Posts Tagged ‘Central Banks’

 

Will the rise of China mean the fall of America? In a word, yes. Although decline might be more accurate.

Why do I think this? Because China is about to launch the PetroYuan and when it does the demand for dollars and for dollar denominated debt will shrink. When it does, I question whether the world will be so sanguine about the level of debt that America carries. If that happens then the value of the dollar is in question.

At the moment no matter what level of debt America carries, other countries need dollars. Dollars to pay for oil, since oil is traded in dollars. Dollars for their financial system so their banks can settle contracts for goods and services traded in dollars.

But over the last few years China has been systematically putting in place everything it needs to launch the Yuan as not only a rival to the dollar in trading and settling oil contracts but as a rival to the dollar as the world’s reserve currency. At the moment the only rival to the dollar is the Euro. I think it fair to say the relationship between the two currencies and their issuing powers, has been… ‘delicate’. The news that Sadam Hussein was going to start trading his oil in Euros came just a few months before America and its lap dog GB, decided Sadam was a threat to world peace and went to war with him. Something similar happened to Colonel Qaddafi.

Under Qaddafi Libya’s currency was backed by the country’s large holdings of gold and silver. This had allowed Qaddafi to finance, for example, the entire construction of the Great Man Made River without going to Western banks for a single loan. Libya was debt free and owned its own resources and infrastructure. Obviously a very unsatisfactory state of affairs for any third world country to get ideas so far above their station. Worse, he had a very public plan which he had laid before the Pan African Congress, to create a pan African currency backed by gold and silver to be launched by 2023. It was not too long before Hilary Clinton arrived in a freshly bombed Libya and crowed to CBS, “We came, we saw, he died.” Charming woman. I was only surprised she didn’t say “Mission accomplished.”

Libya and Iraq were small enough, that their pretensions to threaten the hegemony of the dollar and have the jumped up arrogance to think they could trade their own resources in their own currency or a currency of their choice, could be dealt with by shock, awe and death. I think China might not be so easily dealt with.

China’s plans for the replacement of the dollar and the positioning of their own currency are very like Libya’s. China too has had the idea to back its new settlement and perhaps one day its reserve currency, with gold. And China is not alone. Russia has been a part of the BRIC group with an interest in the plan. Russia, like China has been a very large buyer of gold.

 

As reported just a few weeks ago by the Irish Independent,

…the Bank of Russia has more than doubled the pace of gold purchases, bringing the share of bullion in its international reserves to the highest of Mr Putin’s 17 years in power, according to World Gold Council data.

In the second quarter alone, it accounted for 38pc of all gold purchased by central banks.

The article goes on to explain how purchasing gold has meant that Russia has not had to buy foreign currencies. For foreign currencies think Dollars.

The gold rush is allowing the Bank of Russia to continue growing its reserves while abstaining from purchases of foreign currency for more than two years.

China and Russia have very large holdings of gold between them. China actually produces 12% of the world’s gold and keeps much if not most of what it produces. The new Petro Yuan will be backed by Gold, Something the IMF decades ago, said no paper currency should have. A clear break with the Bretton Woods Dollar-world agreement.

Who will use this new currency? Over the past few years a network of bilateral agreements has been created around China and Russia. Back in 2012, in an article called A new Reserve currency to challenge the dollar – What’s really going on in The Straits of Hormuz, I pointed out that not only had China and Russia agreed to bypass the dollar and trade direct in their own currencies but that,

the India Times reported that India was talking to Iran about moving out of dollar settlements so as to be able to buy Iranian oil despite a US embargo. India said it was discussing settling in Gold. Remember, India has just signed a settlement agreement with China to use the Yuan.

Remember also, Russia recently eclipsed Saudi as the number one supplier of China’s oil. And if I remember correctly Angola was number two. Promoting perhaps the recent state visit this year of Saudi’s King Salman to see Mr Putin. As The Guardian put it,

 

Saudi king’s visit to Russia heralds shift in global power structure

King Salman agrees new areas of cooperation with Vladimir Putin on first official trip by Saudi monarch to Moscow

In addition Japan and China have agreed to trade in Yuan, by-passing the dollar, as has Iran. They are now trading their oil in Yuan or euros, but not the dollar. Ever wondered why Iran is ‘the axis of evil? It’s because they don’t use the dollar.

Then came the news in 2015 that Qatar had opened the first and so far only financial centre in the Middle East, for trading and clearing oil, gas and anything else, in Yuan. China’s ICBC is the central banking concern in the hub, allowing any Middle Eastern country to trade oil and gas and settle in Yuan. In the previous few years China’s trade with Qatar had tripled. And now, guess what? Qatar has been declared by the US to be a sponsor of terrorism and US allies in the gulf , led by Saudi, have begun to blockade Qatar’s trade. Hmm. Any pattern emerging?

The problem for the US is how much debt is too much for any country or business? Clearly it is not any magic figure or particular debt to GDP ratio. America and China carry huge debts and no one has balked…yet. How much debt you can carry is a function of debt to the estimated future productive capacity of the country in question. That creates the demand for its currency and the demand for the currency creates a market and demand for debt denominated in that currency.

At the moment the US can carry a huge debt load because everyone needs dollars to trade oil. And China can carry a huge debt because everyone needs yuan to buy the goods whose production was off-shored to China by our globalist leadership.

But what happens to demand for Dollars and dollar debt when, not if, oil starts to be traded less and less in dollars? I suggest the world’s appetite will diminish quite quickly. As it does so, the world will start to see US debt in a different light. While the opposite will happen to China. And this is what interests me and makes me think China has a plan.

