Quantum Pranx

ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘Keynesian

Here’s the Setup for the Con of the Decade

with one comment

by Charles Hugh Smith
Posted April 15, 2011

The Con of the Decade, which I described last July, is being set up nicely.

I described The Con of the Decade last July (2010). The Con makes me a heretic in the cult religion of Hyperinflation. I consider myself an agnostic about the destruction of the U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation is fundamentally a political process makes me a heretic. I skimmed a few of the dozens of comments posted on Rick’s Picks and Zero Hedge after they posted one of my expositions on this dynamic, and didn’t see even one comment in favor of this perspective.

The Con is being set up right now, and the outlines are clearly visible. The Con works like this:

1. The Financial Elites/Oligarchy raked in billions in private profit from the orgy of leverage, credit expansion, fraud, embezzlement and misrepresentation of risk that resulted in the Housing Bubble.

2. The losses were transferred to the public (Federal government, i.e. The Central State) or its proxy, the Federal Reserve (i.e. the central bank), via bailouts, backstops, guarantees, the Fed’s purchase of taxic assets, and an open window for the financiers to borrow billions at zero interest (ZIRP) for further speculations.

3. The Treasury now borrows $1.6 trillion every year, fully 11% of the nation’s GDP, as the Central State has replaced private demand and credit expansion with its own borrowing and spending.

4. Non-U.S. central banks have largely ceased to support this unprecedented scale of borrowing, so the Federal Reserve now buys most of the Treasury’s issuance of debt via QE2 (quantitative easing, the direct purchase of $600 billion in Treasury bonds).

5. Unlike Japan, the U.S. cannot self-fund its own government borrowing: while U.S. investors, banks and insurance companies do own a significant chunk of Treasuries, the U.S. savings rate (capital accumulation) is still abysmally low, around 4%, which is half the historical average savings rate.

This is the result of the Keynesian Cult’s One Big Idea, which is to pull demand forward and encourage borrowing and spending now by any means necessary, and thus sacrifice capital formation/saving.

So the basic outline of the Con is that private losses from the financialization of the U.S. economy were shifted to the public. Now to keep the Status Quo and Financial Plutocracy from imploding, the public is on the hook for $1.6 trillion in additional borrowing every year until Doomsday (around 2021 or so).

Having secured the backing of the Central Bank and Central State, the Plutocracy’s only problem now is that it needs a risk-free source of high-yield income. Yes, it has a trillion dollars or so sitting in bank reserves, collecting interest from the Federal Reserve; this is certainly risk-free, but the Fed’s Zero Interest Rate Policy (ZIRP) keeps the rate of return absurdly low.

Here’s where we see the Con taking shape. The ideal setup for risk-free returns is to own Treasurys that pay a high yield. The way to get higher interest rates is to first make the Treasury market supremely dependent on a central bank or single buyer: Done. That buyer is the Federal Reserve.

Next, have that buyer stop buying. Suddenly, interest rates start moving up. If you don’t believe this is possible, or part of a larger project, then please explain why PIMCO sold all its Treasuries. Duh – because interest rates are set to rise, and not by a little bit or for a brief span, but by a lot and for years.

That means holders of long-term Treasuries (and other debt) will be cremated as rates rise. (Holders of TIPS will do OK, unless the government fraudulently sets the rate of inflation well below reality. Hmm, isn’t that exactly what’s it’s already doing?)

Once long-term rates have leaped up, then start accumulating the high-yield bonds. Why would rates jump? Supply and demand: as the demand for low-yield Treasuries dries up, the supply keeps rising: every month, the Treasury has to auction tens of billions of dollars of bonds, or even hundreds of billions of dollars. There is no Plan B, the bonds must be sold, and if there are no buyers, then the yield has to rise.

Once rates have been engineered much higher, the Financial Oligarchy accumulates the high yielding bonds.

Here’s where “austerity” comes in. Once rates are so high that they’re choking the real economy, then voices arise demanding the Federal government stop borrowing and spending so much. Austerity (forced or otherwise) soon reduces the supply of bonds hitting the market and so rates decline, boosting the value of the high-yield debt.

Read the rest of this entry »

“Fear the Boom and Bust”: Hayek vs. Keynes Rap Anthem

leave a comment »

Now it’s time for some light entertainment! Watch and learn, kids, and see the great battles behind the scenes as our world crumbles…

 

Stupid Wager or Clever Prestidigitation?

leave a comment »

by Dr Antal Fekete
Originally posted Tuesday, January 18, 2011

 

 

left: Dr. Antal Fekete

 

 

pres·ti·dig·i·ta·tion (prst-dj-tshn)
n.
1. Performance of or skill in performing magic or conjuring tricks with the hands; sleight of hand.
2. A show of skill or deceitful cleverness.

