking that, you know, if those of us who believed in limited government would just give in and say, “Okay, go ahead and increase the national debt instead of by $1 trillion, increase it by $500 billion and worry about it next week”, and that’s supposed to be a good type of compromise. It solves nothing and makes our problems worse.

“I would think people who are in it for the long term, it looks to me like this would be a very good time to buy gold.”

BGG: Yeah, and that’s why I appreciate Birch Gold trying to educate people and win on that front, I know it’s important to you. But I wanted to ask you: Are you still a buyer of gold? It has gotten so “expensive”, some people even say there is a gold bubble. Is it possible for gold to be in a bubble?

RP: Well, it can get out of whack, people can buy… right now, of course gold is in a bit of a correction. So it’s different than a bubble that occurs when the interest rates are very low in the dollar system and then people overdo things and they overbuy. But markets aren’t always smooth, and the gold market isn’t smooth, so it goes up, it might go up too much, and at times too fast and then it makes a correction because the traders are in there and they have all kinds of motivation. If people look at it long-term, you know, from when the Fed started when it was $20 an ounce up to the time it went up $1,900 an ounce, you know, that’s more of the trend. Of course now it’s down. Instead of people arguing that it’s too “expensive”, I would think people who are in it for the long term, it looks to me like this would be a very good time to buy.

BGG: I would think so.

RP: So some people might say, “Oh well no, it’s too expensive, because it used to be $1,000 or $500 and I’ll wait for that.” No, I think this is a good time. I personally don’t get too much involved because I bought my insurance a few years ago at a different price. I look at gold as insurance and others will, you know, others might be just at a time where they can start buying their insurance against the dollar fiasco, and I would say this is as good time as any.

BGG: Yeah, I have a family member, I won’t get too specific who, but a family member who is inquiring about gold. It’s interesting to me because this person is not someone who is typically into economics and the things that I talk about. But now she’s looking around and getting a little bit nervous and thinking that gold might be a good investment, but wondering if it’s too late to jump in. So…

RP: Certainly if they thought it was too late that means that they must trust the government to balance the budget, and trust the Fed not to print any more money and that you’ll never see prices going up. And most people don’t buy into the government’s argument that the cost of living isn’t going up. People on fixed incomes… and this is one thing that conservatives and libertarians don’t give much credibility to, because we don’t like the setting of wages, you know, and pushing up minimum wages with the law… but the truth is, the cost of living has gone up much faster than the minimum wage.

But that’s characteristic: Cost of living goes up much faster than Social Security benefits. But the fault there is the currency, not the fault of laws not matching up with the system and compelling businesspeople to pay a certain amount. But no, I think the cost of living – which isn’t inflation in the ordinary sense – is very, very serious and that’s why people are saying, “I need more money, send me more money on my Social Security check” or “Send me more money by another law, the minimum wage law.” And this misses the point because it really is the nature of money and deficits and what the Fed does.

BGG: Right. Well, how is retirement treating you? Are you retired?

RP: Not really. I’m retired from Congress and that is good. Not that I didn’t enjoy working there with my staff but…

BGG: You have to say that!

RP: I’m just glad I’m not going back and forth on airplanes, on John Boehner’s schedule. But I have a lot of activities going on: I’m working hard on homeschooling, I have a curriculum on homeschooling, which I like, and the Internet programming, I do some radio broadcasting and write a book now and then, so I’m very happy with my schedule.

BGG: Yeah, I’ve looked into your homeschooling curriculum and I’m a subscriber to the Ron Paul Channel, so it’s all very exciting.

RP: Wonderful. Hey, RonPaulChannel.com.

BGG: Good! Well thank you so much for joining me today. I really enjoy talking to you. Again, my old boss, Congressman Ron Paul. Thank you so much.

RP: Thank you Rachel.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/7-c2DxJNG0w/story01.htm Tyler Durden

Ron Paul Knows "The Longer QE Lasts, The Worse It Will End"

Full audio if the following interview is available here.

Rachel Mills for Birch Gold Group (BGG): This is Rachel Mills for Birch Gold Group. I am speaking with Ron Paul today. How are you, Ron Paul?

Ron Paul (RP): I am doing very well. Nice to talk to you Rachel.

RP: Okay!

BGG: Right, which leads nicely to Janet Yellen as the next Fed Chair, as recently has been announced. What do you think of Janet Yellen? Do you think she’s going to solve all our problems?

“The longer [Quantitative Easing] lasts, the worse the correction will be when eventually people give up on our dollar and give up on our debt.”

