The Downward Spiral…

The Downward Spiral…

The world would be better off if most governments pursued policies that boosted growth through domestic demand, rather than beggar-thy-neighbor export measures.

- Nouriel Roubini, The Dollar Joins the Currency Wars, Project Syndicate

By J.M. Hamilton  (5-8-15)

The world has become a giant hedge fund for the global financial elite, and Central Banksters, who supply same with an ocean of liquidity.  That inexpensive liquidity, the toy of the financial elite (the 1%), is an ever growing tsunami of debt that taxpayers around the globe are responsible for.  The fable the globe’s citizens have been told, since the 2008 global financial crisis, was debt monetization, or the printing of money, was necessary as a short term measure to provide financial markets with liquidity, lost, or withdrawn by the private sector.  That short term play has extended into extra innings and nearly eight years later has become an addiction, that seemingly no central banker or global government can kick.  But don’t take my word for it, let the facts speak for themselves:

1)   Forbes ranks the U.S. among the top seven nations with the highest debt to GDP ratio (unfortunately, these ratios don’t begin to cover unfunded future liabilities);

2)  The trope we were told is that central banks needed to print money to ease the path to debt deleveraging; but per Marketwatch, private and government debt of major economies, between 2007 and the present day, has climbed from 381% to 420% of GDP;

3)  The financial repression engaged in by global central banks, especially the Federal Reserve, has added $1.6 trillion in transfer payments from savers, insurance companies, foreign investors, and pension funds, and gave these funds to the governments of the U.S., U.K. and to the Eurozone, and the global financial elite, in the form of lower borrowing cost.  This comes from the McKinsey Global Institute, but let’s drop the fancy language, and call it what it is:  Theft, perpetrated by central banks against Western democracies’ citizens.

4)  Meanwhile, the Wall Street banking cartel has grown more powerful, owns more of the world’s assets, wealth and income, and writes over $700 trillion in swaps and derivatives - that are reinsured by the American public.  Thanks to the Obama Administration and a Republican led Congress, the very banking institutions that brought the global economy to its knees are back on top and writing their own financial rules and regulations.

5)  Former Chairman, Mr. Ben Bernanke, after running what Mr. Warren Buffett referred to as the "greatest hedge fund" in the world, The Federal Reserve, now advises not one but two private sector hedge funds.

This, in summary, is our global debt based economy, and this debt and central banks policies are largely responsible for the sustained record rates of unemployment, lower aggregate demand, financial engineering conducted by major corporations, and the formation of monopolies and cartels – financed by cheap debt - across the world wide economy.  Why worry about record rates of unemployment/underemployment, record amounts of global debt, and wage suppression, when the fat cats at the top are happy, right? 

After all, it is the Wall Street cartel who plays a large role in financing elections.

Of course, the boys and girls, who run central banks globally, could see all of this coming half a globe away.  It was Japan where present central bank “experiments” were first tried, back in the early nineties and on into the present day.  All of which ended very badly for Japan:  high unemployment, stagnating economy, recession, underemployment and unemployment, malaise, a liquidity trap, and a slavish devotion to banks (at the expense of the economy and the 99%).  Sound familiar?

In short, the lost Japanese decade(s).

Yes, quantitative easing failed in Japan, it failed in America, and it bombed in Europe.  The 2014 and 2015 drop in oil prices did more to revive the American economy for the poor and the middle class, than any of the Federal Reserve’s, post-crisis, extremist measures ever did.  If you don’t believe in trickle down tax policies, than surely you can’t believe in trickle down monetary policy. 

So why does the Fed and central banks continue to engage in these activities?

Well as mentioned, Banks, shadow banking and private equity eat up the free liquidity, as it allows them leverage up and prey upon the 99%.  In short, the lower their borrowing costs, the greater their margins.

Politicians love the Fed’s and central bank policies, as it allows them to escape governing.  Heh, why make the tough – potentially career limiting - fiscal decisions on taxation, government outlays, and budget cuts, when the Fed’s on the job printing money?  It’s so much easier to posture and campaign 24/7/365.

And big business loves it too.   Aggregate demand is down, as is revenue and income for your goods and services, that’s a no brainer…. Use the Fed’s largess to buyout a competitor, cuts jobs via a reorg, consolidate industries into monopolies and cartels, and do the ubiquitous stock buyback.  After all the money is free, so why not?  And major corporations are locking into the present record low interest rates for the long term.

