I see bad libor rising
I see trouble on the way
I see market crashes and (near) defaults
I see bad times today
Don't go 'round tonight
For it's bound to take your cash
There's a bad libor on the rise
Ex-Fed Chairman Greenspan has been accused of occulting (hiding from people's view) dissent from the Fed's panglossian housing market forecasts in 2004. While I'd love for that to be true, I'm with Felix Salmon, who, after reading the whole transcript (always a good idea before jumping to an opinion) discerned the offensive quote (see below) referred to debate over Fed transparency and not the housing market.
We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand. Fed Transcript
To my mind, a more interesting quote can be found in Ms. Minehan's discussion of US economic growth at the same meeting: And like everybody else, I don’t know why the pace of hiring has been as slow as it has been or whether it will get slower or speed up more quickly than we expect.
There's an admission worth noting, she, like everyone else at the table didn't know why the pace of hiring had been as slow as it had been (perhaps because Fed liquidity had gone more to overseas markets than at home would be my guess). In other words, the only occulting that occurred at Fed meetings was the far less sinister, but much more ominous blind leading the blind.
I think the same phenomenon lies behind TPM's discovery of occult practices at the US Treasury in their dealings with Congress (Ms. Pelosi has recently reported the meeting to first request funds came at her, not the Treasury's, request) prior to the request for TARP funds. It isn't sinister, it's just a case of enforced ignorance, as in, let's try whistling past the graveyard, it might work.
Neither Greenspan, nor Rubin, nor Summers (whose financial prescience was shown to be flawed at Harvard) nor Blankfein nor any other of the financial big wigs knows what's going to happen in the financial world because they believe this time is different. (If they did know they would have run for the hills long ago) They have thrown away the only tool that allows economic forecasting, the assumption that the rules of economics always operate (qualifying the proper conditions as they relate to the past being the tricky part of the game, whether I've done so accurately this time remains to be seen).
The collapse of occult economics to which I refer is the apocalypse (Greek for unveiling) of the US$ based system as operating under the same rules of finance that have always operated, specifically the fact that true provision of global liquidity can only come (in a US$ based trading system) through increased US$ supply, a.k.a. Triffin's Dilemma.
As I've previously discussed, Robert Triffin noted the dilemma at the heart of the US$ based global trading system- in order for the world to get the liquidity it wants US$ balances overseas will have to grow, thus eventually weakening the US$ such that it could no longer serve as global reserve currency.
Two events are conspiring to unveil Triffin's Dilemma to the world, the coming economic slowdown in China as a result of previous credit over-extension and current tightening and the current emerging crisis in the Euro periphery- the "G"-less PIGS (Portugal, Italy, Greece (who've gotten their bail-out), and Spain). The "G"-less PIGS must have felt a bit left out of the liquidity party for Greece this past weekend and are now clamoring for their own rescue package.
As an aside, I'm only partially facetious when I suggest a most profitable Hedge Fund theme, find liquidity deprived countries to invest in a fund that will blow out your spreads (CDS and swaps) and create the need for a bail-out. As an added bonus, the rescue deal will likely include a fully funded financial rescue package.
As always there are options available to policy makers. They could allow defaults to occur but that is the "it" (being deflation) Bernanke promised wouldn't happen here (in the US, and by extension, the world), and that option too would likely lead to the end of the US$ based trading system. The other option, the option that has become the rule is more liquidity, and in this case, barring a significant decline in the Euro and RMB vs. the US$, the Fed will have to supply that liquidity at a time when they would prefer to begin unloading some of the toxic securities they bought from the TBTF banks.
Unlike the 2008, 2000-2001 and 1997-1998 crises, however, Fed Funds are already near zero. Quantitative easing, in the form of continued declines in acceptable collateral for Central Bank discounting will be the tool- monetization of poor credit, in large amounts.
At that point, I suspect, Gold will begin to soar against all currencies, and the search for a new global international reserve will being in earnest.
The signs of impending crisis are already manifesting: 1) global stock markets are rolling over 2) credit default swap prices for the "G"-less PIGS are rising rapidly 3) the pace of decline in US$ swap rates has eased.
In the not too distant future, if stock markets continue to weaken, US$ swaps rates will rise. US$ liquidity will, once again, be in short supply and the Fed will be called on to rescue the world.
Let the unveiling commence.
p.s. the primary rule of economics that, in my view, has been occulted from view, because it is so distasteful (to some) is the no free lunch rule...just my, rapidly depreciating, two cents
p.p.s yes, I'm way out on a limb on this one, but what the heck, I'm just a pajama-wearing blogger
Full Disclosure: Long lots of Gold
Showing posts with label Greenspan. Show all posts
Showing posts with label Greenspan. Show all posts
Tuesday, May 04, 2010
Thursday, April 08, 2010
Financial Regulation: Then and Now (Busting TBTF)
Like the internet, finance would benefit from redundancy, and competition, not just in the sense of distributed shareholdings (which is already the case) but viewpoints (which is not helped when directors merely “rubber stamp” CEO opinion, and Fed, Treasury, and other financial regulatory officials are always on loan from GS and the rest of Wall Street). Like minded-ness, if you will, is the issue here and "restraint of trade" the lever. TBTF engenders the myopia which leads men like Greenspan to argue, “nobody saw it coming.” Quite a few did, but they were, in a sense, crowded out of the market.
Simon Johnson and James Kwak of 13 Bankers and The Baseline Scenario, urge President Obama, in a recent Washington Post Op-Ed, to channel Teddy Roosevelt’s defiance of Wall Street, exemplified by the break-up of Northern Securities in 1904 in order to clean up the US financial system.
I agree with Johnson and Kwak’s call to arms, and am sure their views are far more nuanced than a space limited op-ed can relate, however, my examination of the Progressive period in US history, of which the chapter on US financial regulation is but a part, suggests that repetition of that period is most unlikely, and hopefully unnecessary. While there are many similarities between then and now, both the context and issues of concern are, in certain key respects, different.
The Federal Government during the Gilded Age bore little resemblance to that existing today. As a financial entity, in the main, the government collected customs’ duties, which were more than half its receipts, paid interest on the debt, the bulk of which was incurred during the Civil War, and fought the Native Americans and Spain (wars were much cheaper then, additional Army and Navy costs for the 1898 Spanish American War came to $190M).
The malefactors of great wealth, as the industrial and financial titans of the day were known, controlled commerce and finance. They mined iron and made steel, connected the nation via railroads, telegraphs and telephones, and controlled the banks. They set prices and controlled the supply of money, credit and raw materials, which gave them the power to “shake down” people and firms of which they didn’t approve, competitors and frauds alike.
Unlike today, the leading banks which emerged at the end of the Gilded Age weren’t Too Big To Fail, they were Too Solvent To Fail. They owned much of the US gold stock, then the basis of money, and were seemingly immune from the Panics which shook the rest of the nation every decade or so, more often than not, it was claimed, at their instigation.
I’m confident if JP Morgan were running the Fed, credit growth would have been restrained long ago. There is some merit to having someone "own" an issue- unlike Greenspan, Geithner, Rubin et alios, who claim no responsibility. Thus, some believe we need more regulatory officials rather than better ones.
When the government was running dangerously short of gold reserves, in 1895, they went to Wall Street for help- call it a reverse bail-out- and had the Treasury supply replenished. A very small group of unelected men, in effect, owned the government.
This small group of men directed the transformation of America from a disconnected agrarian to a connected soon to be industrial society- from the states united to the United States. In the process, however, they paved the ground for the Progressives to use the power, not of money, but of public opinion, via the ballot box, to usurp their control.
The government that almost died in 1895, was reborn in 1901, when the assassination, by an anarchist (love the irony), of President McKinley, made Teddy Roosevelt President.
Teddy Roosevelt’s Trust Busting kicked off a vigorous 20 year period for the new government. Progressives, who had pushed potentially transformative legislation through Congress from 1885-1900 finally had an executive willing to use it, and his big stick, for change. The Rough Rider took the de jure power of the Interstate Commerce and Sherman Anti-Trust legislation, which had hitherto been used against labor, and prepared to make it de facto, against big business.