At the moment China also has a very large debt load. I have argued that the Central Chinese authorities have not got the control they would like to have over the growth of that debt. Of course I have no inside information. But the on again/ off again attempts of the Chinese central authorities to deflate its housing-debt bubble and its quite out-of-control shadow banking lending suggests, to me at least, that the central authorities have not and can not control the level of debt being accumulated by provincial governments, their off-book, arm’s length financial vehicles, regional banks, property developers and the vast, largely unregulated trade in wealth management vehicles.

Chinese debt already overflowed once back in the 90’s. Four companies were created to take the debt off the banks’ books and trade it away. Decades later these companies still exist and still have the bad debts from the 90’s hanging around. You will see headlines telling you how those companies have been doing well, making money. Suggesting their trade in bad chinese debt has been going well. The reality, if you dig a little deeper, is that those companies lobbied for and were given permission to engage in ‘proper’ banking activities. Which meant they began to make their own loans – to property developers. As the property bubble continued to inflate over the last decade and a half they have ridden it and that, not trading the old bad-debt, is why they have made a profit. But now those ‘bad’ banks, have themselves started to find some of their own loans going bad. In any hard-landing or financial paroxysm the ‘bad-banks’ will need to be rescued by a new bad banks. Bad banks for bad banks is not really a solution.

I think the Chinese authorities can see this. It doesn’t take a genius after all. What can they do? Well if you already have a huge debt problem and know many of them are going to go bad and will do so overnight in the event of another global banking crisis, and know you are not able to reign it all in, then a very tempting alternative would be to get the world to agree that you can carry more debt – a lot more. And what could help convince the world? Well if your currency could become far more sought after, that would be peachy.

And so I think the long standing Chinese goal of making the yuan

an important international currency which China, and Hong Kong in particular, have been working towards for years, has now taken on a far greater import and urgency. I think the Chinese central government’s best way of avoiding a politically disastrous domestic debt implosion is to get the Yuan to be used as a settlement currency for oil and not long after that to become a de facto rival to the dollar as the world’s reserve currency.

Recently I argued at length with a military analyst who disagreed that China would risk such a break with America. Too dangerous he felt. China, he pointed out has such huge holdings of American debt. He argued that the Chinese would prefer to work alongside the dollar. I feel that even if the Chinese would prefer to ‘work alongside’ the dollar, this will prove very difficult if not impossible. Once a flow of countries and trade moves away from the dollar there will be a momentum the Chinese will not be in control of. Cooperation between dollar and Yuan as clearing and reserve currency, especially for oil, will be like trying to dock two super-tankers in a high sea. In theory possible. In practice – not going to work.

As for Chinese holdings of US debt – I think the advantages of avoiding a domestic debt implosion and projecting the Yuan to world centre stage, will outweigh the losses. I also think, If I were the Chinese, I would imagine a scenario where the dollar does begin to look vulnerable. Its value begins to be questioned, nations holding dollars and dollar debt will feel America’s profligate indebtedness is a global danger. They will blame America. How wonderful then, for China to arrive and say to a worried world, on the edge of a huge crisis, “Fear not, we have thought ahead and can offer you the use of a new currency – one backed by GOLD not paper debts. We are here to save you. To offer a ride on a sound ship as an alternative to the rotten and leaking ship you have been riding on.” China will be able to position their rise not as an aggressive act, not as trying to destabilise the world, but as trying to save it, from the collapse of an internally divided, corrupt, aggressive and indebted America.

America’s decline will be both financial and political. Financial due to the recalibration of what the world thinks of America’s debt load, and therefore their confidence in and need for the dollar. Political, because America

has got used to being able to enforce its foreign policy through sanctions and embargoes. But once oil and other goods and the nations trading in them, no longer need the dollar for their trade, and do not have to use US clearing or custodial banks, then this power evaporates.

Try to imagine the shift in power when Wall Street’s banks are no longer guaranteed top position as the world’s custodial banks and Manhattan’s Southern District Court (Wall Street’s court) is no longer in a position to dictate to whole nations via decisions upon Wall Street Custodial banks, what debts those nations and their custodial banks must pay and to whom. The whole edifice of Bilateral Investment Treaties and the trade agreements they sit inside, depends for enforcement upon the US banks being the custodial banks and the Southern District court’s rulings being able to tell those banks what they must do. Take that power away, which will happen if the dollar is no longer pre-emininent, and America will no longer be able to enforce its foreign policy or world view via economic sanction.

I think the main US banks will be positioning themselves to try to bridge this decline by having a major presence in Hong Kong. They are all already there but will be working to be part of the new Yuan-world of trade and clearing.

Of course this is speculation. But it seems to me the underlying evidence of the previous decade makes it worth thinking about.

If I am in any way correct then I think other things follow.

I think the House of Saud knows it’s future is in question. I have written a lot about how I see Qatar rising to rival Saudi. Qatar not Saudi has the Yuan clearing house. Saudi is late to the party. Can Saudi risk being seen to move away from its

traditional ally, America? If it does, too quickly, and signs yuan trade deals it risks falling as soon as Americal turns its back. If it doesn’t move quickly enough it risks being completely eclipsed by Qatar, having to go to Qatar cap in hand to trade its oil with Russia and China.

I see the political changes within the House of Saud as signs of the internal struggles to decide which way to go. I personally think the House of Saud will fall.

I also think the position of Israel under its present leadership is also very fragile. Israel needs Saudi. While they may seem to be on opposite sides, in many ways they are on the same side. If the House of Saud falls or changes allegiances from America to Russia/China then Israel will become even more isolated than it is. And of course if America is eclipsed and does enter a period of decline, then Israel will go with it.

