Sunday, January 13, 2019

Wall Street’s Perpetual Profits Machine

WASHINGTON — The federal budget deficit continued to rise in the first quarter of fiscal 2019 and is on pace to top $1 trillion for the year, as President Trump’s signature tax cuts continue to reduce corporate tax revenue, data released Tuesday shows.

The monthly numbers from the Congressional Budget Office also show an increase in spending on federal debt as rising interest rates drive up the cost of the government’s borrowing.

The widening deficit comes despite a booming economy and a low unemployment rate that would typically help fill the government’s coffers. Federal spending outpaced revenue by $317 billion over the first three months of the fiscal year, which began in October, the budget office reported. That was 41 percent higher than the same period a year ago, or 17 percent after factoring in payment shifts that made the fiscal 2018 first-quarter deficit appear smaller than it actually was.

- Federal Deficit Climbs Again, Putting It on Track for $1 Trillion This Year, NY Times

By JM Hamilton (1-13-2019)

Why does the yield curve invert, or appear to have nearly flat lined?

Many economists will tell you that an inverted yield curve, or a flattening yield curve (that’s where the two year Treasury yield is little different than the 30 year), may signify an imminent recession. But in today’s world, w/ over a decade of hyper-accommodative central bank policy around the globe, it could signify something entirely different.

One thing does appear relatively certain, however. And that is the global financial aristocracy - perhaps intentionally or unintentionally – have built a perpetual profits machine, and have locked in central bank accommodative policy for decades to come.

A perpetual profits machine? How? And does such a thing exist?

Look around you and what do you see?

Ø In industry after industry we see M&A and industry consolidation that all but guarantees a steady flow of profits, given some consideration for elasticity of demand. Factor in financial engineering – often fueled by record low financing - and who needs to make the top line grow, when a stock buyback or a LBO can do the job.

Ø Globalization has taken hold, so that supply chains, manufacturing, and patents are housed w/in the country w/ the least onerous regulations, lowest tax rates, and least expensive labor.

Ø We see a very low tax regime that benefits high net worth individuals, and multinationals, at the expense of austerity & higher tax rates for the middle class. If the plutocracy can’t obtain compounded interest anymore, from fixed income assets… thanks to crony democracy, there’s the compounding power of lower tax rates over time.

Ø And the piece de resistance, or engine that drives the perpetual profits machine, and the metaphorical gun held to every central bankers head, a global tsunami of private and public sector debt. It’s this ocean of debt that keeps central banks accommodative, interest rates suppressed, and central bank balance sheets expanding… and ironically, the Wall Street perpetual profits machine motoring along.

It’s ironic because a great deal of the US national debt (which more than doubled, from 2008 to present, by some ten trillion plus, dollars) was accumulated bailing out Wall Street banks, financing tax cuts for the wealthy, and fighting an entirely over the top global war on terror. The bailout, tax cuts for the one percent, and the credit card wars – you guessed it – enriched the financial aristocracy. And now, these very same robber barons use this cataclysmic debt to insure the Fed Chair doesn’t stray too far from home, that is to say, provides accommodative monetary policy for as far as the eye can see. (Everyone else isn’t so lucky, as debt is the father of inequality, instability, and indentured servitude. When many of us pay our taxes this Spring take a close look; I can assure you Apple, or GM, aren’t paying anything close to the tax rates you are paying, that’s if they pay any taxes at all.)

Together these four items (consolidation, globalization, low taxes, and cheap debt - provided by central banks) all but guarantee that the financial aristocracy can’t lose, or let’s just say the game/monetary policy is rigged and their financing, & refinancing, risks have been immunized & mitigated. Now, growth and profits may not continue to rise overtime, but profits are all but locked in w/ as much certitude as this world can offer: that’s the power of a monopoly & financial engineering supported by cheap debt.

Owning the government, via a battalion of K-Street lobbyist, doesn’t hurt either.

Source: US Department of the Treasury

There’s just a couple of problems. Remove anyone of these four components, and the perpetual profits machine begins to malfunction, and the financial elite and Wall Street banks can signal their dissatisfaction, via capital strike or what has become to be known among stock market aficionados, as a taper tantrum. Distortions, instability, & volatility can occur – or be reverse financially engineered - which can give the Fed Chair heart palpitations, or wreck a President’s career, possibly both.

Remove M&A, financial engineering, disrupt global supply chains, take away the low tax rate regime, or highly accommodative central bank policy… and all sorts of hell can break loose. And not just for the financial elite. As industries consolidate, the leverage these cartels or monopolies hold over the economy, labor, markets, and politicians only expands and grows…. So if they are not happy, nearly everybody else can be made miserable or worse. As for the federal government, higher interest rates (i.e. higher debt service loads) means much beloved entitlement programs, Social Security & Medicare, come under threat.