The Federal Government, as we know it today, was born. It was a small child about to battle grown men. US Federal Government receipts totaled $670M in 1900 (JP Morgan bought the Carnegie Steel Company around that time for $487M). In 1904, Northern Securities, a railroad trust owned by JP Morgan, JD Rockefeller et alios, was ordered to break up. The precedent, after appeal, was set and many other trusts followed. In 1911, after more than a decade of court battles, the Supreme Court dissolved Standard Oil, making JD Rockefeller, according to some, the richest man in the world, in cash.
He and the other Titans got rich, but lost control of their businesses. Like the Titans of Greek Mythology, they are, for good or ill, only going to appear once.
The child was growing quickly. In 1913, the Federal Reserve was created and the 16th Amendment, which made income taxes Constitutional, was ratified. Four years hence, the US entered World War I. At war’s end, the child had given way to the man. By 1920, receipts had grown to $23B. The Federal Government was now the biggest guy in town.
On one level, this growth of government is like that of Gilded Age business-built on the destruction of competition. There are, however, two key differences: 1) government didn’t “swallow” competitors, they dissolved them into smaller pieces, diluting their control 2) Gilded Age businesses were dynastic and decision-making was concentrated into few hands, government officials were (and are) popularly elected, operate within a system of checks and balances, and change more frequently.
The context in which Progressives operated was, as I’ve hopefully made clear, very different from today. The Federal Government then was, at least in a critical mass of minds, like a Deus ex machina, come to save the day. It didn’t tax the average citizen, but was likely to tax the wealthy and promised to not only break up the trusts, but also to open the credit spigot much wider. One hundred years hence, the bloom is off the Federal Government's rose. Increased taxation to fund another government expansion seems most unlikely.
Back then, the “money question”, as the debate between those who favored deflation or inflation was called, was one which brought people to the ballot box (I can’t imagine President Obama giving a Cross of Gold type speech). Elastic money seems to me the deciding factor which cemented Woodrow Wilson’s support of the Fed’s take-over of financial regulation.
Before turning to the present period, a few words about the Fed’s creation. There were two competing visions for the proposed central banking system, the Aldrich plan, which kept bankers in control, but allowed banks, at their discretion, access to government created liquidity (thus the need, under either vision, for the government, as financial entity, to grow, via increased taxes), The Bryan plan wanted government totally in control of a Central Bank which regulated the banks, and, at its sole discretion, could also supply liquidity.
The creature, as some call it, which emerged, was a compromise: government top down control of some key board members, banker control of others, the controlling board would be in D.C., thus demoting NY bankers, banks had access to liquidity, but the national liquidity level was at the board’s discretion.
Fortunately, unlike Johnson and Kwak, I’ve had the luxury of virtually unlimited internet space to flesh out the history. Unfortunately, I’ve probably lost most readers in this exercise of pedantry.
For those few that remain, let’s soldier on.
A Progressive solution, for our era, would involve for the creation of an empowered, taxing, global government with its own central bank, empowered with regulating all banks. This is, in a sense, the Nietzsche solution, fight monsters by creating bigger monsters. The United Nations (which replaced the earlier League of Nations) could be seen, in a Progressive dream, as the US Federal Government during the Gilded Age, an institution that, under direction of charismatic individuals, should become the biggest monster on the block, and maintain world order.
In my view, such a solution would but buy time in the same way that, 100 years from the empowering of the US government, many of the old problems remain. Ideas and conviction, not power, seem to me the missing elements. Further, the newly empowered Federal Government of a century ago was battling individuals, not national governments with armies, which would be the objects to be brought under control of any world government. If national governments begin to collapse, or fail to restrain growth of their internal monsters, however, I wouldn’t be surprised to see this “solution” emerge.
Supporters of continued US sovereignty within our borders, and the big bankers themselves, who might win the battle against US regulation only to risk eventually losing the war to world regulators (as the NY banks won the battle against state regulator but lost the war to the Feds) should take note. Men like Rockefeller and Carnegie, who ultimately submitted to government restraint, financed legacy institutions like the Trilateral Commission and its ilk to lay the basis for these bigger monsters. For a preview, consider: The IMF and the EU are currently battling for control in Greece, which seems willing to trade sovereignty rather than restrain its appetites via default.
Today, as then, the issue of size is key in one sense. Our regulators were seduced by “economies of scale” arguments and allowed a few financial institutions to grow beyond the ability of an indebted government to restrain. The 1895 analog is striking and, in that sense, Johnson and Kwak’s call to channel Roosevelt seems right on the mark. Terms like charisma and force of personality are often used to explain Teddy Roosevelt’s ability to bend people, ostensibly possessed of more power, to his will.
In the event, it took more than Roosevelt’s charisma to beat Morgan and his crew (or his charisma, and fear of popular backlash, was such that he bent a critical mass of the Supreme Court, to his will). US vs. Northern Securities was decided 5-4, with Chief Justice Fuller and Justices White, Peckham and Holmes dissenting. From a financial perspective, David, in the form of the US Government, had slain Goliath, a Trust whose capitalization was almost 2/3 of US revenues.
The basis of the decision, which, after appeal, and modification, became unanimous, however, was not bigness, but restraint of trade, via the stifling of competition. As Justice Holmes wrote in his dissent, “Size has nothing to do with the matter.”
Justice Harlan, writing in the affirmative: The Government charges that, if the combination was held not to be in violation of the act of Congress, then all efforts of the National Government to preserve to the people the benefits of free competition among carriers engaged in interstate commerce will be wholly unavailing, and all transcontinental lines, indeed the entire railway systems of the country, may be absorbed, merged and consolidated, thus placing the public at the absolute mercy of the holding corporation.
Adding: it need not be shown that the combination, in fact, results or will result in a total suppression of trade or in a complete monopoly, but it is only essential to show that, by its necessary operation, it tends to restrain interstate or international trade or commerce or tends to create a monopoly in such trade or commerce and to deprive the public of the advantages that flow from free competition;
Having read both sides, I understand the dissenting view; until trade is restrained, monopoly, per se, isn’t a crime, and might even lead to reduced consumer costs. Should there always be at least two rail options for every possible route? I assume, however, that the objects sought by President Roosevelt were a precedent, and distributed control and profits, not a strict reading enforcement.
I dwell on the decision to suggest a legal challenge to the current concentration of financial control into very few hands. Contrary to the above, financial concentration has already restrained trade, and imposed additional costs to all. Financial support (and even the expectation thereof) of TBTF firms also restrains trade in that potential (and actual) competitors who avoided (or even profited by) the declines in certain asset markets were restrained in gaining increased market share. Surely one of the benefits of competition is the weeding out of the short-sighted.
Fortunately, I don’t think we need new legislation, we just need to enforce what’s already on the books.
Like the internet, finance would benefit from redundancy, and competition, not just in the sense of distributed shareholdings (which is already the case) but viewpoints (which is not helped when directors merely “rubber stamp” CEO opinion, and Fed, Treasury, and other financial regulatory officials are always on loan from GS and the rest of Wall Street). Like minded-ness, if you will, is the issue here. TBTF engenders the myopia which leads men like Greenspan to argue, “nobody saw it coming.” Quite a few did, but they were, in a sense, crowded out of the market.
The need for redundancy would become more apparent if we held as self-evident the belief that there is no magic cure for financial overextension (bubbles) and their dissolution (busts) in a fractional reserve banking system. It will happen, again and again. Mitigation, as should now be clear, is not just an issue of additional liquidity but also a financial industry comprised of smaller, and more numerous, competing firms. It might also help to examine the books of any firm (including the Fed) which promotes the notion that “this time is different.”
I hold no illusions about being the sharpest knife in the drawer, as the Brits say, and thus assume others have considered similar legal arguments against financial concentration. Given the obvious trade restraining effects of TBTF, why isn’t the Supreme Court hearing arguments?