If any of the above is near the mark, will it mean the end of America? Of course not. American’s will still work and sleep and raise their children like everyone else. But the pre-eminence of the dollar and American finance will decline as the stock of dollar denominated bonds and debt agreements expires, and with it the power and wealth of many of America’s elite. How that decline will sit alongside America’s still overwhelming military power I don’t know.

Of course what I have suggested above is merely speculation but personally I think another debt crisis will happen, because never ending QE and Central Bank debt buying cannot go one for ever, and what China does in the next few months could very well destabilise the whole unstable system. Many people will suffer and lives will be blighted. But I wonder if, when we all look back from a decade or a generation after, if we won’t think it lucky the crisis did finally come and the system we have been slaving under since 2007 as well as those who have forced it upon us for their own enrichment, were called to account.

It is difficult to accept that such historic changes could occur. But history has not ended despite what some have claimed.

Rumours of History’s end have been, in my opinion, greatly exaggerated. History is very much alive and happening to us, now. We are, as the Chinese saying goes, living in interesting times.

 

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Some optimists are touting the hypothesis that the weakness of the economic expansion since the last cyclical trough (June 2009) means that the next recession will be mild.

In fact, such a tendency has never been observed in the 140 years of US business cycle history examined famously by University of Chicago Professor Victor Zarnowitz. The only reliable rule which he found was that “the worse the downturn the stronger the subsequent upturn” — a rule that has famously broken down under the onslaught of the Great Monetary Experiment in the present cycle.

So how can we best decipher the future of this cycle including its peak and subsequent trough? In broad terms the best guide is King Solomon “there is nothing new under the sun” on the one hand and the Austrian school and behavioral finance theorists on the other. The latter warn in combination against pseudo-scientific hypothesis making and the perils of making judgment on the basis of those small sample sizes available from the laboratory of history.

Three Reasons We’re Told not to Worry

To be fair, the optimists on the shallowness of the next recession are not citing a past historical episode to back their case. Rather they make three claims: (1), because investment spending has been so anemic, its scope to fall is correspondingly limited; (2), the likely tumble in asset prices will not this time cripple the US banking system which is now unusually resilient; and (3), the new tools which the central bankers have tried out during the experiment so far can now be sharpened and adapted to better combat the next recession when it hits. All these claims are unfortunately bogus and they fail to acknowledge a potential recessionary shock from  the side of the co

Weak Business Spending, Declining Consumption, Popping Bubbles

The weakness likely has much to do with the uncertainty generated by the monetary experiment. Business decision-makers and their shareholders in thinking about the future can see that the Fed (and central banks abroad) have generated a dangerous asset price inflation disease which will likely end up badly. This will include much evidence of mal-investment, a crash across many asset markets, and a big pull back in consumption as households realize the mistakes of their past credulity.

Given so much fear about the end-destination of the monetary experiment, the road to raising shareholder equity is often not via undertaking long-term investment projects. Rather, companies are paying out cash to shareholders and leveraging up to do so. This tendency to eschew long-run commitments is also attributable to awareness that present equity values contain much froth which may well have vanished by the time the business owners (including executives with share-options) would hope to cash out.

Yes, the areas of mal-investment during the economic expansion do emit boom-like signals. The speculative stories and the high leverage found there are characteristics of the Hunt for Yield as induced by the income famine conditions prevalent under the Great Monetary Experiment. The eventual plunge of investment in these areas can be large overall in macro-terms even though overall business capital spending across the economy as a whole is sub-normal. We have seen that already for the energy boom and bust in the US. The same may be true further ahead for all the suspect areas of mal-investment, whether commercial real estate construction, Silicon Valley, apartment construction, and any activity related to the biggest bubble of all — private equity.

Why We Should be Skeptical of Claims that There is “No Potential US Banking Crisis”     

The widespread collapse in speculative temperatures which would mark the late stage of asset price inflation disease would cause — in the US and globally — a huge loss across a wide range of financial institutions whose purpose is to provide income for retirement. The reckless reaching for yield as these institutions have pretended to meet their commitments under income famine conditions would come home to roost as high-yield debts and dividend-rich equities fell sharply in price and the liquidity of even the investment grade corporate bond market seized up. 

The alarmed clients of these institutions would pull back their present spending in alarm that their rosy expectations regarding future income had blown apart. This may already be happening pre-emptively as indicated by the “surprise” weakening of US retail sales during July and August.

The dimensions of the overall seizing up of credit markets would be tremendous even though US banks may continue in relative safety at least in the early stages. Near-zero or negative interest rates has caused the normal credit alarm system to hibernate. Delinquency or non-performance occurs in silence with no evidence of non-payment. But alarm mal-function will not prevent the dud nature of bad credits to finally emerge or sudden fear of these to cause a shudder in market prices.

Italian government bonds, whose 10-year yield is now (mid-September) barely 1.30 and significantly below T-bond yields could be the canary in the mine. A sovereign debt crisis and banking crisis in Europe worse than that in 2010–12 is a mainstream scenario for the end-phase of this global asset price inflation disease. Indeed, Europe could be the tinderbox where a US stock market crash led initial recession shifts into full slump mode with feedback loops to the vaunted safety of US banks.

But Surely the Federal Reserve Would Pre-Emptively Exercise a Mega-Yellen Put?

The advocates of the Great Monetary Experiment would have us believe that the central bankers could put a floor under the next recession and at least provide the basis for a new weak but long economic expansion as the present one. The bad news for the experimenters (and their political chiefs) is that next time the Federal Reserve may not be able to lift asset prices by turning on the music of “nowhere else to go” and stimulating a “Hunt for Yield.” The experience of loss may have tamed the hunters and emptied the audiences, with no one believing the central bank narratives about the wonders of their tool box and the potential to fix long-term interest rates.