BGG: So do you think Larry Summers would have been any better? He was rumored to be Obama’s preferred choice. What do you think?

And they believe, though of course, the most important role for the Fed – and Congress never talks about it, but they secretly acknowledge it – without the
Fed, who would buy the debt? And if somebody didn’t buy the debt, interest rates would soar. So even this big talk about all the arguments in Washington on the issues of war and spending and welfare and debt, they’re in total agreement with each other, and they all support the Fed’s role in being not only the lender but the printer of the last resort. Print what you need… but just common sense tells you that this can’t last.

“Since they will not work out of [Quantitative Easing] gracefully and deliberately, we will probably go on to having a major crash of the dollar.”

BGG: Who would’ve you picked?

BGG: Yeah but it wouldn’t solve the spending problems…

BGG: …institution to begin with, yeah. It seems like debt ceiling, the only purpose anymore is just to create an artificial crisis which Washington seems to thrive on.

“I would think people who are in it for the long term, it looks to me like this would be a very good time to buy gold.”

BGG: I would think so.

RP: So some people might say, “Oh well no, it’s too expensive, because it used to be $1,000 or $500 and I
’ll wait for that.” No, I think this is a good time. I personally don’t get too much involved because I bought my insurance a few years ago at a different price. I look at gold as insurance and others will, you know, others might be just at a time where they can start buying their insurance against the dollar fiasco, and I would say this is as good time as any.

BGG: Right. Well, how is retirement treating you? Are you retired?

RP: Not really. I’m retired from Congress and that is good. Not that I didn’t enjoy working there with my staff but…

BGG: You have to say that!

BGG: Yeah, I’ve looked into your homeschooling curriculum and I’m a subscriber to the Ron Paul Channel, so it’s all very exciting.

RP: Wonderful. Hey, RonPaulChannel.com.

BGG: Good! Well thank you so much for joining me today. I really enjoy talking to you. Again, my old boss, Congressman Ron Paul. Thank you so much.

RP: Thank you Rachel.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/7-c2DxJNG0w/story01.htm Tyler Durden

State Of Emergency Declared As Another Oil/Gas Train Derails In Canada

Thirteen cars came off the tracks around 1 a.m. Saturday — 9 of which were carrying liquefied petroleum gas and four that were carrying crude oil. The derailment prompted local officials to declare a state of emergency and the evacuation of the nearly hamlet of Gainford about 80km west of Edmonton. As AP reports, an eyewitness noted "the fireball was so big, it shot across both lanes of the Yellowhead (Highway)… there's fire on both sides." According to the latest reports, the train cars remain ablaze as the liquified hydrocarbons continue to leak. Parkland County police chief added "how it exploded and why is yet to be determined," but while only 2 injuries (CN employees) and no deaths have been reported, he noted "it's still a risky situation so we need to contain as much as possible and keep people far away." This explosion comes just 3 months after the disaster that too 47 lives in Lac-Megantic and once again raises questions over the safety of dramatically increased rail traffic from/to the Bakken.

Local News details:

More color from eyewtinesses:

Images of the scene:

The accident occurred at 1am and a helicpter captured the initial images…

and as day light arrived, the proximity to the freeway was evident…

The Freeway remains closed…

Details via AP,

Emergency crews battled a massive fire Saturday after a Canadian National tanker train carrying oil and gas derailed west of Edmonton, Alberta, overnight. No injuries have been reported so far.

Canadian National spokesman Louis-Antoine Paquin said 13 cars — four carrying petroleum crude oil and nine loaded with liquified petroleum gas — came off the tracks around 1 a.m. local time in the hamlet of Gainford, about 50 miles (80 kilometers) from Edmonton. The entire community of roughly 100 people was evacuated.

…

The train was travelling from Edmonton to Vancouver, British Columbia, Paquin said.

The Transportation Safety Board said it is sending investigators to the scene.

Questions about the increasing transport of oil by rail in the U.S. and Canada were raised in July after an unattended train with 72 tankers of oil rolled into the small Quebec town of Lac-Megantic near the Maine border, derailing and triggering explosions that killed 47 people. The town's center was destroyed. The rail company's chairman blamed the train's operator for failing to set enough hand brakes.

Much of that increase is from oil produced in the Bakken region, a rock formation underlying portions of Montana and North Dakota in the U.S., and Saskatchewan and Manitoba in Canada.

The train that crashed in the small Quebec town was carrying oil from North Dakota to a refinery in New Brunswick, Canada.