The plutocracy loves it, because the Fed's and central banks' actions affirmed and preserved, and saved, their position in society.  If the Fed and central banks had not acted in 2008, many a plutocrat would have found themselves in humble circumstances, and there would have been rioting in the streets, banksters would have been hung in effigy, and the Wall Street cartel would have been smashed.

Arguably, all the Fed and centrals banks have done is put off the day of reckoning, using mountains of debt to buy time.  Debt on top of more debt, buys time, but only compounds the problem.

The problem is the Fed’s and the ECB’s policies come at a price, and the price is born by ordinary Americans and Europeans, daily.  You don’t have to be from Greece to know that an avalanche of debt is bad news for your country and fellow citizens.  In the U.S., consumers and workers, or would be workers, are beset on all sides:  If they’re not being robbed in their savings accounts, certificates of deposit, bond yields, or pension fund returns, than they are getting the shaft on tax policy, as the wealthy dodge paying taxes, and the middle class and upper middle class are forced to pay higher taxes to help service an ever growing debt load.  And since corporations can engage in the aforementioned financial engineering to hit earnings targets, and mint profits through oligopoly and monopoly, they don’t have to worry about high rates of unemployment, deficient aggregate demand, or paying a living wage.  In short, it’s an employer’s job market, and high rates of unemployment and underemployment are only further aggravated by central bank policies, globalization, and labor saving technology. 

The banking cartel and financial power elite, once they were bailed out, went back to their highly leveraged gambling and market manipulation; but the banks noticed, after having been bailed out, that many countries – like Ireland, Greece, Italy, Spain and Portugal – had high debt to GDP ratios.  So the banks demanded austerity and cuts in government services for the poor and the middle class, all to better insure that said governments would not run the risk of defaulting on their debt, and so as to better service their debt loads.  And many banks, chasing yield (yield that has been beaten down by Central Banksters printing money), hold considerable amounts of government debt, with little regard for the risk/reward involved.  Unfortunately, that’s true of many investors searching for a safe haven.

It says volumes when the safe haven debt has become junk bonds.  Blame rests squarely on global central bank policies.  All of which are engaged in currency manipulation, whether it be QE, purchasing alternative currencies, printing money, or interest rate suppression.  And the Federal Reserve is at the top of the list.

The problem is the debt continues to mount.  And the hell of it is the poor and the middle class, and the youth, have had to pay for this crisis for seven consecutive years.  In short, government debt represents a huge drag on the global economy, and the mounting debt is escalating in a vicious downward spiral.  Japan’s central bank devalues its currency to help exports and the E.C.B. responds in kind…. Chasing bond yields into negative territory, as too much money is chasing too few bond opportunities. 

It’s a global Ponzi scheme.  Who will get left holding a bag full of worthless bonds?  How many times can governments and central banks double-down?

So looking at the government’s tool kit, economist and politicians aren’t left with a lot of options:  fiscal policy is tapped out, since governments have over spent on bailouts for the elite (and in the case of the U.S., wars paid for on a credit card), and politicians refuse to tax their core constituency, the aristocracy; and monetary policy – as illustrated in Japan, America and Europe – has only served to enrich those who took the economy down.

Which leaves an unpalatable but very real option: The application of haircuts to government debt. 

And therein lies the multi-trillion dollar/euro question: how to apply haircuts without setting off a Lehman event or worse?

The haircuts I’m writing about are not like those that transpired in Cyprus, where depositor funds were confiscated to pay for Cyprus bank losses; nor are we talking about the haircuts applied in Argentina, where the government seized pension funds.  No, the haircuts that I’m  writing about – in a perfect world - would be applied to the very enterprises that put the world economy into the swamp, the global banking cartel.

But how exactly?  The answer is slowly and cautiously.  In the case of Greece, where citizens – and in particular the youth and children - have paid dearly for corrupt and inept government leadership over the course of decades, and austerity imposed by the Troika, one could start by freezing interest payments and principle payments on the national debt.  Without austerity and the debt service load, the Greek economy would have an opportunity to heal.  Once the economy was healed by achieving a benchmark unemployment figure, say 5%, the country would be expected to begin to make principle payments once again.  The principle payments could be tied to GDP growth.  But this is key, interest payments would default, retroactively, to zero.  In exchange for the elimination of interest payments on all government debt, Greece would agree not to take on any additional government debt until such time as all existing government debt/principle was paid off in full (but debt payment/principle payment, and this is key, would be predicated upon first achieving a sustained healthy economy).  By forcing Greece to live within its means, it would also require the government to buttress its tax collection system, address its crony economy, fight fraud in government, and would likely cause the government to renegotiate some its government employee pay and pensions. 