The good news for economic prosperity and freedom is that the failure of the grand experimenters next time to ignite asset price inflation early on in any incipient economic upturn might lead to their dismissal (if not effected earlier!).

Why let them continue to nurture the monetary virus which at some point will reach escape velocity and start to re-infect global markets, thus producing anemic economic outcomes? Would it not be better to install a sound monetary order? That is the main hope for curing the global curse of the Federal Reserve and its grand experiment. But its fruition depends crucially on the next US president reacting to the recession and its likely severity by firing the present Fed chief, choosing wisely her replacement, and joining with Congress to legislate a framework for monetary stability.

“That Wall Street has gone down because of this is justice… They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

– Steve Eisman

 

One decade before he became famous for the being the inspiration behind Mark Baum’s character, played by Steve Carell in the movie the “The Big Short”, Steve Eisman was making hundreds of millions predicting the next big short, namely the collapse of the subprime mortgage industry. Which is why every appearance of the otherwise reclusive financial guru sees broad popular interest, and this past Sunday, when Eisman appeared at the beachfront Fontainebleau Hotel in Miami, where several thousand Wall Street securitization professionals are convening this week for their 22nd annual ABS East Conference, was no different.

Incidentally, it’s the same gathering where, in one scene of the film “The Big Short,” the character based on Eisman bursts into outrage at a mortgage executive giving a talk.


Steve Eisman Photographer: Daniel Acker/Bloomberg

Eisman hadn’t attended a securitization conference since 2007. But Information Management Network, the organizer of an annual confab in Miami, decided to changed that when it invited him to give the keynote speech Sunday.

So what did did Eisman have to say to the industry that he helped bring down? “You fuckers blew up planet earth. Shut up and move on.” adding that “it feels like Daniel in the lion’s den.”

Cited by the Asset Securitization Report, he then apologized in advance for offending his audience, and launched into an explanation of the mortgage crisis and an assessment of the current state of the economy and financial system, or “why things still suck.” The bottom line, in his view, we don’t have the three prerequisites for a full-blow crisis: too much leverage, a big asset class that blows up, and a lot of banks holding this asset class.

By that measure, neither subprime auto loans nor student loans are going to be the next mortgage crisis. Eisman seems more concerned about Europe, where banks are still much more highly leveraged than in the U.S., and where regulators in peripheral countries like Italy, Spain and Portugal have been slow to force them to recognize losses.

But while the big picture may not be so bad right now, Eisman said he is not a big believer in marketplace lending. “Silicon Valley is clueless,” he says.

“If you buy a book on Amazon, that’s the end of the relationship.”  Whereas, if you make a mortgage, “that’s the beginning of the transaction.” And there are only two business models. “The first is to originate the loan and hold it, which means you’re a bank. That’s a low margin business. The second is to originate a loan and sell it, and who are they going to sell it to? You [Wall Street]. And you are fickle.”

As Bloomberg adds, Eisman said that the central problem is that lending startups, their founders and backers in particular, don’t have a lot of experience making loans to consumers, and some of them approach loan-making as they would retail sales, Eisman said.

As Bloomberg notes, more than 160 startup firms of this kind have emerged since 2009. The biggest include LendingClub Corp., Prosper Marketplace Inc. and Social Finance Inc. Together these companies arranged more than $36 billion of financing in 2015, mainly for consumers, up from $11 billion the year before, according to a report from KPMG. A spokeswoman for SoFi declined to comment about Eisman’s remarks; representatives for LendingClub and Prosper didn’t return messages seeking comment.

“We have seen loans underperform from their expected loss estimate at the time of underwriting,” Stephanie Yeh, a director at Credit Suisse Group AG, said on a Monday morning panel discussion. “There still isn’t a lot of data.”

Earlier this year, a spike in delinquencies and defaults from some lenders rippled through the community of investors who buy these securitizations. Investors demanded that lenders raise their rates to protect the high returns that they’ve come to expect from the debt. In an audience poll on the same panel, more than 50 percent of the crowd said in a live electronic survey that there is not sufficient data for investors to assess risk tied to unsecured consumer loan securitizations.

To be sure, proponents of peer 2 peer lending cite the benefits of this technology, which include faster approval times, cheaper transaction costs, and more availability of credit to borrowers who may otherwise not qualify for traditional consumer loans, typically of several thousand dollars and with higher interest rates. Big banks, money managers, hedge funds, insurers, trustees, law firms and credit ratings firms are all competing for the online lenders’ business. But these lenders and their wares are new, and they haven’t been tested in an economic downturn yet. This has drawn concern from skeptics like Eisman, who say there’s no telling how the loans will perform long-term. He said Sunday night the business will never scale to the proportions that its proponents claim.

That said, if the recent woes of former lending giant LendingClub are any indication, one won’t even need to wait for a downturn before the industry faces its own subprime moment.

Then there is the “risk” of heightened regulation, to which Eisman had an emphatic answer: “Tough,” Eisman told an audience member who raised a question about whether regulations from the Dodd-Frank Act should be forced upon companies that specialize in other kinds of consumer debt aside from mortgages. “You live in a bad neighborhood, you blew up planet Earth, so shut up, and move on.”

* * *

But while the focus of Eisman’s address was his bearish outlook for the marketplace lending model, he had some other just as notable remarks:

On Quantitative Easing.

“QE is no more than monetary policy for rich people,” the money manager quipped. He said that central banks “use QE to go out the risk curve, so people invest in the stock market, but it does not impact the economy.  Most people do not invest in the stock market, they invest in banks [they are saving more] and banks don’t pay interest on their money.”

From a corporate perspective, GDP is lower than pre-crisis, if you buy back stock you get a return on your investment that’s fairly certain, or build a new factory, where the return is uncertain. In a zero interest rate environment, you’ll choose the more certain reward. Very low interest rates have a negative signaling effect. A lot of people think something has to be wrong.