(It’s one of the reasons Trump’s moves on trade – during a moment in time when the Fed is seeking to normalize monetary policy – are so bold. And while Trump has many issues, and a long list of flaws, the necessary renegotiation of US trade agreements, particularly w/ China, takes tremendous courage. Essentially, Trump & Lighthizer are treading where no administration has dared tread for several decades.)

There’s another problem: theories on perpetual motion machines have been around for centuries, but the laws of thermodynamics guarantee that no such machine can exist. A machine can only produce as much energy as it can consume; and judging from the manner in which the financial elite continually harvest profits, and manipulate debt, from their perpetual profits machine… we all know this machine will eventually breakdown. Call this profit taking analogous to the second law of thermodynamics, which states that energy disburses, and, in this world, is subject to friction. That friction, in this example, being the front loading of profits, bonuses, & dividends that are paid out every time a private equity firm, or C- Suite, loads another company up w/ debt. Essentially, setting the business up for greater risk than necessary, when faced w/ market disruptions or during the next economic downturn.

Put another way, any number exogenous and/or endogenous shocks – individually or in combination – can disrupt the Wall Street perpetual profits machine. Add in a global web of derivatives, swaps, and repos, and the odds of contagion only increase, in the event of yet another financial crisis. (Although at the moment, I’d place my bet on political crisis. Just ask Mr. Macron about the best-laid plans of mice and Rothschild’s bankers.)

So back to our original question: Why does the yield curve invert, or nearly flat line? Or in some countries, like Japan, stray into negative territory.

It’s based upon insider knowledge that central banks are being held hostage by the avalanche of debt they amassed, and created, bailing out banks, the billionaire class, multinationals, and, in the case of the US, paying for multi-trillion dollar credit card wars.

As for when the perpetual profit machine ultimately breaks down, well there’s certainly money to be made in chaos. That is, when this profits machine, inevitably, runs off the road and ends up in a ditch, if past is prologue, there’ll be some tycoon(s), banks & shadow banking, and private equity fund(s) ready to pounce, pick up the pieces, and we’ll see even greater industry consolidation (which means far greater leverage over the economy, labor, and governments).

Some folks call this “creative destruction.” Yes, as JMH has written before, the financial elite’s creativity and our destruction.

In short, buckle up, because the air bags just might deploy.

Copyright JM Hamilton Publishing 2019

Sunday, December 30, 2018

The Wolf at our Door…

Back in 2009, on his third day in office, President Obama ordered the detention facilities at Guantanamo to be closed "as soon as practicable, and no later than one year from the date of this order.”

- Trump Inherits Guantanamo's Remaining Detainees - NPR

WASHINGTON — The Trump administration has ordered the military to start withdrawing roughly 7,000 troops from Afghanistan in the coming months, two defense officials said Thursday, an abrupt shift in the 17-year-old war there and a decision that stunned Afghan officials, who said they had not been briefed on the plans. President Trump made the decision to pull the troops — about half the number the United States has in Afghanistan now — at the same time he decided to pull American forces out of Syria, one official said.

- U.S. to Withdraw About 7,000 Troops From Afghanistan, Officials Say - NY Times

The Defense Department has declined to offer details about the timing of the Syria withdrawal or whether the air campaign against the Islamic State in that country will continue apace. Neither the White House nor the Pentagon has made an announcement about Trump’s order to withdraw roughly half of U.S. troops from Afghanistan. On a trip to the region over the holidays, the chairman of the Joint Chiefs of Staff, Gen. Joseph F. Dunford Jr., dismissed reports of the order as “rumors.”

- U.S. forces will stay in Iraq and could reenter Syria from there, Trump says – Washington Post

By JM Hamilton (12-30-2018)

Salutations and a very Happy New Year!

Future economist and historians may eventually determine that the year 2018 marked an inflection point in global economics and politics. Populist movements are the rise throughout the West, and centrist parties – owned by the establishment – are in retreat. Even President Macron – the investment banker, who was going to “reform” France, and make her a beacon of failed globalism and a diseased neoliberal ideology – is beating a hasty retreat and surrendering to the demands of ordinary French citizens, who have long suffered austerity. (Apparently, the EU elites only get excited when Italian populists do not conform to Brussels’ & Germany’s budgetary and fiscal diktats… but it’s all good when a sophisticate from Rothschilds blows out his nation’s budget because he’s facing revolution from the Yellow Vests in Parisian streets. Besides, the uprising from the vox populi is bad for the EU's image & tourism.)