The train, using DOT-111 railcars, was operated by a U.S. company, the Montreal, Maine & Atlantic Railway.

…

The fire is still burning (via CBC),

Although Mills initially told CBC News that two of the cars containing liquefied petroleum gas were on fire, a later news release by Evansburg RCMP stated that three cars — all containing LPG — had caught fire.

Officials told CBC that one of the three burning cars later exploded, and that another is now compromised.

Fire officials say they have little choice but to let the fire burn itself out.

Louis-Antoine Paquin, speaking for CN, said the four crude oil tankers are still intact.

“Right now, the idea is to remediate the situation and try to contain the fire,” said Paquin, who said the risk to the local community has been minimized as much as possible.

Questions over saefty remain (via CBC),

…

“This kind of disaster will become the new normal unless the federal government takes much more effective measures to improve oil transportation safety,” said Mike Hudema, speaking for Greenpeace.

“The truth is that the Harper government has become such a cheerleader for the petroleum industry that it is failing in its duty to protect our communities and the environment.

“This is the third major derailment in Alberta in the last few months. How many more will it take before Ottawa implements transportation safety regulations that were recommended more than a decade ago?"

and via AP,

In the first half of this year, U.S. railroads moved 178,000 carloads of crude oil. That's double the number during the same period last year and 33 tim
es more than during the same period in 2009. The Railway Association of Canada estimates that as many as 140,000 carloads of crude oil will be shipped on Canada's tracks this year, up from 500 carloads in 2009.

Following the fatal Quebec derailment, Cynthia Quarterman, head of the Pipeline and Hazardous Materials Safety Administration, has said the U.S. agency expects to publish draft regulations requiring that DOT-111 railcars be retrofitted to address safety concerns. The agency's proposal is intended to fix a dangerous design flaw in the rail cars, which are used to haul oil and other hazardous liquids throughout North America.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/O8kdSeIib4Q/story01.htm Tyler Durden

JPMorgan To Pay Record $13 Billion Mortgage Settlement But Criminal Case Remains

Under the guidance of Jamie Dimon, adjudged by the mainstream media to be the greatest banker the world has ever known (hyperbole accepted), a late night Friday phone call (we assume not a drunk-dial) between Attorney General Eric Holder and JPMorgan’s general counsel, confirms, according to the WSJ, that JPMorgan will settle their residential mortgage bond suits with the DoJ for $13 Billion – the biggest settelement ever for a single company. Bloomberg reports that an additional $2 billion was added during the negotiations last night. Who knows: perhaps Dimon feels the same about Holder as the rest of the population and made it quite clear, at a cost of another $2 billion.

The final wording of the deal is to be finalized but as part of the deal the DoJ expects JPM to cooperate with the continuing criminal probe of the bank’s RMBS issuance – which remain unresolved. The settlement is ‘unsurprisingly’ in line with JPM’s expected litigation expenses for Q2/Q3 13 but it would appear they expect worse to come still as the total litigation reserve was recently increased.

*JPMORGAN SAID TO HAVE REACHED $13 BLN MORTGAGE ACCORD WITH U.S.
*JPMORGAN SAID TO AGREE TO ADDITIONAL $2 BLN OVER EARLIER AMOUNT
*JPMORGAN SETTLEMENT SAID TO COVER ALL CIVIL MORTGAGE MATTERS
*JPMORGAN ACCORD SAID TO EXCLUDE ANY CRIMINAL RELEASE

The settlement appears to right in the middle of the range…

The initial “ask” was $20 billion – as floated by the FHA.
JPMorgan countered with an “expectation” of around $3 billion
and the final “settlement” comes in at $13 billion

Perhaps unsurprisingly in line (as seen below) with expectations for losses in Q2 and Q3 2013 (of $5.7 billion and $6.8 billion respectively)

Via WSJ,

JPMorgan has reached a tentative $13 billion deal with the Justice Department to settle a number of outstanding investigations of its residential mortgage-backed securities business, according to a person familiar with the decision.

The general terms of the deal were struck Friday night in a phone conversation between Attorney General Eric Holder, his deputy Tony West, and the bank’s general counsel, Stephen Cutler, the person said.

…

The deal doesn’t resolve a continuing criminal probe of the bank’s conduct, which is being handled by federal prosecutors in Sacramento, Calif., the person said.

…

The deal does include a roughly $4 billion agreement with the Federal Housing Finance Agency to settle allegations that J.P. Morgan misled Fannie Mae and Freddie Mac about the quality of loans it sold them

…

As part of the deal, the Justice Department expects J.P. Morgan to cooperate with the continuing criminal probe of the bank’s issuance of mortgage-backed securities between 2005 and 2007, the person said.