On GSE Market Share

“I’m about as left-wing as they come. Obamacare does not bother me. GSE dominance [of the mortgage market] does.” “The reason that Fannie Mae and Freddie Mac continue to dominate the mortgage market is the federal government decided not to put people in jail. Instead it fined banks. Banks don’t want to get fined, so they don’t make [nonconforming] mortgages.”

* * *

Finally, and most importantly, he explained what he believes the next “big short” will be.

 “In 2007, I’m so happy I can’t stand it. But in 2008, it was planet earth [in trouble]. I told someone I felt like Noah … do you think Noah was happy?”

Asked to name the next big short, Eisman initially declined. “I’m not in such a rush to do it again,” he said. “It took years off my life.” Then he relented, saying, “The only big short out there is when the world loses confidence in QE.”

Predictably, Eisman did not offer any ideas on how to profit when his prediction is – again – proven to be right, since the collapse of the central bank model will mean all fiat-denominated conventional finance as we know it will come to an end, and force the world to revert to “traditional” hard assets, such as gold.

Idiocy and mendacity are a bad combo in the affairs of nations, especially in elections. The present case in the USA displays both qualities to near-perfection: on one side, a boorish pseudo-savior in zero command of ideas; on the other side, a wannabe racketeer-in-chief in full command of her instinctive deceit. Trump offers incoherent rhetoric in opposition to the current dismal order of things; Clinton offers empty, pandering rhetoric in defense of that order. Both represent an epic national drive toward political suicide.

The idiocy and mendacity extend to the broad voting public and the discredited elites pretending to run the life of the nation. The American public has never been this badly educated and more distracted by manufactured trivia. They know next to nothing. Even college seniors can’t name the Secretary of State or find Switzerland on a map. They don’t know in what century the Civil War took place. They couldn’t tell you whether a hypotenuse is an animal, a vegetable, or a mineral. Their right to vote is a danger to themselves.

The elites operate in their own twilight zone of ignorance, only at a loftier level, flying on wings of sheepskin. Submitted for your approval: Harvard wizard Kenneth Rogoff’s new book, The Curse of Cash. This is the latest salvo in the international campaign to herd all money into the control of central banks and central governments, supposedly to make central planning of the economy more effective — but really for the purpose of extending the fallacy that the mis-pricing of credit and collateral (that is, of everything) can save the current incarnation of crony capitalism, and more to the point, save the fortunes of the racketeers running it, along with the reputations of their intellectual errand boys. Henceforth, all “money” transactions would be traceable, allowing unprecedented power for authorities to regulate the lives of citizens.

It remains to seen whether the American public might be snookered into this scheme, which already has some traction in Europe. Of course, Europe is headed into some interesting political heavy weather of its own in the months ahead, and there is plenty of reason to think that even the docile people of Denmark and Sweden might eventually revolt against the central bank regime if they see the Germans do it.

Aggravating matters is the hyper-complexity of our current financial arrangements, much of it in the service of deliberately mystifying the masses. Does the public understand the rationale behind zero interest rate policy (ZIRP)? Not any more than they understand the interaction of gluons and quarks or the doctrine of the Holy Trinity. It is one of the abiding mysteries of our time, for instance, that a group like AARP, purporting to represent the interests of retired persons, has offered not a peep of pushback to ZIRP, which has pounded retired people dependent on savings into penury. Of course, this might be explained by the pervasive racketeering feature of our current national life: AARP is an insurance racket masquerading as a citizen interest group. Or, stretching credulity to suppose that AARP is honest, perhaps the org’s executives don’t understand that zero interest on savings equals zero income to savers.

Kenneth Rogoff tries to justify his war on cash by invoking two of the era’s favorite bogymen: terrorists and drug dealers. Cash, he says, allows this axis of evil to do its thing(s). This is a ruse, of course. If currency is eliminated, these outfits will turn to gold and silver, it’s that simple. And so will everybody else, by the way. The real reason to abolish cash and herd all money into central banks is to permit the authorities to confiscate it one way or another, either by unavoidable taxation or by “bail-ins” — declaring deposits to be “unsecured loans” that can be repudiated in the event of a financial “accident.”

The results are already in for this experiment: “money” becomes more and more dishonest, that is, it cannot be trusted to represent what it pretends to stand for: an index of account and a store of value. Its role as the basis of capital formation is so impaired that real capital (i.e. wealth) cannot be generated, meaning that none of the credit issued as “money” will ever be paid back. Zero interest rate policy eventually equals zero interest paid. “Money” based on loans that won’t be paid back loses its legitimacy. Herding all the “money” onto central bank computers only allows for more three-card-monte maneuvers to conceal the bezzle. It would be much harder to hide the destruction of value in circulating paper currency. Eliminating currency as a medium of exchange can only lead to the repudiation of “money” — which will beat a quick path to the repudiation of all authority. And there is your recipe for really suicidal political disorder.

One more thing this week: why exactly are America’s Clinton-invested political elites inveighing so strenuously against Russia and its president, Mr. Putin? The US has gone out of its way to provoke Russia militarily the past several years. We foolishly sponsored the revolution in Ukraine that has left it a failed state — and which prompted Russia to reclaim the Crimea, historically its own territory and the site of its strategically crucial warm water ports. We continue to run NATO war game exercises along Russia’s borders. We fly surveillance planes in their airspace and then act surprised when Russia sends up fighters to remind us where we are. We hold naval exercises in the Black Sea and wonder why the Russians buzz us. Are we out of our minds? How would we act if the Russians flew their planes over Catalina Island or held naval war games off Hampton Roads? Who does the US policy elite think they’re kidding?