What Greek political party would better have the moral authority to make such reforms, than the socialist presently in power?

In short, Greece would be the master of its destiny again, instead of being stripped down, privatized, and sold off to its creditors (which appears to be the wet dream of the International Banking cartel: all nations and citizens of the world indentured to banks for life).  Laws would need to be passed to protect bank balance sheets holding Greek debt; that is to say, the Troika, the E.C.B., the I.M.F., and the governments of the E.U., would need to re-write the terms of the outstanding Greek debt, so that payment was predicated upon the Greek economy’s health.  (By rewriting Greek bond terms in such a fashion, a technical default could be prevented; in fact, who needs retroactive terms, simply retire the existing debt, and reissue new debt at the proposed terms, zero interest or negative yields.) The Troika took on and swapped out the majority of Greece’s debt, with private sector banks in 2012. 

And the ISDA would have to be involved so that suspension of Greece’s interest payments would not constitute a “credit event,” and trigger swaps and derivatives payments.  Such products, in fact, would need to be unwound.

Yet another alternative, rather than have Greek debt revert to zero percent interest, is to apply negative interest or coupons, that is now frequently seen among healthier E.U. members’ bond issuance (e.g. Germany).  The existing Greek government debt, with revised debt terms and negative yields, could run out in perpetuity – until the negative yield, itself, liquidated the principle.  To repeat: If Greece’s debt was retired at negative yields, retroactively or under new debt issuance, the principle debt would write itself down, as the negative yields took hold.  But this is key, with the retroactive application of negative yields, the I.M.F., the E.C.B. and European governments would not suffer a default or a haircut, at least not technically.  These institutions probably would not like the outcome, but if so inclined, they could tax the global banking cartel (which appears to be flush and full of profits) to mitigate or pay for the loss. 

Many of my readers may laugh at such a scheme, but what’s the alternative, a disorderly default scenario?  A credit event triggering swaps and derivatives, and financial Armageddon?   An involuntary haircut applied to interest payments and principle?   What Bill Gross referred to as a "financial supernova" that could bring the whole house of cards down?  Lawsuits against Goldman Sachs for selling derivatives and repos to Greece that obscured the amount of debt the Greek government held, and took it off balance sheet, so as to allow Greece to gain E.U. admittance?

The idea of a retroactive zero coupon rate, or perhaps even negative yields, should come as a surprise to no one, since E.C.B. policies have led to negative interest rates for government debt in parts of Europe already.  If the E.U. was truly combined, not just on monetary policy, but fiscal and tax policy as well, Greece would incur a much lower yield on its government debt anyway.

It is because of a lack of fiscal union, and perverse austerity heaped upon Greece’s poor and middle class (in essence another round of bank bailouts), that Greece now finds itself, per the Economist, with more debt today (315 billion euros), than in 2009 (301 billion euros).  These numbers despite the ’10 and ’12 haircuts and write downs to Greek debt that have already been applied.  However, at nearly the same amount of national debt, Greece’s debt to GDP ratio has climbed from 127% in 2009 to 175% today, as the Greek economy lay crippled in the road over the same time frame.

The central banks have had their time to apply their alchemy, and all they have done is bailout the elite, the plutocracy and the banks, at the expense of creating unsustainable amounts of debt foisted upon the public.  As the global debt mounts, the world can ill afford to let these policies continue.  The answer, as painful as it may be in the short run, is write downs; and a leash placed upon central bank activities. 

The multi-trillion dollar/euro question is will the write downs/haircuts be voluntary or involuntary? 

And will the Sword of Damocles, Wall Street swaps and derivative products, which will only compound the problem of write downs - exponentially, be defused?  As these products are reinsured by the public, the answer should be easy.  They should be banned, unless the direct counterparties are willing to put up the collateral to cover the loss. 

P.S.

Irony or ironies, Ms. Janet Yellen, Chairperson of the Federal Reserve, stated this week that stock valuations are inflated, while bond yields are suppressed.  One wonders if Ms. Yellen sees a correlation between these events and seven years of failed Fed policy?

Copyright JM Hamilton Publishing 2015