Like the Federal Government in 1895, ours too needs a bail-out. While the big financial firms can no longer provide such support, they can keep the Feds afloat by selling bonds as Primary Dealers, and, if needed, increase their own holdings thereof (particularly after the Fed has graciously relieved them of toxic mortgage, et alia, assets). If the Federal Government is ever to restrain finance, they need to break this dependency, and prepare to take their lumps, so to write, for poor fiscal management. If they were crafty they would blame the firms they were about to break up…just a thought.
This will require either skillful diplomacy or a good deal of charisma from some in power, and a good deal of conviction that this problem cannot be fixed without radical solutions, and will only worsen if left to fester. The "break-up" strategy from the early trust busting days may well prove effective today, and increase the number of balance sheet managers in the bargain. It will also, I suspect, require inflation ($ debasement) as a self-administered bail-out. President Obama might need to channel William Jennings Bryan, as well as Teddy Roosevelt to get the US out of this mess.
Perhaps President Obama can deliver a Cross of TBTF speech at the next Democratic convention.
Simon Johnson and James Kwak of 13 Bankers and The Baseline Scenario, urge President Obama, in a recent Washington Post Op-Ed, to channel Teddy Roosevelt’s defiance of Wall Street, exemplified by the break-up of Northern Securities in 1904 in order to clean up the US financial system.
I agree with Johnson and Kwak’s call to arms, and am sure their views are far more nuanced than a space limited op-ed can relate, however, my examination of the Progressive period in US history, of which the chapter on US financial regulation is but a part, suggests that repetition of that period is most unlikely, and hopefully unnecessary. While there are many similarities between then and now, both the context and issues of concern are, in certain key respects, different.
The Federal Government during the Gilded Age bore little resemblance to that existing today. As a financial entity, in the main, the government collected customs’ duties, which were more than half its receipts, paid interest on the debt, the bulk of which was incurred during the Civil War, and fought the Native Americans and Spain (wars were much cheaper then, additional Army and Navy costs for the 1898 Spanish American War came to $190M).
The malefactors of great wealth, as the industrial and financial titans of the day were known, controlled commerce and finance. They mined iron and made steel, connected the nation via railroads, telegraphs and telephones, and controlled the banks. They set prices and controlled the supply of money, credit and raw materials, which gave them the power to “shake down” people and firms of which they didn’t approve, competitors and frauds alike.
Unlike today, the leading banks which emerged at the end of the Gilded Age weren’t Too Big To Fail, they were Too Solvent To Fail. They owned much of the US gold stock, then the basis of money, and were seemingly immune from the Panics which shook the rest of the nation every decade or so, more often than not, it was claimed, at their instigation.
I’m confident if JP Morgan were running the Fed, credit growth would have been restrained long ago. There is some merit to having someone "own" an issue- unlike Greenspan, Geithner, Rubin et alios, who claim no responsibility. Thus, some believe we need more regulatory officials rather than better ones.
When the government was running dangerously short of gold reserves, in 1895, they went to Wall Street for help- call it a reverse bail-out- and had the Treasury supply replenished. A very small group of unelected men, in effect, owned the government.
This small group of men directed the transformation of America from a disconnected agrarian to a connected soon to be industrial society- from the states united to the United States. In the process, however, they paved the ground for the Progressives to use the power, not of money, but of public opinion, via the ballot box, to usurp their control.
The government that almost died in 1895, was reborn in 1901, when the assassination, by an anarchist (love the irony), of President McKinley, made Teddy Roosevelt President.
Teddy Roosevelt’s Trust Busting kicked off a vigorous 20 year period for the new government. Progressives, who had pushed potentially transformative legislation through Congress from 1885-1900 finally had an executive willing to use it, and his big stick, for change. The Rough Rider took the de jure power of the Interstate Commerce and Sherman Anti-Trust legislation, which had hitherto been used against labor, and prepared to make it de facto, against big business.
The Federal Government, as we know it today, was born. It was a small child about to battle grown men. US Federal Government receipts totaled $670M in 1900 (JP Morgan bought the Carnegie Steel Company around that time for $487M). In 1904, Northern Securities, a railroad trust owned by JP Morgan, JD Rockefeller et alios, was ordered to break up. The precedent, after appeal, was set and many other trusts followed. In 1911, after more than a decade of court battles, the Supreme Court dissolved Standard Oil, making JD Rockefeller, according to some, the richest man in the world, in cash.
He and the other Titans got rich, but lost control of their businesses. Like the Titans of Greek Mythology, they are, for good or ill, only going to appear once.
The child was growing quickly. In 1913, the Federal Reserve was created and the 16th Amendment, which made income taxes Constitutional, was ratified. Four years hence, the US entered World War I. At war’s end, the child had given way to the man. By 1920, receipts had grown to $23B. The Federal Government was now the biggest guy in town.
On one level, this growth of government is like that of Gilded Age business-built on the destruction of competition. There are, however, two key differences: 1) government didn’t “swallow” competitors, they dissolved them into smaller pieces, diluting their control 2) Gilded Age businesses were dynastic and decision-making was concentrated into few hands, government officials were (and are) popularly elected, operate within a system of checks and balances, and change more frequently.
The context in which Progressives operated was, as I’ve hopefully made clear, very different from today. The Federal Government then was, at least in a critical mass of minds, like a Deus ex machina, come to save the day. It didn’t tax the average citizen, but was likely to tax the wealthy and promised to not only break up the trusts, but also to open the credit spigot much wider. One hundred years hence, the bloom is off the Federal Government's rose. Increased taxation to fund another government expansion seems most unlikely.
Back then, the “money question”, as the debate between those who favored deflation or inflation was called, was one which brought people to the ballot box (I can’t imagine President Obama giving a Cross of Gold type speech). Elastic money seems to me the deciding factor which cemented Woodrow Wilson’s support of the Fed’s take-over of financial regulation.
Before turning to the present period, a few words about the Fed’s creation. There were two competing visions for the proposed central banking system, the Aldrich plan, which kept bankers in control, but allowed banks, at their discretion, access to government created liquidity (thus the need, under either vision, for the government, as financial entity, to grow, via increased taxes), The Bryan plan wanted government totally in control of a Central Bank which regulated the banks, and, at its sole discretion, could also supply liquidity.
The creature, as some call it, which emerged, was a compromise: government top down control of some key board members, banker control of others, the controlling board would be in D.C., thus demoting NY bankers, banks had access to liquidity, but the national liquidity level was at the board’s discretion.
Fortunately, unlike Johnson and Kwak, I’ve had the luxury of virtually unlimited internet space to flesh out the history. Unfortunately, I’ve probably lost most readers in this exercise of pedantry.
For those few that remain, let’s soldier on.
A Progressive solution, for our era, would involve for the creation of an empowered, taxing, global government with its own central bank, empowered with regulating all banks. This is, in a sense, the Nietzsche solution, fight monsters by creating bigger monsters. The United Nations (which replaced the earlier League of Nations) could be seen, in a Progressive dream, as the US Federal Government during the Gilded Age, an institution that, under direction of charismatic individuals, should become the biggest monster on the block, and maintain world order.
In my view, such a solution would but buy time in the same way that, 100 years from the empowering of the US government, many of the old problems remain. Ideas and conviction, not power, seem to me the missing elements. Further, the newly empowered Federal Government of a century ago was battling individuals, not national governments with armies, which would be the objects to be brought under control of any world government. If national governments begin to collapse, or fail to restrain growth of their internal monsters, however, I wouldn’t be surprised to see this “solution” emerge.
Supporters of continued US sovereignty within our borders, and the big bankers themselves, who might win the battle against US regulation only to risk eventually losing the war to world regulators (as the NY banks won the battle against state regulator but lost the war to the Feds) should take note. Men like Rockefeller and Carnegie, who ultimately submitted to government restraint, financed legacy institutions like the Trilateral Commission and its ilk to lay the basis for these bigger monsters. For a preview, consider: The IMF and the EU are currently battling for control in Greece, which seems willing to trade sovereignty rather than restrain its appetites via default.