These memes in financial and foreign policy are dangerously crazy and dishonest. They are doing a good job of making the US political establishment look like a claque of fools and outlaws, and laying a red carpet for the election of Trump, the fake savior… the apotheosis of the fabled Greater Fool.

The signs are ominous, the rhetoric constant. Whichever way you look at it, the world is slowly descending into an ever greater spiral of conflict. We all know that the current wars raging in the Middle East have the potential to go catastrophically wrong and pull the super-powers into something much bigger.

You also know things are not good when the so-called ‘conspiracy theories’ from alternative media outlets eventually goes mainstream, and there’s no shortage:

To confirm the state of the world today, the Global Peace Index states, and I quote – “There are now only ten countries in the world that are free from conflict”. 

The Independent has a 40 second video (HERE) of these ten countries, it’s worth watching, you’ll be surprised…

 

Some believe World War III has already started, most dispute that. It takes no more than a spark to light the fire and currently there are a lot of sparks flying around. Even political instability in the European Union as a result of a refugee crisis is a cause for concern. Pew Research, published just last month, confirmed that European’s fear a wave of refugees will mean more terrorism and fewer jobs. Violent protests have broken out, politician’s are worried. The VP of the International Relations Committee at Hungary’s parliament, Jobbik Member Marton Gyongyosi was supported by other EU leaders when he has suggested that “physical protection of our borders” is required. He went further –

 “The US caused this (refugee) problem in the neighborhood of Europe and then leans back criticizing European countries for not dealing with the problem efficiently.”

In that context, a few EU leaders are calling for an EU wide army and its own intelligence service. It seems America and therefore NATO are not as trusted as they once were. The US/EU trade deal TTIP, the largest deal in the history of humanity, is reported as being over. Is this evidence of the widening gap of disagreement, maybe.

The outcome is a changing political landscape. Before the European Union was created by the Maastricht Treaty on November 1st 1993 there were just 25 nationalist political parties. Since the birth of the formalised EU there has been a 150 per cent rise in political parties on the extremes of the political spectrum, now totalling 64. One of them was Ukip that focused on immigration and subsequently produced the ‘Brexit’ protest vote that now threatens to tear the EU project apart.

North Korea is a wild card scenario – anything could happen, but if South Korea was attacked, America would have no option but to step in. And what would China do – it’s anyone’s guess.

John Pilger's interview on Going Underground spells out the increasing risk of a global conflicthttps://www.youtube.com/watch?v=ahEdcuxlN1o

John Pilger’s interview on Going Underground spells out the increasing risk of a global conflict

Tension has substantially risen around the world over USA and Russia/China relations, the South China Sea, Ukraine and Crimea, multiple Mid-East conflicts, north Africa and South America. One should not forget currency wars, economic and political sanctions adding to the global strain. John Pilger’s interview on the Threat of World War Three leaves the viewer in no doubt as to where he lays blame, and if anyone knows about war, he should, he’s covered most of them since Vietnam.

Even basic resources are a cause for concern. Natural water for one, food scarcity, food security and environmental disasters all add to a backdrop where global terrorism is massively on the rise, global debt is now a third bigger than prior to 2007, mass protests due to political instability, such as South America (Brazil being a new hotspot) all adding to increasing tension.

The geo-political situation is now characterised by ever-increasing militarism across the world, bringing the prospect of another world war closer than at any time since 1939.

Scrutinising the underlying issues and causes for the devastating outbreak of World War I in 1914 which ended up killing 17 million, Leon Trotsky laid bare the startling similarities between the crisis of the world economy at the time and the turn to militarism. Historical records display a relevance for today that should serve as an advance warning of the horrors that extreme neoliberalism and globalisation offers up if we do not make efforts to pull back from the brink.

From WSWS  in an article entitled “Capitalist breakdown and the drive to war,” comparisons are made between the extreme economic conditions just prior to the first world war and today.

“The years leading up to the outbreak of World War I, like the period prior to 2008, were marked by stormy economic growth. But by 1913–14, the limits to that growth had been reached and the world economy experienced a fundamental shift. From the middle of the 1890s, Trotsky explained, the basic curve of capitalist development climbed steeply upwards. But this very upswing created the conditions for a breakdown. “In 1914,” Trotsky wrote, “a crisis broke out which marked not merely a periodic oscillation, but the beginning of an epoch of prolonged economic stagnation. The imperialist war was an attempt to break out of the impasse.” Further economic development at the pace of the previous period was “extremely difficult,” as the bourgeoisie “flinched against the limits of the market.” “This created class tensions, made worse by politics, and this led it to war in August 1914.”

Corrupt bankers represent a threat not only to those they directly rip off but also potentially the entire global financial system, the Governor of the Bank of England has warned.

Corrupt bankers represent a threat not only to those they directly rip off but also potentially the entire global financial system, the Governor of the Bank of England has warned.

The parallels are striking, particularly as the financial crisis forced upon us in 2007/8 by an out of control banking system, that benefited a tiny elite, caused wave after wave of economic turbulence, austerity and the dismantling of the social democratic movement that itself was born from the wreckage of World War Two. Peoples across the world are getting angry as inequality worsens.

Mark Carney has written a very strongly worded letter, in his capacity as chair of the Financial Stability Board (FSB) to a global forum of national regulators, financial ministries and central banks – to the G20, which is currently meeting in China.