“Heads — you win; tails — I lose.” Such is the message the Fed sends to bond speculators. But why would the Fed offer such a stupid wager?

THE FED IS TRYING TO BRIBE BOND SPECULATORS WITH RISK-FREE PROFITS. That’s how the Treasury/Fed check-kiting conspiracy makes sure that there will always be plenty of buyers for government debt, regardless of the size of offering. Ten years ago I started writing about my theory that, wittingly or unwittingly, the Fed has become the quartermaster general of the coming deflation and depression.

I offered a logical, closely argued reasoning for this thesis. My argument had to do with the contention that the open market operations of the Fed make bond speculation risk-free, which explains the perpetual bull market in bonds. Bond speculators, knowing that the Fed must needs buy bonds in order to keep the money supply growing, front-run (or, to use the old-fashioned term: pre-empt) the Fed’s open market operations. They buy the bonds beforehand, and pocket risk-free profits when they sell them to the Fed. Speculators will allow the bond price to fall only so much. Then they show up as buyers for another ride of the escalator upstairs.

Incidentally, my theory also gives the coup-de-grâce to Keynesian and Friedmanite economics. Keynes, and later Friedman, advised governments to discard the gold standard thus destabilizing foreign exchange. That would give them free hand to pursue monetary policy — euphemism for the license to engineer unlimited depreciation of the currency. Scarcely did they consider that their scheme was to back-fire. They were shooting for inflation only to bag deflation. They wanted rising prices; instead, they got falling prices.

A falling interest-rate structure engenders a falling price-level structure. It is most destructive to the economy. It devastates existing capital and blocks the accumulation of new capital. The 30-year old regime of falling rates destroyed the once flourishing American industry forcing it to flee the country. There is no chance to accumulate new capital as long as interest rates keep falling.

Continuation of this trend will cause excruciating pain to those producers who remain. They will not be able to compete with newcomers who carry a much smaller burden, thanks to their lower cost of capital. The squeeze of the old-guard producers will show up in the falling price level. The “grapes of wrath” — the seeds of which were planted by Keynes and Friedman — will come to full maturity when hoards of angry and hungry unemployed people will roam from city to city and country to country.

Read the rest of this entry »

2010 is just deck chair politics on the USS Titanic

leave a comment »

by  Ron Holland
Originally posted October 23, 2010

“Every election is a sort of advance auction sale of stolen goods.” – H.L. Mencken

THE POLITICAL CONSENSUS IS FOLLOWING THE 2010 ELECTION, the Tea Partiers and the GOP establishment will breathe a sigh of relief and celebrate their victory and our two-party monopoly system of government will continue as before. A GOP House majority will checkmate Obama and the Democrats in the Senate and political stalemate will result. Many conservatives and a few Washington pseudo-libertarians will claim stalemate is better than a Democrat landslide but they will be wrong.

Like the Titanic, the Washington/Wall Street ship of state hit a Federal Reserve created iceberg under the command of George W. Bush with the recession/depression. Again, like recent evidence suggests, the original Titanic hit the iceberg and sank so fast because of a steering mistake turning the ship in the wrong direction which could have been avoided.

In a similar fashion, both Obama and Bush, following the self-serving orders of Bernanke and Wall Street steered the nation directly into the current depression and coming national debt and dollar collapse by following Keynesian economic principles instead of letting the market quickly resolve the crisis.

Everything you read or see on the establishment propaganda news outlets is just a rearranging of the deck chairs on the Titanic as the ship of state is certainly sinking. The goal of productive American citizens should be to get as far away from the ship of state as possible to avoid the downward pull a sinking vessel exerts on everything in the water as it goes under.

The Establishment Political Consensus Is Dead Wrong

America today is a one-party state much like the Soviet Union, China or Nazi Germany and both nominal political parties are just facades presented to the public to create the illusion of competition and choice. The establishment leadership in both the GOP and the Democrats represent the goals of the same special interests.

Our ability to “throw the bums out” every two or four years is just a release valve built into the political system which guarantees the continued elite control of our political process. Although there are some patriots in national politics in both parties, they never are allowed to take control of either party or the closed political system.

Before the summer of 2011 is over, the Tea Party supporters will already be angry and disappointed as the GOP elites will maintain the status quo and there will only be empty rhetoric rather than political action to control spending, curtail the deficits and limit government. When the coming debt and dollar crisis takes hold, I guarantee the GOP will have an action plan supported by the Democrats which will pass with bilateral support to solve the economic crisis. The solution will be the theft of your private wealth and promised benefits all done in the public interest to save America.