Today, as then, the issue of size is key in one sense. Our regulators were seduced by “economies of scale” arguments and allowed a few financial institutions to grow beyond the ability of an indebted government to restrain. The 1895 analog is striking and, in that sense, Johnson and Kwak’s call to channel Roosevelt seems right on the mark. Terms like charisma and force of personality are often used to explain Teddy Roosevelt’s ability to bend people, ostensibly possessed of more power, to his will.
In the event, it took more than Roosevelt’s charisma to beat Morgan and his crew (or his charisma, and fear of popular backlash, was such that he bent a critical mass of the Supreme Court, to his will). US vs. Northern Securities was decided 5-4, with Chief Justice Fuller and Justices White, Peckham and Holmes dissenting. From a financial perspective, David, in the form of the US Government, had slain Goliath, a Trust whose capitalization was almost 2/3 of US revenues.
The basis of the decision, which, after appeal, and modification, became unanimous, however, was not bigness, but restraint of trade, via the stifling of competition. As Justice Holmes wrote in his dissent, “Size has nothing to do with the matter.”
Justice Harlan, writing in the affirmative: The Government charges that, if the combination was held not to be in violation of the act of Congress, then all efforts of the National Government to preserve to the people the benefits of free competition among carriers engaged in interstate commerce will be wholly unavailing, and all transcontinental lines, indeed the entire railway systems of the country, may be absorbed, merged and consolidated, thus placing the public at the absolute mercy of the holding corporation.
Adding: it need not be shown that the combination, in fact, results or will result in a total suppression of trade or in a complete monopoly, but it is only essential to show that, by its necessary operation, it tends to restrain interstate or international trade or commerce or tends to create a monopoly in such trade or commerce and to deprive the public of the advantages that flow from free competition;
Having read both sides, I understand the dissenting view; until trade is restrained, monopoly, per se, isn’t a crime, and might even lead to reduced consumer costs. Should there always be at least two rail options for every possible route? I assume, however, that the objects sought by President Roosevelt were a precedent, and distributed control and profits, not a strict reading enforcement.
I dwell on the decision to suggest a legal challenge to the current concentration of financial control into very few hands. Contrary to the above, financial concentration has already restrained trade, and imposed additional costs to all. Financial support (and even the expectation thereof) of TBTF firms also restrains trade in that potential (and actual) competitors who avoided (or even profited by) the declines in certain asset markets were restrained in gaining increased market share. Surely one of the benefits of competition is the weeding out of the short-sighted.
Fortunately, I don’t think we need new legislation, we just need to enforce what’s already on the books.
Like the internet, finance would benefit from redundancy, and competition, not just in the sense of distributed shareholdings (which is already the case) but viewpoints (which is not helped when directors merely “rubber stamp” CEO opinion, and Fed, Treasury, and other financial regulatory officials are always on loan from GS and the rest of Wall Street). Like minded-ness, if you will, is the issue here. TBTF engenders the myopia which leads men like Greenspan to argue, “nobody saw it coming.” Quite a few did, but they were, in a sense, crowded out of the market.
The need for redundancy would become more apparent if we held as self-evident the belief that there is no magic cure for financial overextension (bubbles) and their dissolution (busts) in a fractional reserve banking system. It will happen, again and again. Mitigation, as should now be clear, is not just an issue of additional liquidity but also a financial industry comprised of smaller, and more numerous, competing firms. It might also help to examine the books of any firm (including the Fed) which promotes the notion that “this time is different.”
I hold no illusions about being the sharpest knife in the drawer, as the Brits say, and thus assume others have considered similar legal arguments against financial concentration. Given the obvious trade restraining effects of TBTF, why isn’t the Supreme Court hearing arguments?
Like the Federal Government in 1895, ours too needs a bail-out. While the big financial firms can no longer provide such support, they can keep the Feds afloat by selling bonds as Primary Dealers, and, if needed, increase their own holdings thereof (particularly after the Fed has graciously relieved them of toxic mortgage, et alia, assets). If the Federal Government is ever to restrain finance, they need to break this dependency, and prepare to take their lumps, so to write, for poor fiscal management. If they were crafty they would blame the firms they were about to break up…just a thought.
This will require either skillful diplomacy or a good deal of charisma from some in power, and a good deal of conviction that this problem cannot be fixed without radical solutions, and will only worsen if left to fester. The "break-up" strategy from the early trust busting days may well prove effective today, and increase the number of balance sheet managers in the bargain. It will also, I suspect, require inflation ($ debasement) as a self-administered bail-out. President Obama might need to channel William Jennings Bryan, as well as Teddy Roosevelt to get the US out of this mess.
Perhaps President Obama can deliver a Cross of TBTF speech at the next Democratic convention.
Wednesday, March 31, 2010
TBTF isn't just Bad Policy, it's a Scam
Free money from the Fed, and bail-outs from various governments allowed US Bank employees to pull off a marvelous trick, thereby freeing them from the normal contraints of Capitalism. They paid out more in dividends than they made in each of the past 3 years: by $8B in 2007, $41B in 2008 and $30B in 2009. Net operating income (NOI) for the banks was $102B for 2007, $10B for 2008 and $17B for 2009. This is obviously unsustainable, and makes the crooks from the Tech Boom look like amateurs- while the Techies based their fraud on the greater fool theory, the Bankers simply paid off their owners, and gave themselves raises.
Banks always and everywhere make the bulk of their income from lending and the US sub-species is no exception to this rule. Bankus Americanus is, however, unique in a few regards. It is the only animal on the Endangered Species list whose dwindling numbers are a result of cannibalism. To wit, in just the past 15 years numbers have dropped from 12,604 to 8,012 but those that remain are fatter than ever. Additionally, (and somewhat more seriously) unlike most banks in history, in recent times non-interest income has risen to more than 50% of interest income, helped in part, by the termination of Glass Steagall restrictions. Data: FDIC- all covered institutions, aggregated
Given the substantial compensation American Bankers receive one might expect the increased non-interest income to come via trading, investment banking or the recently allowed insurance and brokerage activities, but this is not the case. Service charges on deposit accounts earn US Banks more than trading, investment banking, insurance, or brokerage in every year for which I have data. The lowly paid back office workers, in other words, generate much more income than the highly paid traders.
Admittedly, as I learned at Chase, there are indirect benefits to having a trading desk (and other financial services). Trading, for example, requires a cash deposit which will not only generate its own set of fees but also increase lending by whatever multiple the bank deems prudent.
Regardless, in the aggregate, US bank trading profits (exclusive of employee expense) have never exceeded 10% of net interest income. And the banks haven't even begun to unwind their derivatives portfolios, an event which may well push the absolute value of trading income above that of interest income for a year or two. I suspect in the not too distant future the wisdom of bank trading will be seen as pure folly. The NIMBY (Not In My Back Yard) movement which drove, e.g. chemical processing, off to foreign lands will soon, I believe, drive trading from Banks.
Pause for a moment. Can you imagine the outrage if ATMs were outlawed and tipping a teller a few dollars each time one made a withdrawal became mandatory? Can you imagine how many people would suddenly get the urge to be a bank teller? Banks would then have no problem staying open 24 hours a day, just like the ATMs- and we might all enjoy a human voice saying, "Thank you for banking with us."
There's a lesson to be learned here. The aggregate data strongly suggests that bankers aren't smarter than they were 30 years ago, they are just more protected. Protection of the sector allowed a relatively small group of people to pay themselves huge salaries (and huger bonuses) while the bulk of bank income was derived not from their efforts but from normal bank services spared the ravages of tech sector cost cutting. The high priced guys are the one's who have generated the problems.
Returning to cash flows, income isn't generated for free. The network of ATMs required development (but shouldn't the patent protection for this have expired like those for pharmaceuticals?), installation, and continued service. Profits accrue only when incomes exceed expenses. Banks must borrow funds more cheaply then they lend them.
As interest income is the bulk of bank income, you would expect that interest expense (i.e. cost of funds) is the bulk of bank expense. Up until the past few years, this was true. In 1994, interest expense was $145B (interest income was $321B) while employee compensation was $70B. In 2009, interest expense was $145B (interest income was $541B) while employee compensation was $163B. Amazingly, less than 2 million bankers (actually the problem is caused by the top 10%) paid themselves more than they paid the 100s of millions of depositors for the use of their funds. They even paid themselves more than they paid the bank owners.