…

The settlement also doesn’t cover other criminal investigations of conduct unrelated to mortgage-backed securities, the person said.

So they have $23bn in total reserves outstanding… and they estimate $12.5bn in losses over reserves as of Q3 (see above).

Which makes a total of $35 billion potential legal charges.

So summing it all up…

$13 billion down… $22 billion still to go – as civil litigation and the full criminal case continues

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/p3hu2hdpSM0/story01.htm Tyler Durden

When Hyman Minsky Runs For The Hills: Japan Central Bank To "Own" 100% Of GDP In 5 Years

Over two years ago, in “Japan’s WTF Chart” we showed where Japan lies on the sovereign debt-to-tax revenue continuum. The “where”, with a WTF-inducing 1900% sovereign debt/revenue, was essentially off the chart as it was nearly 5 times greater than the first runner up: Greece, with 400%. Naturally, that ratio is absolutely unsustainable and the second rates begin creeping higher, all bets are off, however the day of reckoning could be delayed if as we said two years before Japan’s insane QE was unveiled, the BOJ enter “hyprintspeed” and started monetizing debt at a pace that would make Hyman Minsky break out in a lunatic cackle.

One look at the chart below, which shows JPM’s estimate for various central bank holdings as a percent of host nation GDP, is enough to explain why that distant giggling is Hyman Minsky warming up… and he is running for the hills.

The reason: while as a result of its recent decision to double its monetary base in (every) two years Japan’s central bank now holds about 40% of local GDP on its books, it has precommited to seeing this percentage hit 60% over the next two years. But that’s jst the beginning.

As JPM’s Mike Cembalest points out, the “contingent” line is where the BOJ’s asset holdings as a % of GDP will rise to should Japan’s 2% inflation goal prove elusive. Did we say “contingent” – we meant definite. And as the line shows, the Bank of Japan will, for the first time in history, “own” all of Japan’s GDP on its balance sheet some time in 2018 when its “assets” as a percentage of GDP surpass 100%, and then proceed in linear fashion to add about 10% of GDP to its balance sheet with every passing year until everything inevitably comes crashing down.

What is most ironic here is that we still assorted carnival barkers and trolling nobel prize winning op-ed writers working for cash burning media outlets, bitching and moaning about the 90% “unsustainable threshold” level of sovereign debt to GDP. Um, standalone sovereign debt in a world with central banks means nothing.

A far more important question is what happens in a world in which the first official sovereign LBO by a central bank of a sovereign nation (remember those fringe bloggers who said in 2009 the
Fed will keep failing up in its central-planning attempts to “fix” the
economy, and whose ridiculed opinions are now mainstream views?… We
do) is not just a mere conspiracy theory but just the lastest conspiracy fact.

So just what do Reinhort and Rogoff, or anyone else for that matter with 2 functioning neurons to rub together, think about a world in which a nation’s central bank owns more assets, and has thus created more cash and reserves, than all the good and services for its host nation, which it has then effectively LBOed… with debt created out of thin air and collateralized by what can only be defined as funny money.

We can’t wait to find out, and neither can the aforementioned Mr. Minsky, who if not running for the hills, is certainly spinning in his grave.

* * *

Some more thoughts on that absolute, circus-like clusterfuck with zero regard for the future that is happening in a very irradiated Japan, which at this point knows quite well it’s game over.

I saw the chart above on Japan’s balance sheet compared to the Fed and ECB in a research report from J.P. Morgan Securities last week (their October 11th Global Data Watch). One segment of the line on the chart shows what Japan has already committed to, and another segment showing where its balance sheet might go (“contingent”) if inflation expectations do not rise to the government’s 2% target in time. Japan’s planned massive increase in Central Bank holdings of government bonds looked huge and almost unnatural, like a picture I saw this week of a giant 20-foot oarfish discovered off Catalina Island. But this is exactly what Japan plans to do: liquefy the Japanese economy to the point where inflation expectations rise, and where owners of Japanese government bonds decide that real yields are so low that they either (a) buy riskier domestic assets, or (b) any foreign asset, which would weaken the Yen and presumably contribute to an export-led recovery. To propel more of (a), Japan is considering the creation of new investment accounts which allow citizens to contribute money whose subsequent gains are untaxed, but only if they are invested in equities (not bonds, cash or gold). Amazing.