Perhaps Mr. Macron is having fever dreams about the tumbrels making there way to the The Place de la Concorde?

Mr. Trump never fails to surprise, and keeps things interesting (The MSM owes this man a debt that never can be repaid). And his policies and twitter pronouncements spark all kinds of wondrous consequences, both intended and unintended. And to think, if one notorious HRC had been elected in 2016, the tables might very well have been reversed during the 2018 midterms: w/ Madam President on trial and facing possible impeachment, and the GOP retaining the House. Instead, Dems can thank their lucky stars that Trump – who ran as a populist – turned out to be the plutocracy’s champion. POTUS Trump's greatest claim to fame, so far, being tax cuts for the rich. That and the remarkable ability to alienate a very large number of American women, creating a mass movement against his reign, and electing a record number of women to America’s federal and state legislative bodies. (He’s also quietly stacking the judiciary to insure the plutocracy’s agenda will be legislated from the bench for generations to come, by politicians wearing black robes.)

Meanwhile, in a futile effort to thwart the will of the people, GOP legislatures are attempting to take a meat axe to American democracy… the last refuge of a dying political party.

But POTUS Trump isn’t all bad: He’s attempting to accomplish at least two things POTUS Obama campaigned on, but failed to realize, before he did a complete about-face and fully adopted the globalist, neocon, and neoliberal paradigm (Stymied by Congress, Obama gambled the Dem Party’s, then, immediate future on: free trade agreements dictated by multinationals behind closed doors - see TPP, endless wars in the Middle East, nation building, and regime change). Yes, liberals and progressives may want to give Trump credit where it is due. Sometimes it takes a Republican to get things done, where Dems fear tread for worry of being called weak (see Nixon’s embrace of communist China).

Trump is attempting to renegotiate trade agreements that have long favored multinationals at the expense of the US economy, labor, and the nation’s tax base (And has anyone seen China’s economy or stock market lately, as a result of Trump’s trade war?… Here, Trump doesn’t appear to be winning, but is winning, in his ability to contain and thwart Asia’s communist juggernaut, at least for the immediate future. But you won't hear or read that, often, in the plutocratically controlled news organizations).

Also, POTUS Trump, in a matter of days, set fire to the Pentagon and took a sledgehammer to the US Foreign Policy Establishment - to hear the corporate, & billionaire, owned US mainstream media tell it – by, gasp, actually doing something Obama campaigned on, and promised while in office. That is to say, our current White House occupant ordered US troops home from Afghanistan and the Middle East (aka Syria). In fairness to Obama, our former president waffled several times on his commitments to wind down foreign wars. Obama withdrew from and returned to Iraq; and some may recall there were a couple of meaningless surges thrown in during his two terms, w/ highly dubious outcomes.

As with all things Washington, however, the public should be cautious in not fully buying into the hype surrounding revised trade agreements & the winding down of nation building. As for the new NAFTA, or USMCA agreement, it still has to make its way through Congress, and the devil will ultimately be in the congressional amendments, details, and the enforcement mechanisms. And as for Trump’s troop withdrawal… Obama, once upon a time, ordered Guantanamo closed, only to be thwarted by the Deep State that runs US foreign policy and our nation’s Police & Surveillance State. Trump, at least on these two issues - trade and unwinding nation building - has been shrewd to follow through on his campaign commitments. Commitments that bridge the left/right political divide, and enjoy widespread public support. (And as Trump comes under mounting pressure, as the Dems retake the House and Mr. Mueller issues his report, expect the very real possibility that the POTUS will dust off and embrace his more populist 2016 campaign promises. Could the return of Glass-Steagall - contained w/in the 2016 Republican platform - be around the corner?)

Per the Washington Post - which has apparently changed its motto from, “democracy dies in darkness,” to “cheerleader for the military industrial complex” - the head of the Joint Chiefs called Trump’s orders on troop withdrawals “rumors.” Perhaps someone should tell General Dunford, Junior, that the US Constitution states the US military shall suffer civilian oversight, not the other way around. Unless, of course, unbeknownst to the American public, the United States has undergone a military coup and the Joint Chiefs have taken it upon themselves to, unilaterally, rewrite and amend the US Constitution, so that they alone are US foreign policy’s sole arbiters.

Ø Meanwhile, what is not a rumor, or in dispute – General - is the price tag for these credit card wars has reached $5 to $6 trillion, and the service load on this debt is potentially exponential. In essence, when coupled w/ the 2008 bank bailout, America’s addiction to empire & nation building is bankrupting the United States.

Ø What is not in contention is that Americans have suffered austerity to pay for these wars, and that somewhere between 20 to 25% of US children live in poverty.