If this (taking new equity capital to pay off previous investors and line their pockets) sounds like a Ponzi scheme that dwarfs that of Mr. Madoff, then I've made my point.
This brings us to the bottom line. If the Banks are truly TBTF and Bank employees truly indispensible, Capitalism is well and truly dead and Banking no longer a job, but a religion. In Capitalism, shareholders, not employees are the ultimate arbiters of business. Once net income goes to zero or below, the business, in its current form, is on borrowed time.
Free money from the Fed, and bail-outs from various governments allowed US Bank employees to pull off a marvelous trick, thereby freeing them from the normal constraints of Capitalism. They paid out more in dividends than they made in each of the past 3 years: by $8B in 2007, $41B in 2008 and $30B in 2009. Net operating income for the banks was $102B for 2007, $10B for 2008 and $17B for 2009. This is obviously unsustainable, and makes the crooks from the Tech Boom look like amateurs- while the Techies based their fraud on the greater fool theory, the Bankers simply paid off their owners, and gave themselves raises.
Yesterday Paul Volcker said TBTF was "moral hazard writ large". He was wrong. It's a hazard before it happens. This has been going on for 3 years.
As with the Tech Boom, something has to give. The real sector in the US isn't recovering, in part because credit is just circling round in the financial markets, as was the case in the early 90s, but on a much larger scale today. Real sector borrowing rates (adjusted for tighter credit conditions) are still too high. Thus the residential mortgage problem is not going away, and likely to worsen now that the Fed is out of the game (for the moment at least) and a commercial mortgage problem is looming. Unlike the early 90s, there is no RTC set up to recover money for the banks, and there's that problem of who really owns the mortgages to be solved.
At current price levels it will be years before the banks are back to whatever constitutes normal these days, and I don't think we'll have that much time. Unlike the 90s, we have a government debt roll-over problem. If Banking sector NOI is roughly zero again this year, will shareholders be willing to accept zero dividends? I doubt it. Absent a sudden recovery in the real sector, US Banks, like the Irish Banks, will soon find they need more money.
Barring an unlikely substantial reduction in employee compensation (a solution I highly recommend, rolling salaries back to 1999 levels would free up roughly $70B A YEAR for loan loss provisions), the banks could dilute their own shares (but only for so long) or try to raise more overseas equity, but the amounts would be limited, in the case of foreign investment, to less than a controlling stake. I can't imagine the US population or government allowing China to hold a controlling interest in Citibank or any other big BHC.
A $ devaluation policy would alleviate the mortgage problem but the subsequent rise in interest rates would likely ignite another, much larger problem in the 200+ Trillion dollar derivatives portfolios, and our foreign creditors would be none too pleased. Sadly for them, the Germen option of forced liquidation is that least desired by the powers that be. Devaluation, I suspect, is the only option- it just has to appear to be an accident.
Regardless, we'll likely soon discover that TBTF isn't just bad policy, it's a scam- the Tech Boom on steroids.
A note on aggregation: Sometimes this process makes it easy to miss the trees for the forest-some banks might have profitable trading desks but they get lost. Goldman Sachs comes to mind. Yet, during the crisis of 2008, GS would have gone the way of LTCM (for the same reason) but for their transformation into a BHC and the bail-out of other institutions (notably AIG) which kept payments flowing. GS isn't much of a bank in the usual sense but an investment house. They should not, in my view, have gotten the protection of commercial banks.
A note on trading: This essay might leave readers with the notion that I'm against trading. I'm not. I trade. I simply believe that for trading to provide the promised price discovery benefits, they must stand on their own as private sector businesses.
The streams here in the Northeast US today, following a solid 2 day rain, are akin to those of income enjoyed by US Banks- spilling over at record setting levels.
As promised yesterday when I detailed the obscene compensation of bank industry employees, today's musings will focus in more detail on US Banking sector incomes, expenses and the future of Too Big To Fail.
Banks always and everywhere make the bulk of their income from lending and the US sub-species is no exception to this rule. Bankus Americanus is, however, unique in a few regards. It is the only animal on the Endangered Species list whose dwindling numbers are a result of cannibalism. To wit, in just the past 15 years numbers have dropped from 12,604 to 8,012 but those that remain are fatter than ever. Additionally, (and somewhat more seriously) unlike most banks in history, in recent times non-interest income has risen to more than 50% of interest income, helped in part, by the termination of Glass Steagall restrictions. Data: FDIC- all covered institutions, aggregated
Given the substantial compensation American Bankers receive one might expect the increased non-interest income to come via trading, investment banking or the recently allowed insurance and brokerage activities, but this is not the case. Service charges on deposit accounts earn US Banks more than trading, investment banking, insurance, or brokerage in every year for which I have data. The lowly paid back office workers, in other words, generate much more income than the highly paid traders.
Admittedly, as I learned at Chase, there are indirect benefits to having a trading desk (and other financial services). Trading, for example, requires a cash deposit which will not only generate its own set of fees but also increase lending by whatever multiple the bank deems prudent.
Regardless, in the aggregate, US bank trading profits (exclusive of employee expense) have never exceeded 10% of net interest income. And the banks haven't even begun to unwind their derivatives portfolios, an event which may well push the absolute value of trading income above that of interest income for a year or two. I suspect in the not too distant future the wisdom of bank trading will be seen as pure folly. The NIMBY (Not In My Back Yard) movement which drove, e.g. chemical processing, off to foreign lands will soon, I believe, drive trading from Banks.
Moving on to larger streams, the biggest line item in the FDIC's breakdown of non-interest income is obscurely titled "additional non-interest income." The FDIC defines this as:
All non interest income of the bank not required to be reported elsewhere, including (but exclusive to):
- Income and fees from the rental of safe deposit boxes;
- Income and fees from the sale of checks, money orders, cashiers' checks, and travelers' checks;
- Income and fees from the use of the bank's ATMs;
- Income from performing data processing services for others;
- Earnings on or other increases in the value of the cash surrender value of bank-owned life insurance policies;
- Rent and other income from Real Estate Owned.
Pause for a moment. Can you imagine the outrage if ATMs were outlawed and tipping a teller a few dollars each time one made a withdrawal became mandatory? Can you imagine how many people would suddenly get the urge to be a bank teller? Banks would then have no problem staying open 24 hours a day, just like the ATMs- and we might all enjoy a human voice saying, "Thank you for banking with us."
There's a lesson to be learned here. The aggregate data strongly suggests that bankers aren't smarter than they were 30 years ago, they are just more protected. Protection of the sector allowed a relatively small group of people to pay themselves huge salaries (and huger bonuses) while the bulk of bank income was derived not from their efforts but from normal bank services spared the ravages of tech sector cost cutting. The high priced guys are the one's who have generated the problems.
Returning to cash flows, income isn't generated for free. The network of ATMs required development (but shouldn't the patent protection for this have expired like those for pharmaceuticals?), installation, and continued service. Profits accrue only when incomes exceed expenses. Banks must borrow funds more cheaply then they lend them.
As interest income is the bulk of bank income, you would expect that interest expense (i.e. cost of funds) is the bulk of bank expense. Up until the past few years, this was true. In 1994, interest expense was $145B (interest income was $321B) while employee compensation was $70B. In 2009, interest expense was $145B (interest income was $541B) while employee compensation was $163B. Amazingly, less than 2 million bankers (actually the problem is caused by the top 10%) paid themselves more than they paid the 100s of millions of depositors for the use of their funds. They even paid themselves more than they paid the bank owners.
If this (taking new equity capital to pay off previous investors and line their pockets) sounds like a Ponzi scheme that dwarfs that of Mr. Madoff, then I've made my point.
This brings us to the bottom line. If the Banks are truly TBTF and Bank employees truly indispensible, Capitalism is well and truly dead and Banking no longer a job, but a religion. In Capitalism, shareholders, not employees are the ultimate arbiters of business. Once net income goes to zero or below, the business, in its current form, is on borrowed time.