Yup: the proverbial Bernanke chopper warming up now, somewhere in Tokyo.

Such a strategy is not riskless, of course. One I can think of: if the Yen collapses and oil/natural gas prices remain high, Japanese energy import costs may become intolerably high and threaten any recovery. All the more reason that Japan is going to be under increasing pressure to re-commission nuclear power, even as the situation in Fukushima deteriorates further. For a couple of decades, being underweight Japanese equities was a very reliable thing to do. For now, owning a normal allocation seems like the best course of action, as long as the Yen exposure can be hedged. Another rise in Japanese equities is going to be easier to engineer than a durable, consistent increase in Japanese growth and inflation; these are two very different things.

Since we’ve said all of this before, and frankly are tired of repeating ourselves, the only thing that needs clarification is what a 20-foot oarfish looks like. Here is the answer.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NXHc4_ehLqA/story01.htm Tyler Durden

When Hyman Minsky Runs For The Hills: Japan Central Bank To “Own” 100% Of GDP In 5 Years

We can’t wait to find out, and neither can the aforementioned Mr. Minsky, who if not running for the hills, is certainly spinning in his grave.

* * *

Some more thoughts on that absolute, circus-like clusterfuck with zero regard for the future that is happening in a very irradiated Japan, which at this point knows quite well it’s game over.

I saw the chart above on Japan’s balance sheet compared to the Fed and ECB in a research report from J.P. Morgan Securities last week (their October 11th Global Data Watch). One segment of the line on the chart shows what Japan has already committed to, and another segment showing where its balance sheet might go (“contingent”) if inflation expectations do not rise to the government’s 2% target in time. Japan’s planned massive increase in Central Bank holdings of government bonds looked huge and almost unnatural, like a picture I saw this week of a giant 20-foot oarfish discovered off Catalina Island. But this is exactly what Japan plans to do: liquefy the Japanese economy to the point where inflation expectations rise, and where owners of Japanese government bonds decide that real yields are so low that they either (a) buy riskier domestic assets, or (b) any foreign asset, which would weaken the Yen and presumably contribute to an export-led recovery. To propel more of (a), Japan is considering the creation of new investment accounts which allow citizens to contribute money whose subsequent gains are untaxed, but only if they are invested in equities (not bonds, cash or gold). Amazing.

Yup: the proverbial Bernanke chopper warming up now, somewhere in Tokyo.

Such a strategy is not riskless, of course. One I can think of: if the Yen collapses and oil/natural gas prices remain high, Japanese energy import costs may become intolerably high and threaten any recovery. All the more reason that Japan is going to be under increasing pressure to re-commission nuclear power, even as the situation in Fukushima deteriorates further. For a couple of decades, being underweight Japanese equities was a very reliable thing to do. For now, owning a normal allocation seems like the best course of action, as long as the Yen exposure can be hedged. Another rise in Japanese equities is going to be easier to engineer than a durable, consistent increase in Japanese growth and inflation; these are two very different things.

Since we’ve said all of this before, and frankly are tired of repeating ourselves, the only thing that needs clarification is what a 20-foot oarfish looks like. Here is the answer.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NXHc4_ehLqA/story01.htm Tyler Durden

Guest Post: The JPMorgan Problem Writ Large

Authored by Howard Davies, originally posted at Project Syndicate,

JPMorgan Chase has had a bad year. Not only has the bank just reported its first quarterly loss in more than a decade; it has also agreed to a tentative deal to pay $4 billion to settle claims that it misled the government-sponsored mortgage agencies Fannie Mae and Freddie Mac about the quality of billions of dollars of low-grade mortgages that it sold to them. Other big legal and regulatory costs loom. JPMorgan will bounce back, of course, but its travails have reopened the debate about what to do with banks that are “too big to fail.”

In the United States, policymakers chose to include the Volcker rule (named after former Federal Reserve Chairman Paul Volcker) in the Dodd-Frank Act, thereby restricting proprietary trading by commercial banks rather than reviving some form of the Glass-Steagall Act’s division of investment and retail banks. But Senators Elizabeth Warren and John McCain, a powerful duo, have returned to the fight. They argue that recent events have shown that JPMorgan is too big to be managed well, even by CEO Jamie Dimon, whose fiercest critics do not accuse him of incompetence.

Nonetheless, the Warren-McCain bill is unlikely to be enacted soon, if only because President Barack Obama’s administration is preoccupied with keeping the government open and paying its bills, while bipartisan agreement on what day of the week it is, let alone on further financial reform, cannot be guaranteed. But the question of what to do about huge, complex, and seemingly hard-to-control universal banks that benefit from implicit state support remains unresolved.