Why Only Nixon Could Go To China

And only the Republicans will be able to steal most of your wealth and get away with it with the acquiescence of the Democrats. Only older readers will remember the above political metaphor as it suggests additional legitimacy for politicians making “tough decisions” can result when strong supporters of a political viewpoint suddenly change their views and direction always in the public interest for a crisis etc. In other words, only Nixon, perceived as a rightwing conservative could have opened the door to China in 1972 as a liberal Democrat would have been criticized, attacked and thwarted by the opposition GOP.

What asset will be lost or auctioned off?

As America goes under, here are nine assets and guarantees likely to be stolen by the politicians and then auctioned off to buy more time for the Washington elites of both political parties. Do not believe anything anyone from the establishment tells you as it is always false information.

Social Security Theft – As we see today in France, Social Security retirement ages will be further extended into the future. Wealthy Americans will be “means tested” and entirely forfeit their benefits and Washington will eventually end cost-of-living adjustments for all but the poorest Social Security recipients.

Solution: If you are eligible for SS benefits start taking them as soon as possible even at the lower rate and age currently age 62.

Rising Income & Estate Taxes – This is already a done deal by the Democrats and there will be some minor temporary pushback by the GOP but nothing of substance.

Solution: You might get one more year of the Bush tax cuts so throw all income possible into 2011.

National Health Care Expands – Again, some minor changes by the GOP and Blue Dog Democrats but it will never be overturned and in a few years this travesty will be just as supported by the Republicans as they now support Social Security, the Department of Education and the Patriot Act today. There is no solution.

The Risk of Private Gold Confiscation Will Go Up – When the dollar and Treasury market crashes, Washington will enact legislation against gold investors to curtail your profits, add a confiscatory non-productive asset tax or confiscate your gold with some type of fiat currency exchange. In any case, they plan to end up with your gold as this will be the basis of a restored dollar.

Solution: Move most of your gold offshore in a legal and reportable manner but outside the threat of closed or paralyzed banks, US investment firms and desperate politicians.

Home Values Will Continue To Fall – The long-term effects of the Fed and Wall Street bank created boom and subsequent real estate bust along with the foreclosure crisis now beginning will likely continue to weigh heavily on home prices.

Solution: Wait to buy any property you need at a lower price and walk away from properties outside your residence now sinking further underwater.

Confiscation of Large Retirement Fund Accounts – The long-term confiscation and control idea is to eventually force all retirement benefits under the new automatic/mandatory IRA program where everything will be combined with and managed like your Social Security benefits. Wealthy and productive Americans will find their retirement benefits used to support the trillions in underfunded union, state and local government employee plans.

Solution: When possible, move your substantial retirement assets legally offshore to escape a future liquidity crisis when the theft will occur and drawdown your balances by taking withdrawals as soon as you can without an early retirement penalty.

A National Sales or VAT Tax – This will be a quick revenue generator for the Feds but will probably start out somewhere between 2%-5% and rising quickly after that to confiscatory levels. Americans in low tax brackets may initially be exempted from this tax.

Solution: Make any major purchases sooner rather than later.

An End to the Home Interest Deduction – Again, this will be a quick revenue generator for the Feds but will put additional downward pressure on home prices. There is no solution but never buy anything tangible or even an investment for tax benefits. as tax preferences always change and never in your favor.

An Organized Collapse of the Dollar – The Feds fully hope to get some control over the outstanding national debt externally and internally over transfer payments by depreciating the dollar. How they hope to accomplish this without creating a run and collapse of the dollar and Treasury debt is beyond me but this is their intention.

Solution: Diversify your wealth internationally outside the US in banks and annuities, equities, bonds and real estate not denominated in dollars. Buy gold bullion, quality gold mining and national resource stocks outside the US.

The Bottom Line

It really doesn’t matter where you sit on the deck of the Titanic, you have to get off the boat quickly in a lifeboat of your own design. The call for “women and children first” and “there are plenty of lifeboats for everyone” will just be misinformation to enable the leaders of Wall Street, Washington and the Fed to hide their identities, assets and involvement in creating the crisis.

I can’t wait to see Bernanke, Bush and Obama in a lifeboat disguised and dressed in women’s clothing along with most of Congress and the Wall Street insiders. May the sharks not be too hungry and the water not too cold so they will suffer longer. Or as Jimmy Buffet put it so well: You got fins to the left, fins to the right and you’re the only bait in town.

This editorial originally appeared on LewRockwell.com.