Free money from the Fed, and bail-outs from various governments allowed US Bank employees to pull off a marvelous trick, thereby freeing them from the normal constraints of Capitalism. They paid out more in dividends than they made in each of the past 3 years: by $8B in 2007, $41B in 2008 and $30B in 2009. Net operating income for the banks was $102B for 2007, $10B for 2008 and $17B for 2009. This is obviously unsustainable, and makes the crooks from the Tech Boom look like amateurs- while the Techies based their fraud on the greater fool theory, the Bankers simply paid off their owners, and gave themselves raises.
Yesterday Paul Volcker said TBTF was "moral hazard writ large". He was wrong. It's a hazard before it happens. This has been going on for 3 years.
As with the Tech Boom, something has to give. The real sector in the US isn't recovering, in part because credit is just circling round in the financial markets, as was the case in the early 90s, but on a much larger scale today. Real sector borrowing rates (adjusted for tighter credit conditions) are still too high. Thus the residential mortgage problem is not going away, and likely to worsen now that the Fed is out of the game (for the moment at least) and a commercial mortgage problem is looming. Unlike the early 90s, there is no RTC set up to recover money for the banks, and there's that problem of who really owns the mortgages to be solved.
At current price levels it will be years before the banks are back to whatever constitutes normal these days, and I don't think we'll have that much time. Unlike the 90s, we have a government debt roll-over problem. If Banking sector NOI is roughly zero again this year, will shareholders be willing to accept zero dividends? I doubt it. Absent a sudden recovery in the real sector, US Banks, like the Irish Banks, will soon find they need more money.
Barring an unlikely substantial reduction in employee compensation (a solution I highly recommend, rolling salaries back to 1999 levels would free up roughly $70B A YEAR for loan loss provisions), the banks could dilute their own shares (but only for so long) or try to raise more overseas equity, but the amounts would be limited, in the case of foreign investment, to less than a controlling stake. I can't imagine the US population or government allowing China to hold a controlling interest in Citibank or any other big BHC.
A $ devaluation policy would alleviate the mortgage problem but the subsequent rise in interest rates would likely ignite another, much larger problem in the 200+ Trillion dollar derivatives portfolios, and our foreign creditors would be none too pleased. Sadly for them, the Germen option of forced liquidation is that least desired by the powers that be. Devaluation, I suspect, is the only option- it just has to appear to be an accident.
Regardless, we'll likely soon discover that TBTF isn't just bad policy, it's a scam- the Tech Boom on steroids.
A note on aggregation: Sometimes this process makes it easy to miss the trees for the forest-some banks might have profitable trading desks but they get lost. Goldman Sachs comes to mind. Yet, during the crisis of 2008, GS would have gone the way of LTCM (for the same reason) but for their transformation into a BHC and the bail-out of other institutions (notably AIG) which kept payments flowing. GS isn't much of a bank in the usual sense but an investment house. They should not, in my view, have gotten the protection of commercial banks.
A note on trading: This essay might leave readers with the notion that I'm against trading. I'm not. I trade. I simply believe that for trading to provide the promised price discovery benefits, they must stand on their own as private sector businesses.
Friday, October 23, 2009
It's Not The Size Of The Banks, Comrade Bernanke, It's...
Mr. Bernanke, speaking at a Federal Reserve Bank of Boston meeting Friday on Cape Cod, said [in response to question about "too big to fail"] he would prefer “a more subtle approach without losing the economic benefit of multi-function, international (financial) firms." WSJ
The players are laying their cards on the table at the Big Casino debates over regulation. On one side of the table we have Paul Volcker, and Alan Greenspan, Mervyn King et alios, who think that banks should be broken up (although with some difference between them on how that might be done). On the other side of the table we have current Fed Chairman (who obviously knows whom he speaks for ) Ben Bernanke who thinks that Bigger is still Better when it comes to banking.
To wit, in that Friday speech, Mr. Bernanke argued: First, recent experience confirms the value of supervision of financial holding companies--especially the largest, most complex, and systemically critical institutions--on a consolidated basis, supplementing the supervision that takes place at the level of the holding company's subsidiaries.
Leaving aside the rather obvious (to anyone but Big Bank CEOs and Ben Bernanke, it seems) point that recent experience only proves that that the value of supervision of financial holding companies was roughly nil, let's examine his argument more fully.
He continues: Second, our supervisory approach should better reflect our mission, as a central bank, to promote financial stability. The extraordinary pressure on financial firms last fall underscored how profoundly interconnected firms and markets are in our complex, global financial system. Thus, any effort to address systemic risks will require a more systemwide, or macroprudential, approach to the supervision of systemically critical firms. More generally, supervisors must go beyond their traditional focus on individual firms and markets to try to identify possible channels of financial contagion and other risks to the system as a whole.
A ha. In other words, Big Banks mean Big Regulations. According to Comrade Bernanke, it's the job of the Fed (or another even Bigger Brother) to to promote financial stability, whatever that might mean.
The thin edge of the wedge has pretty much split the log of Capitalism here. The Fed's job, at least before Humphrey Hawkins slid into obscurity, is to maintain price stability and foster as full an employment situation as is consistent with the first directive. Financial stability, under that head, is only important to the extent it impairs one of those directives.
If "Financial Stability" of Comrade Bernanke refers to the casino-derivative markets never being short of liquidity, that is a fool's dream- Big Finance will keep leveraging until they ex(im)plode. It also strikes me as anti-Capitalist. Bankruptcies, liquidity shortages, defaults and currency crises are part of the game- a self-correcting game if failure is allowed to extract its price.
Paul Volcker's "middle of the road" approach, echoed by Mervyn King, to "financial stability" is to separate the casino (he, being more genteel used, speculative) elements of finance from the utility elements. In other words, instead of "financial stability" we should aim for "commercial stability" and retain the "survival of the fittest" aspect of capitalism in the big stakes arena.
In that way, Comrade Bernanke might even get his way, although I suspect the virtues of economies of scale to which he refers are offset by the vices of complacency that flow from lack of competition. As olive branch perhaps we can separate the commercial banking departments of the Big 5 from the speculative elements and roll them into one or two big firms with some Banking Czar, like Comrade Bernanke, in charge. Not that I'll be banking there, I'm going to stick with my local bank. Then we can see if the proprietary traders at the big banks are really worth the bucks without risking the commerical financial system in the process.
The problem, to which I alluded in the title, is not the size of the banks. It's Big Finance's use of key commercial banking aspects to shield them from speculative losses that would have sent any other not protected firm into bankruptcy. Even LTCM got wound down. Trading is supposed to be about managing risk (at least if the intent is to allocate capital wisely), and if you can't go bust, there isn't much of that.
Of course, mine is but a lone opinion from the woods of Upstate NY. I'm eager to see how the battle progresses, assuming the debate doesn't become moot due to another crisis.
The players are laying their cards on the table at the Big Casino debates over regulation. On one side of the table we have Paul Volcker, and Alan Greenspan, Mervyn King et alios, who think that banks should be broken up (although with some difference between them on how that might be done). On the other side of the table we have current Fed Chairman (who obviously knows whom he speaks for ) Ben Bernanke who thinks that Bigger is still Better when it comes to banking.
To wit, in that Friday speech, Mr. Bernanke argued: First, recent experience confirms the value of supervision of financial holding companies--especially the largest, most complex, and systemically critical institutions--on a consolidated basis, supplementing the supervision that takes place at the level of the holding company's subsidiaries.
Leaving aside the rather obvious (to anyone but Big Bank CEOs and Ben Bernanke, it seems) point that recent experience only proves that that the value of supervision of financial holding companies was roughly nil, let's examine his argument more fully.
He continues: Second, our supervisory approach should better reflect our mission, as a central bank, to promote financial stability. The extraordinary pressure on financial firms last fall underscored how profoundly interconnected firms and markets are in our complex, global financial system. Thus, any effort to address systemic risks will require a more systemwide, or macroprudential, approach to the supervision of systemically critical firms. More generally, supervisors must go beyond their traditional focus on individual firms and markets to try to identify possible channels of financial contagion and other risks to the system as a whole.