“The incidence of financial sector misconduct has risen to a level that has the potential to create systemic risks” he says. The message is quite clear. Carney believes there is another systemic crisis centred around financial markets. Even he believes and openly stated that corrupt bankers now represent a threat not only to those they directly rip off but also to the entire global financial system. Last year, just four of Britain’s banks were fined well over £50billion ($67bn) for their egregious acts of criminality. Prison beckoned for no-one, whilst poverty soared. Don’t forget the London riots. Spreading like wildfire, the resulting chaos generated looting, arson, and mass deployment of police and resulted in the death of five people. In just three days, a dozens towns and cities were no-go areas of violence, 3,443 crimes reported, over a thousand arrests – from an unrelated spark.

According to Jim Rickards, the CIA’s Asymmetric Warfare Advisor, the probability of a new global conflict is rising every day. In a startling interview from last year he reveals that all 16 U.S. Intelligence Agencies have begun to prepare for World War III. Richards is predicting the fall of the dollar with the result of “an extended period of global anarchy”.

In the meantime, Russia is preparing to be attacked by NATO and America. Global Research reports that “Colonel General Leonid Ivashov, President of the International Centre of Geopolitical Analysis explained in an interview to KP, that ‘if data on Russia-NATO power balance at the Western direction is analyzed, as well as military activity build-up rate at our borders, scale of combat equipment deployment, if the grade of Russia’s demonization is estimated, one can say that preparation to a real war is taking place, as such acts are usually undertaken at the forefront of a war.’

Russia, so threatened by the West, it is now building huge nuclear bunkers around Moscow to protect itself at a time when financial resources are at best ‘stretched’.

As TIME reports “The South China Sea has instantly become uncharted waters for the globe’s two most-powerful nations. The ruling from the Netherlands, while legally binding, has no mechanism for enforcement. That means negotiations will be required to ease the growing territorial tensions in and around the South China Sea. If talks don’t happen, or go nowhere—and China continues to refuse to back down—a military clash could occur.”

Dr.Paul Craig Roberts quite firmly believes a Third World War is currently being fought. How long before it moves into its hot stage he asks.

 “Washington is currently conducting economic and propaganda warfare against four members of the five bloc group of countries known as BRICS—Brazil, Russia, India, China, and South Africa. Brazil and South Africa are being destabilized with fabricated political scandals. Both countries are rife with Washington-financed politicians and Non-Governmental Organizations (NGOs). Washington concocts a scandal, sends its political agents into action demanding action against the government and its NGOs into the streets in protests.”

We have already seen what the New World Order has done with Islam. As Pope Francis says, they have used it to foment a crisis, a clash of civilisations

“We have already seen what the New World Order has done with Islam” As Pope Francis says, “they have used it to foment a crisis, a clash of civilisations”

Even The Pope believes the start of World War Three is underway – ““To be clear, when I speak about war, I speak about real war. Not a war of religion. There is a war of interests. There is a war for money. There is a war for natural resources. There is a war for domination of peoples” Pope Francis said, alluding to globalisation and the goals of the so-called New World Order of complete and total control over every human being on the planet.

Already, the world has more displaced people than at any time during the course of either World War One or Two. The fight for resources as a direct result of globalism now threatens peace on every continent in the world.

The Doomsday Clock is an internationally recognised design that conveys how close we are to destroying our civilisation with dangerous technologies of our own making, nuclear weaponry by far our most dangerous experiment, makes the clock tick each year. It puts the current time of war at 23.57 – just 120 seconds left.

The current position of the Doomsday Clock is the closest it has been since 1984 and is actually a few clicks closer to reaching a global extinction event for humans than in 1962 when the Cuban missile crisis had twitchy American and Russian fingers on red buttons. What a cataclysmic ending for humanity, bombed back into the stone age. For what?

The Burning Platform’s quote of the day sums it all up perfectly: “The further a society drifts from the truth, the more it will hate those who speak it.” George Orwell

Contemporary governance embodies corruption within deranged systems resting on foundations of theft and fraud. Corruption makes reform impossible; derangement assures eventual collapse.

“Defense” spending is a misnomer. The US could defend itself at a small fraction of what it spends on its military and intelligence. The US government’s foreign intervention and maintenance of a confederated empire are actually a welfare and transfer payment program. Spending has become the point: maximizing the payoff to military and intelligence contractors, their think tanks and lobbying arms, captured politicians, and the vast bureaucracies. Winning wars doesn’t serve the interests of those beneficiaries, lengthy and inconclusive engagements do.

The war on terrorism is a mother lode. The enemy is whomever the government deems it to be, wherever the government chooses to fight it. The war itself creates more terrorism. Victory cannot be defined; the war will go on as long as the current ideology remains in place. It enriches the military-intelligence-industrial complex, but a war-without-end welfare program is clearly deranged, a fitting target of satire. It will continue indefinitely because its beneficiaries have far more incentive and resources to promote their interests than the rest of us have in promoting peace.

Politicians use other people’s money to line their own pockets and buy votes; recipients accept the largess and become dependent on it. There is no limit to demands that the government fund “needs,” and no limit on the political willingness to meet those demands. It is testament to this lack of limits that the world’s richest countries cannot fund the demand for redistributive largess from their countries’ own resources. Aggregated, they have accumulated the largest debt load in history, far beyond their ability to repay it.

Mounting debt generates its own limit: insolvency. Demographics shaped by the transfer state compound the problem. Stealing the fruits of labor penalizes honest productivity and constricts opportunity. Faced with bleak prospects, many of the young opt out of the financial obligations of starting families, rearing children, or even supporting themselves. Birthrates have dropped far below replacement in most developed countries: fewer people to fund taxes and debt just as the number of putative beneficiaries skyrocket. Pension shortfalls around the world are the canary in this coal mine. The mathematics are inescapable. Present arrangements are unsustainable, but will continue until debt markets and taxpayers rebel.They will face a counter-rebellion by dependency-warped recipients deprived of that which was never really theirs. Those who can but don’t honestly produce are both dishonest and unproductive. Faced with a cut-off, expect chaos and violence.