The “school solution,” agreed at the Financial Stability Board in Basel, is that global regulators should clearly identify systemically significant banks and impose tougher regulations on them, with more intensive supervision and higher capital ratios. That has been done.

Initially, 29 such banks were designated, together with a few insurers – none of which like the company that they are obliged to keep! There is a procedure for promotion and relegation, like in national football leagues, so the number fluctuates periodically. Banks on the list must keep higher reserves, and maintain more liquidity, reflecting their status as systemically important institutions. They must also prepare what are colloquially known as “living wills,” which explain how they would be wound down in a crisis – ideally without taxpayer support.

But, while all major countries are signed up to this approach, many of them think that more is needed. The US now has its Volcker rule (though disputes between banks and regulators about just how to define it continue). Elsewhere, more intrusive rules are being implemented, or are under consideration.

In the United Kingdom, the government created the Vickers Commission to recommend a solution. Its members proposed that universal banks be obliged to set up ring-fenced retail-banking subsidiaries with a much higher share of equity capital. Only the retail subsidiaries would be permitted to rely on the central bank for lender-of-last-resort support.

A version of the Vickers Commission’s recommendations, which is somewhat more flexible than its members proposed, is in a banking bill currently before Parliament. A number of MPs want to impose tighter restrictions, and it is difficult to find anyone who will speak up for the banks, so some form of the bill is likely to pass, and big British banks will have to divide their operations and their capital.

The UK has decided to take action before any Europe-wide solution is agreed. We British are still members of the European Union (at least for the time being), but sometimes our politicians forget that. Sometimes they simply lose patience with the difficulty of agreeing on changes in negotiations that involve 28 countries, which seems especially true of financial reform, given that many of these countries are not home to systemically important banks and probably never will be.

But EU institutions have not been entirely inactive. The European Commission asked an eminent-persons group, chaired by Erkki Liikanen, the head of the Finnish central bank, to examine this issue on a European scale.

The group’s report, published in October 2012, came to a similar conclusion as the Vickers Commission concerning the danger of brigading retail and investment banking activities in the same legal entity, and recommended separating the two. The proposal mirrors the UK plan – the investment-banking and trading arms, not the retail side, would be ring-fenced – but the end point would be quite similar.

But the European Banking Federation has dug in its heels, describing the recommendations as “completely unnecessary.” The European Commission asked for comments, and its formal position is that it is considering them along with the reports.

That consideration may take some time; indeed, it may never end. Germany’s government seems to have little appetite for breaking up Deutsche Bank, and the French have taken a leaf from the British book and implemented their own reform. The French plan looks more like a Gallic version of the Volcker rule than Vickers “à la française.” It is far less rigorous than the banks feared, given President François Hollande’s fiery rhetoric in his electoral campaign last year, in which he anathematized the financial sector as the true “enemy.”

So we now have a global plan, of sorts, supplemented by various home-grown solutions in the US, the UK, and France, with the possibility of a European plan that would also differ from the others. In testimony to the UK Parliament, Volcker gently observed that “Internationalizing some of the basic regulations [would make] a level playing field. It is obviously not ideal that the US has the Volcker rule and [the UK has] Vickers…”

He was surely right, but “too big to fail” is another area in which the initial post-crisis enthusiasm for global solutions has failed. The unfortunate result is an uneven playing field, with incentives for banks to relocate operations, whether geographically or in terms of legal entities. That is not the outcome that the G-20 – or anyone else – sought back in 2009.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Hi-w6Lvl_Zs/story01.htm Tyler Durden

Unlike America, China Is Embracing Bold Reform

The contrast of the past week has been telling. In the U.S., you’ve had the yawn-fest otherwise known as the debt ceiling debate. All too predictably, the Republicans caved because their politicians will be up for re-election soon enough whereas Obama won’t be (he can only serve two terms). It wasn’t hard to work out the endgame in advance, despite all the hoopla, and the markets nailed it from day one.

What’s received far less attention is the rise of the Chinese yuan to a 20-year high versus the U.S. dollar. That’s big news, comparable to the U.S. debt ceiling resolution. And it may have a hugely beneficial impact not only on China, but the rest of the world.

The reason for this is that significant yuan undervaluation was one of the key drivers behind the 2008 financial crisis. It allowed China to become an exporting powerhouse. For that to happen though, China needed willing consumers for its exported goods and it found them in developed markets, particularly the U.S. Given stagnant real incomes, American consumers were only too happy to rack up debts to pay for these goods. And those debts eventually brought the U.S., and the world, unstuck.