A ha. In other words, Big Banks mean Big Regulations. According to Comrade Bernanke, it's the job of the Fed (or another even Bigger Brother) to to promote financial stability, whatever that might mean.
The thin edge of the wedge has pretty much split the log of Capitalism here. The Fed's job, at least before Humphrey Hawkins slid into obscurity, is to maintain price stability and foster as full an employment situation as is consistent with the first directive. Financial stability, under that head, is only important to the extent it impairs one of those directives.
If "Financial Stability" of Comrade Bernanke refers to the casino-derivative markets never being short of liquidity, that is a fool's dream- Big Finance will keep leveraging until they ex(im)plode. It also strikes me as anti-Capitalist. Bankruptcies, liquidity shortages, defaults and currency crises are part of the game- a self-correcting game if failure is allowed to extract its price.
Paul Volcker's "middle of the road" approach, echoed by Mervyn King, to "financial stability" is to separate the casino (he, being more genteel used, speculative) elements of finance from the utility elements. In other words, instead of "financial stability" we should aim for "commercial stability" and retain the "survival of the fittest" aspect of capitalism in the big stakes arena.
In that way, Comrade Bernanke might even get his way, although I suspect the virtues of economies of scale to which he refers are offset by the vices of complacency that flow from lack of competition. As olive branch perhaps we can separate the commercial banking departments of the Big 5 from the speculative elements and roll them into one or two big firms with some Banking Czar, like Comrade Bernanke, in charge. Not that I'll be banking there, I'm going to stick with my local bank. Then we can see if the proprietary traders at the big banks are really worth the bucks without risking the commerical financial system in the process.
The problem, to which I alluded in the title, is not the size of the banks. It's Big Finance's use of key commercial banking aspects to shield them from speculative losses that would have sent any other not protected firm into bankruptcy. Even LTCM got wound down. Trading is supposed to be about managing risk (at least if the intent is to allocate capital wisely), and if you can't go bust, there isn't much of that.
Of course, mine is but a lone opinion from the woods of Upstate NY. I'm eager to see how the battle progresses, assuming the debate doesn't become moot due to another crisis.
Wednesday, October 21, 2009
Big Finance as Napoleon: Heading to its Waterloo
I cannot accept your canon that we are to judge Pope and King unlike other men, with a favourable presumption that they did no wrong. If there is any presumption it is the other way against holders of power, increasing as the power increases. Historic responsibility has to make up for the want of legal responsibility. Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority: still more when you superadd the tendency or the certainty of corruption by authority. There is no worse heresy than that the office sanctifies the holder of it. Letter from Lord Acton to Bishop Creighton
To everything there is a season, and a time for every purpose under heaven, begins Turn, Turn, Turn by the Byrds. Within that perspective men play the parts assigned to them (sometimes poorly and sometimes exceptionally) towards some goal which may not, as Hegel, inter alios, assumed, by easy to divine.
Unifying and increasingly larger civilizations have been created by men like Cyrus, Alexander, Caesar, Mohammed, Charlemagne and Genghis Khan, to name a few. Whether this is for good or ill seems a matter of opinion but that these men played a large role in history is certain.
In more modern times, men like Washington and Napoleon played similar roles. The former managed to resist the temptations of power to which most men succumb, and thus helped create these United States. The latter could not resist temptation. He overplayed the given part, and ended his life in captivity.
From that perspective of purposeful history, Washington and Napoleon were asked, in a sense, to lead the effort to sweep away the Monarchical system which had run Western Civilization for centuries. Washington, perhaps due to his lack of skill as General compared to Napoleon, played his part well. His letters suggest an awareness of the role of Providence on his side and a sense that he was simply playing a role.
Napoleon, by contrast, called himself a liberator, and did free, for a time, Continental Europe from the old system and, I believe, helped plant the seed of liberation which eventually killed it. However, he, like most men who rise to positions of great power, succumbed to the temptation described by Lord Acton. He did not see that, as the Chinese might put it, the Mandate of Heaven was limited.
Big Finance, in a sense, played an important role in history as well. If you believe, as I do, that Capitalism, as classically understood, is a much better method of providing for man's material needs as compared to "rule from the top", whether by King or Committee, you might agree with the support Big Finance received from the late 70s through the end of the 20th Century. In this sense I agree, in part, with the views of Fukuyama's End of History. While I doubt the US model is an end, it seems a much better way station than the alternatives.
If the stock market crash of 1987 inspired a Mellon-esque liquidation would the Soviet Union have given way to the Russia we know today? If the Asian Crisis left those nations with the sense that their turn towards Western Capitalism was a mistake would China have continued its drive towards economic integration with the rest of the world?
Just as I can understand those who supported Napoleon early in his career, I can understand why many supported Big Finance when, from a purely economic standpoint, restraint seemed a wiser choice.
Napoleon, as we know, turned his back on the principles of the Revolution which gave him power and declared himself Emperor. Big Finance, in my view, turned its back on a key principle of Capitalism- a measure and procedure for failure- when they pushed the Financial Modernization Act of 1999 into law and used commercial deposits as assets to lever for speculation.
Since that time, Big Finance has successfully fought attempts to restrain its power. Like Napoleon in Russia, Big Finance suffered a terrible defeat in the arena of mortgage finance and credit default swaps. Also like Napoleon, Big Finance was not chastened by defeat, but rather emboldened. Like Napoleon, Big Finance pays no heed to old supporters' warnings. While Alan Greenspan doesn't strike me as a gifted economist, he has a proven knack for divining changing political winds. When he argues that banks which are too big to fail are too big, he seems to me to be sending a message that the political support Big Finance has long received is waning.
Big Finance, as I have been arguing, has as its greatest weapon the exorbitant privilege of unlimited US$ finance and presumed support of key politicians. They have bet heavily that this will continue.
Just today I find that Big Finance might have found its opponent- the counterpart to Napoleon's Wellington- in the person of the BoE's Mervyn King. Mr. King's declaration that Big Banks should be broken up sets the stage for Battle.
These words, from a recent speech by Mr. King are "fighting words": Whichever approach to the “too important to fail” problem is adopted, there is growing agreement that such financial institutions should, as I argued at the Mansion House in June, be made to plan for their own orderly wind down – to write their own will.
In support of this view he argues: To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.
It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk. That is what economists mean by “moral hazard”. The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The “too important to fail” problem is too important to ignore.......
In other industries we separate those functions that are utility in nature – and are regulated – from those that can safely be left to the discipline of the market. The second approach adapts those insights to the regulation of banking. At one end of the spectrum is the proposal for “narrow banks”, recently revived by John Kay, which would separate totally the provision of payments services from the creation of risky assets. In that way deposits are guaranteed. At the other is the proposal in the G30 report by Paul Volcker, former Chairman of the Federal Reserve, to separate proprietary trading from retail banking. The common element is the aim of restricting government guarantees to utility banking.
I wonder what carnage the upcoming battle will leave in its wake? If Big Finance is broken up, will alternative investments like Gold become even more attractive?
Full Disclosure: Long Gold
To everything there is a season, and a time for every purpose under heaven, begins Turn, Turn, Turn by the Byrds. Within that perspective men play the parts assigned to them (sometimes poorly and sometimes exceptionally) towards some goal which may not, as Hegel, inter alios, assumed, by easy to divine.
Unifying and increasingly larger civilizations have been created by men like Cyrus, Alexander, Caesar, Mohammed, Charlemagne and Genghis Khan, to name a few. Whether this is for good or ill seems a matter of opinion but that these men played a large role in history is certain.
In more modern times, men like Washington and Napoleon played similar roles. The former managed to resist the temptations of power to which most men succumb, and thus helped create these United States. The latter could not resist temptation. He overplayed the given part, and ended his life in captivity.
From that perspective of purposeful history, Washington and Napoleon were asked, in a sense, to lead the effort to sweep away the Monarchical system which had run Western Civilization for centuries. Washington, perhaps due to his lack of skill as General compared to Napoleon, played his part well. His letters suggest an awareness of the role of Providence on his side and a sense that he was simply playing a role.