Debt and taxes fund governments and enslaves their constituents. They’re the foundation for the second most insidious racket: the banking complex. The Federal Reserve Act of 1913 began the shift from real money (gold) to debt, enshrined the banking cartel, and was, through the establishment of the lender of last resort function, the first major step towards making taxpayers the guarantors of bank liabilities. Later, deposit insurance and Too Big To Fail (TBTF) sealed that guaranty.

Bankers have found heaven on earth, but their paradise has destroyed the economy. TBTF has removed capitalism’s most potent corrective: failure. Government debt issuance, central bank monetization, interest rate suppression, and random, whimsical, and absurd policies provide banks with middleman’s profits, inside information, access to cheap funding for speculation, and, as a particularly vicious policy—the war on cash—gathers steam, captive deposits. They destroy honest saving and investment and burden the economy with an increasingly onerous load of debt and taxes. Even governments and central banks, entities that can conjure their own debt and mandate its acceptance, will for all intents and purposes go broke if spending outruns revenues long enough.

The most insidious racket? While the banking camarilla is nothing to sneeze at, lawyers writing laws and regulations must be reckoned the Mt. Everest of rackets. They write, implement, interpret, and enforce the laws, augmenting their wealth and power every step of the way. Even the bankers ostensibly kowtow to the government (what happens behind the scenes is another matter). The repository of lawful coercive force, government inevitable becomes organized crime and the law nothing more than the means to corrupt ends. Write the law and write your own ticket.

Standards of honesty and integrity crumble in societies based on theft and fraud, replaced by a new standard. Coercive, redistributive “altruism” excuses all manner of corruption among the powerful and the servitude of those who either choose or are forced to produce. Bread, circuses, and moral degeneracy entertain and placate the masses. The bizarre becomes commonplace, but the populace grows sated with each new manifestation, always more “transgressive” (of standards that no longer exist) than the previous one, in progressively shorter spans of time.

Anything and everything goes. Only one standard remains that rouses virtually everyone—rich and poor, powerful and powerless—to righteous indignation: the more pervasive the corrupt derangement, the less acceptable it is to talk about it. In our own time, the obvious conclusion that the warfare and welfare states are morally and fiscally bankrupt, doomed to collapse, remains confined to the fringe.

Here’s a rewrite of the “Emperor’s New Clothes” in light of modern realities.

 The child points out the Emperor’s nudity.

The Emperor’s beholden courtiers and the impoverished but thoroughly cowed townspeople immediately threaten and intimidate the child.

Naively stubborn, he repeats himself until someone claps a hand over his mouth.

The headline next day: “Child who Questioned Emperor’s Attire Found Dead in Field Outside of Town.”

Hillary Clinton wins support not despite her corruption and derangement, but because of it, especially among the establishment. Their rackets need a participant and patron. Donald Trump is hardly a naively honest child, but he has had the temerity to question a few rackets, notably immigration, trade, and the warfare state’s global empire. Questioning that last one—because it’s the largest and most lucrative—has provoked copious quantities of vehement vitriol.

Truth can awaken minds and rouse people to action, posing an obvious threat to the corrupt and deranged. Should Trump win the election, he will assuredly be presented with the same choice as the child in the story: get with the program or die. Odds are he folds, in which case those of us rooting for meaningful change will be left with the hope that the inevitable collapse occurs before we die.

One conundrum stumping investors in recent months has been how, with investors pulling money out of equity funds (at last check for 17 consecutive weeks) at a pace that suggests a full-on flight to safety, as can be seen in the chart below which shows record fund outflows in the first half of the year – the fastest pace of withdrawals for any first half on record…

 

… are these same markets trading at all time highs?  We now have the answer.

Recall at the end of January when global markets were keeling over, that Citi’s Matt King showed that despite aggressive attempts by the ECB and BOJ to inject constant central bank liquidity into the gunfible global markets, it was the EM drain via reserve liquidations, that was causing a shock to the system, as net liquidity was being withdrawn, and in the process stocks were sliding.

Fast forward six months when Matt King reports that “many clients have been asking for an update of our usual central bank liquidity metrics.”

What the update reveals is “a surge in net global central bank asset purchases to their highest since 2013.”

 

And just like that the mystery of who has been buying stocks as everyone else has been selling has been revealed.

But wait, there’s more because as King suggests “credit and equities should rally even more strongly than they have done already.”

More observations from King:

 The underlying drivers are an acceleration in the pace of ECB and BoJ purchases, coupled with a reversal in the previous decline of EMFX reserves. Other indicators also point to the potential for a further squeeze in global risk assets: a broadening out of mutual fund inflows from IG to HY, EM and equities; the second lowest level of positions in our credit survey (after February) since 2008; and prospects of further stimulus from the BoE and perhaps the BoJ.

His conclusion:

 While we remain deeply skeptical of the durability of such a policy-induced rally, unless there is a follow-through in terms of fundamentals, and in credit had already started to emphasize relative value over absolute, we suspect those with bearish longer-term inclinations may nevertheless feel now is not the time to position for them.

And some words of consolation for those who find themselves once again fighting not just the Fed but all central banks:

The problems investors face are those we have referred to many times: markets being driven more by momentum than by value, and most negatives being extremely long-term in nature (the need for deleveraging; political trends towards deglobalization; a steady erosion of confidence in central banks). Against these, the combination of UK political fudge (and perhaps Italian tiramisu), a lack of near-term catalysts, and overwhelming central bank liquidity risks proving overwhelming – albeit only temporarily.

Why have central banks now completely turned their backs on the long-run just to provide some further near-term comfort? Simple: as Keynes said, in the long-run we are all dead.