Now China is actively pursuing a strong yuan policy. The reason that it’s doing this is because the country’s exporters are strong enough to withstand a higher yuan. And more importantly, China knows that it needs to re-balance its economy, which has been over-reliant on exports at the expense of consumption. A stronger currency promotes consumption as it allows the Chinese to import cheaper foreign goods and enjoy less expensive overseas holidays.

A rising yuan is not only good for China though. It also goes a long way to removing a central problem in global trade: that of a significant trade imbalance between China and America.

Today I’m going to further explore why a rising yuan is such a big deal. But also why it isn’t a cure-all for China’s problems, or the world’s for that matter. The development should be welcomed though as genuinely good news in an otherwise downbeat global economic environment.

Economic fault lines

At the outset, I must confess something: I’ve developed a bit of a man-crush. It’s embarrassing because I’m not naturally inclined to put people up on a pedestal. But India’s new central bank chief Raghuram Rajan deserves many of the accolades which he’s already received.

Rajan is relevant to the discussion because of his book, Fault Lines, published in 2011. Reading through the book this week, it does a great job of outlining the underlying issues which caused the financial crisis and remain threats to the world economy today.

For those that don’t know, Rajan is famous for warning of impending economic problems at the glamorous (at least by economist standards) Jackson Hole conference in 2005. His speech went down like a lead balloon then as Alan Greenspan was still at the height of his powers and the world could seemingly do no wrong. Or at least that’s what everyone thought, bar Rajan.

Anyhow, the book details a number of the key threads from the 2005 speech. It suggests that there were four primary causes for the 2008 crisis:

Rising inequality and the push for housing credit in the U.S.
Export-led growth and dependency of several countries including China, Japan and Germany.
A clash of cultures between developed and developing countries.
U.S central bank policy pandering to political considerations by focusing on jobs and inflation at any cost.

The first cause is fascinating as it’s one that few people have focused on. Rajan suggests that rising income inequality in America created the political pressure to push easy credit conditions. Everyone knows of the increasing inequality in the U.S. but Rajan has a unique take on it, placing the blame on a poor education system and inadequate social safety nets.

Technological progress has meant that the labor force requires ever-greater skills which the U.S. education system has been unable to provide. That’s resulted in stagnant paychecks for the middle class and growing job insecurity. Politicians have felt the pain of their constituents but fixing the education system is a long-term solution which they’ve been unwilling to promote. Instead, they’ve opted for short-term fixes. Namely, they created the conditions for easier credit so their constituents could afford things via debt which they couldn’t afford via their own incomes. That ultimately contributed to the subprime and housing crisis.

This brings us to the second cause for the 2008 meltdown: the export-led growth of several countries including China. Normally, debt-fueled consumption in the likes of the U.S. would push up prices and inflation there. Then the central bank would have to raise rates to stem the consumption.

But what happened prior to 2008 was that increased U.S. household consumption was met by exporters from abroad. China, Japan and Germany needed other countries to consume their excess supply of goods and the U.S. came to the party. It was a win for the exporters and a win for the U.S. as it kept a lid on inflation. That is until high household indebtedness in the U.S. limited further demand growth and everything eventually unraveled.

Rajan describes the third cause of the crisis as a “clash of systems”. Here, he examines what pushed many developing countries towards export-oriented economic models. And he suggests the 1997 Asian crisis played a key role.

Prior to the this crisis, Asian countries weren’t net exporters. Yes, they produced exports sold overseas. But their strong growth entailed substantial investment in machin
ery and equipment, often imported from the likes of Germany. That meant they often ran trade deficits, having to partially fund their investments via borrowing from abroad.

The financing for the investment mainly came from the developed world. Given the lack of transparency in many Asian countries, these financiers were only willing to lend on a short-term basis. When trouble hit, that short-term financing evaporated. And the Asian crisis ensued.

Due to the crisis, Asian countries decided to cut back on debt-fueled investment. Instead, they focused on boosting exports by maintaining undervalued currencies. In other words, they went from being net importers to substantial net exporters, thereby creating the conditions for a global glut in goods.

Finally to the fourth cause of the 2008 downturn. Rajan says U.S. central bank policy poured fuel on the flames. The bank pandered to politicians wishes by keeping interest rates too low for too long. They did this to maintain high employment, one of the bank’s two central mandates. Note that keeping people in jobs was critical to assuage the masses given the stagnant incomes and inadequate social safety nets in the U.S. But low interest rates, ably aided by greedy financiers, helped create the credit bubble.