Ø There is no rumor in the fact that the military industrial complex wastes hundreds of billions of dollars in cost overruns for weapons systems that are not delivered on time and often do not deliver upon their intended purpose. And congress fails to hold the defense cartel accountable.

Ø What’s indisputable is that US nation building in Afghanistan and the Middle East, like Vietnam before it, has been an abject failure, and following General McChrystal’s doctrine all the US has succeeded in doing is creating more terrorists in the region.

Ø Meanwhile the root cause of Middle East terrorism, and its primary sponsor – a/k/a the Royal House of Saud and oil rich monarchy states – are said, by the US foreign policy establishment, and the State Department, to be key US allies.

Ø Feeling nauseous yet? In fact, General/POTUS Eisenhower warned us that the military industrial complex (like all cartels and monopolies) is a threat to our democracy, and that each dollar spent on war is tantamount to theft against the US citizenry.

Ø No rumor in the fact that there is an industry of academics, punditry, and think tanks dedicated to, and directly and indirectly funded by, the DOD and military industrial complex. Not to mention many members of Congress, who are all too glad to take money from this very same industry.

Ø Of little doubt is the fear mongering that has transpired, post 9-11, has been grossly oversold & overplayed, and the US response, itself, to the 9-11 event is both absurdly disproportionate and remains entirely out of control.

Ø What is not a rumor is that poll after poll clearly demonstrates that the US citizenry supports our American troops, but no longer supports these costly and ruinous wars. (Americans can show no greater support for our troops then to send them home from endless nation building & the US empire.)

Ø What is not in dispute is the fact that our MIC owned Congress has abdicated its responsibility for waging war, and in a cowardly manner continues to rely upon the original 9-11 AUMF in allowing POTUS(s), now spanning three administrations, to wage war around the globe and expand our bankrupting US empire (all the name of fighting phantom terror.)

Ø It’s no rumor that the revolving door spins at a rapid clip, between the military brass and vast riches awaiting them working for military contractors and/or the private equity firms w/ MIC ownership stakes. See General Mattis – who just suffered an ignominious exit from the Trump administration – and his board seat at General Dynamics.

Ø Finally, what’s not in dispute is the fact that the US spends more than the G-10 combined on our military, and yet, it’s never enough for the generals and the politicians owned by the MIC. Meanwhile, US life expectancy is in decline, because the nation cannot take care of its own.

The academics, politicians, and writers – who constantly call for and lobby for a Pax Americana foreign policy – are right about one thing: the US does, indeed, have an enemy, who is a direct threat to our democracy and freedom. These groups, like the little boy who cried wolf one too many times, are forever banging the gong for war and about the imagined capabilities of our foreign adversaries. The use of misplaced fear is their primary tool.

But where this tribe of armchair warriors is wrong is that the enemy, our enemy, is not outside the United States, but from within; our real threat is not foreign but domestic. That enemy is a rapacious military industrial complex that is bankrupting the nation; and, arguably, an elite military brass, who, often, not only have placed their career interests above the national interest, but who also believe they know, exclusively, what is best for the nation’s foreign policy (despite numerous failures). Combined, the MIC & the military brass – with aid from the MSM and financing from Wall Street - have formed a Deep State that appears to be willing to ignore both the US Constitution, and the civilian oversight called for within the same document, directly and indirectly, overtly and passively.

POTUS Madison said it best:

Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few. In war, too, the discretionary power of the Executive is extended; its influence in dealing out offices, honors, and emoluments is multiplied; and all the means of seducing the minds, are added to those of subduing the force, of the people. The same malignant aspect in republicanism may be traced in the inequality of fortunes, and the opportunities of fraud, growing out of a state of war, and in the degeneracy of manners and of morals engendered by both. No nation could preserve its freedom in the midst of continual warfare.

Who knew the truth could be so radical?

The politicians and pundits are right: there is a wolf at the door, but that wolf has already entered and closed the door, and the DOD/MIC has made us all slaves to the Federal Reserve and the Wall Street banks that finance the debt created to support war w/out end and the MIC’s unconscionable waste and fraud. This debt is ultimately unpayable, and yet, Wall Street insists that we keep up the charade and continue to suffer domestic austerity, as a nation, in the service of the national debt.

Notice, however, that austerity does not extend to the unauditable DOD/MIC (or plutocratic or Wall St. bailouts), which hoovers up over half of America’s discretionary federal spending.

Let’s hope that POTUS Trump is both sincere and successful in reining in the generals and bringing our US troops home. Our fighting force deserves better, and may actually be called upon someday to fight a real battle for our nation's survival. As it stands, the DOD, the MIC, and its various cheerleaders & experts have cried wolf one too many times, all in the service of a ravenous cartel.