Rajan believes the four underlying causes for the 2008 crisis are still with us today and they need to be addressed if we’re to avoid further trouble.

Let’s now draw the discussion back to the significance of a rising yuan.

The impact on China

The undervaluation of the Chinese yuan didn’t only contribute to the global problems which precipitated 2008. It also created enormous issues within China itself, many of which are still with us.

I’ve argued previously that China’s 50% devaluation of the yuan in 1994 was a critical event in recent economic history. It was one of several devaluations and resulted in a significantly undervalued yuan. That undoubtedly aided in China becoming the world’s largest exporter. The country’s entry into the World Trade Organisation in 2001 also kicked things along.

But an undervalued yuan created a long list of problems for China, including:

An over-reliance on investment and exports at the expense of consumption. An undervalued yuan meant more expensive imports and more expensive overseas holidays, among other things.
Negative real interest rates. Keeping an undervalued currency via a peg to the dollar meant sterilising excess yuan creation and maintaining rates below the dollar interest rate in order to avoid huge losses on dollar reserves. That pushed people out of low-yield bank deposits into stocks and property, creating bubbles in these areas.
A side effect from the policies was that state-owned banks tended to lend mainly to state-own businesses as they were deemed less risky. This starved the private sector of funds and ultimately made them less competitive. It also led to alternative financing, such as the recent phenomenon of “wealth management” products.

These issues haven’t disappeared. Far from it. But the underlying issue – an undervalued yuan – is being addressed.

Welcoming a rising yuan

The above provides some context to the yuan rising to 20-year highs versus the U.S. dollar over the past week. It represents a dramatic change in Chinese policy. The country’s leaders know that the export-led economic model which has powered China over the past two decades isn’t sustainable. A stronger yuan will help re-balance the economy, with consumption becoming a larger contributor to growth.

Chinese leaders are also in the process of addressing other related issues. You should to see more on this at a key meeting of Communist Party leaders next month.

As I outlined in a previous post, likely reforms at this meeting include:

The central government taking over key expenditure functions of local governments, including social security, compulsory education and parts of healthcare. The thinking is that there’s a substantial skew in revenue and expenditures of central and regional governments. Currently, local governments account for 52% of total fiscal revenue but 85% of expenditure. Spending at the local government level has spiked from 46% of total to the current 85%. That’s why these local governments have had to borrow money and why they’ve resorted to off-balance sheet vehicles.
Local governments at the provincial level being allowed to issue bonds. And this financing will replace the problematic local government finance vehicle (LGFV).
Financial liberalisation – interest rate liberalisation and RMB internationalisation.
Hukou (resident-ship reform) being opened to small and medium-sized cities as well as a relaxation of the one-child policy.

A stronger yuan and related reforms can help put China on a more sustainable economic path. But it can also assist the global economy. With China consuming more of its production, that may mean less goods being sent overseas. That could go some way to addressing the current oversupply in goods. In other words, it could remove a key impediment to a global economic recovery.

More work to be done

All of this isn’t to suggest that China is out of the woods . It isn’t. For instance, the GDP figures of the past week show that debt-funded investment remains the key driver to growth. That needs to change and further reform is required.

I’m not as optimist
ic as some commentators are that the transition to a new economic model will happen fast enough to prevent serious short-term pain for China. But I’m not as pessimistic as others who suggest China will go the way of Japan, which encountered similar issues as a dominant exporter in the 1980s but failed to re-balance its economy. It’s likely that China still has some time to avoid the fate of Japan.

And though a rising yuan reduces some of the global economic imbalances highlighted by Rajan, significant imbalances still remain. Japan is trying to export its way out of deflation by turning the yen into toilet paper. Germany is also committed to its export-oriented model. That means the global supply glut is unlikely to rapidly diminish, even if Chinese export growth slows from a higher yuan.

At the other end of the spectrum, reform in the U.S. is as elusive as ever. Central bankers there seem determined to reflate debt-driven consumerism. The politicians are happy to go along with this as it placates disgruntled voters, whose real wages haven’t risen over the past 20 years and worry about losing their jobs. The debt ceiling debate largely ignored these inconvenient truths.

In sum, the world’s economic problems remain acute but a stronger yuan is a welcome step forward.

This post was originally published at Asia Confidential:
http://asiaconf.com/2013/10/19/china-is-embracing-bold-reform/