Napoleon, by contrast, called himself a liberator, and did free, for a time, Continental Europe from the old system and, I believe, helped plant the seed of liberation which eventually killed it. However, he, like most men who rise to positions of great power, succumbed to the temptation described by Lord Acton. He did not see that, as the Chinese might put it, the Mandate of Heaven was limited.
Big Finance, in a sense, played an important role in history as well. If you believe, as I do, that Capitalism, as classically understood, is a much better method of providing for man's material needs as compared to "rule from the top", whether by King or Committee, you might agree with the support Big Finance received from the late 70s through the end of the 20th Century. In this sense I agree, in part, with the views of Fukuyama's End of History. While I doubt the US model is an end, it seems a much better way station than the alternatives.
If the stock market crash of 1987 inspired a Mellon-esque liquidation would the Soviet Union have given way to the Russia we know today? If the Asian Crisis left those nations with the sense that their turn towards Western Capitalism was a mistake would China have continued its drive towards economic integration with the rest of the world?
Just as I can understand those who supported Napoleon early in his career, I can understand why many supported Big Finance when, from a purely economic standpoint, restraint seemed a wiser choice.
Napoleon, as we know, turned his back on the principles of the Revolution which gave him power and declared himself Emperor. Big Finance, in my view, turned its back on a key principle of Capitalism- a measure and procedure for failure- when they pushed the Financial Modernization Act of 1999 into law and used commercial deposits as assets to lever for speculation.
Since that time, Big Finance has successfully fought attempts to restrain its power. Like Napoleon in Russia, Big Finance suffered a terrible defeat in the arena of mortgage finance and credit default swaps. Also like Napoleon, Big Finance was not chastened by defeat, but rather emboldened. Like Napoleon, Big Finance pays no heed to old supporters' warnings. While Alan Greenspan doesn't strike me as a gifted economist, he has a proven knack for divining changing political winds. When he argues that banks which are too big to fail are too big, he seems to me to be sending a message that the political support Big Finance has long received is waning.
Big Finance, as I have been arguing, has as its greatest weapon the exorbitant privilege of unlimited US$ finance and presumed support of key politicians. They have bet heavily that this will continue.
Just today I find that Big Finance might have found its opponent- the counterpart to Napoleon's Wellington- in the person of the BoE's Mervyn King. Mr. King's declaration that Big Banks should be broken up sets the stage for Battle.
These words, from a recent speech by Mr. King are "fighting words": Whichever approach to the “too important to fail” problem is adopted, there is growing agreement that such financial institutions should, as I argued at the Mansion House in June, be made to plan for their own orderly wind down – to write their own will.
In support of this view he argues: To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.
It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk. That is what economists mean by “moral hazard”. The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The “too important to fail” problem is too important to ignore.......
In other industries we separate those functions that are utility in nature – and are regulated – from those that can safely be left to the discipline of the market. The second approach adapts those insights to the regulation of banking. At one end of the spectrum is the proposal for “narrow banks”, recently revived by John Kay, which would separate totally the provision of payments services from the creation of risky assets. In that way deposits are guaranteed. At the other is the proposal in the G30 report by Paul Volcker, former Chairman of the Federal Reserve, to separate proprietary trading from retail banking. The common element is the aim of restricting government guarantees to utility banking.
I wonder what carnage the upcoming battle will leave in its wake? If Big Finance is broken up, will alternative investments like Gold become even more attractive?
Full Disclosure: Long Gold
Monday, October 19, 2009
Retiring to a Banana Republic, without leaving home
The figures, [NH Senator Judd] Gregg told [CNN's John] King, “mean we’re basically on the path to a banana-republic-type of financial situation in this country. And you just can’t do that. You can’t keep running these [federal] programs out [into the future] and not paying for them. And you can’t keep throwing debt on top of debt.” CNN
Retiring to a tropical paradise is a very common aspiration. Who knew all Americans of all income levels would get a chance to do so- if one considers a Banana Republic a tropical paradise.
What does Senator Gregg mean by the phrase "banana republic"? He is referring to the stereotype of a tropical country that borrows so much money it eventually finds its interest expense exceeds its receipts. Once that point is reached, no amount of primary (non-interest) budget restraint can fix the problem and default becomes the only option.
So long, however, as the US$, as currently defined, remains the world's reserve currency of choice the US cannot default in the classical sense. As Alan Greenspan noted a few years ago, We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.
Of course, the world has increasingly been looking to shift away from the US$ as world's reserve currency- the exorbitant privilege, to which Greenspan refers, is being revoked- thus the US may indeed risk a classical default.
That day, however, has not yet arrived, but it seems to be rapidly approaching. According to the FY2009 report, Federal Interest expenses came to $383B (admittedly higher than any annual deficit prior to 2004) which compares to receipts of $2,105B. On the surface, it seems the US has a lot of wriggle room.
Underneath the surface, however, the wriggle room is rapidly shrinking.
1) The interest charges on the rapidly growing stock of debt are at historically low levels. In the event the US$ needed to be supported by a substantial increase in interest rates (the, thus far, only sure fire method of putting a floor under a currency), particularly given the short duration of the debt stock, it wouldn't be long before interest charges alone exceeded the $1,000B level, assuming no increase in the debt.
2) The debt, however, is not projected to remain stable. Rather, it is projected (by some) to rise by $1,000B per year for the next 10 years. Given the current stock of Federal Public Debt of $7,530B, a $10,000B increase at 12.5% interest would lead to interest charges in excess of last year's receipts. Admittedly, receipts might rise as well over the decade, but we might also find that the 12.5% interest might be too low. Alternatively, especially if economic policy retains its multi-decade "trickle-down" approach of financial system support to pull the real economy behind, receipts might continue their current decline (FY2009 receipts were $400B less than those of FY2007). The higher unemployment becomes, the higher the deficit will be, particularly given the aging demographics of the US population. Gotta love multi-variable analysis.
Of course, long before the classic banana republic type default point is reached, cleverer people than I would have run their spreadsheets (as I have) and stopped buying new debt (unless the price was right, i.e.at a much higher interest rate). Budget constraints, thanks to the large and growing stock of external debt, would be imposed from without and the painful choices, long pushed into the future would need to be addressed.
The question is one of wriggle room. Currently, low interest charges create the illusion that the US can continue to run trillion $ deficits for years. Yet, the US$, as I argued in yesterday's The Fed vs. Gold, is no longer nearly as good as gold. In the not too distant future the Fed will need to defend the value of the $. This rise in interest rates will, other things equal, further hinder the real sector, and, far more ominously, as I argued in From Black-Scholes to Black Holes, push the big banks closer to insolvency.
The time is soon approaching for the government to prioritize its goals. It seems clear to me that the US cannot wage wars, honor its commitments to its population, and support the speculative elements in its financial system from default, all at the same time. Choices need to be made or Senator Gregg will be correct.
Full Disclosure: Long Gold and Silver
Retiring to a tropical paradise is a very common aspiration. Who knew all Americans of all income levels would get a chance to do so- if one considers a Banana Republic a tropical paradise.
What does Senator Gregg mean by the phrase "banana republic"? He is referring to the stereotype of a tropical country that borrows so much money it eventually finds its interest expense exceeds its receipts. Once that point is reached, no amount of primary (non-interest) budget restraint can fix the problem and default becomes the only option.
So long, however, as the US$, as currently defined, remains the world's reserve currency of choice the US cannot default in the classical sense. As Alan Greenspan noted a few years ago, We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.
Of course, the world has increasingly been looking to shift away from the US$ as world's reserve currency- the exorbitant privilege, to which Greenspan refers, is being revoked- thus the US may indeed risk a classical default.
That day, however, has not yet arrived, but it seems to be rapidly approaching. According to the FY2009 report, Federal Interest expenses came to $383B (admittedly higher than any annual deficit prior to 2004) which compares to receipts of $2,105B. On the surface, it seems the US has a lot of wriggle room.
Underneath the surface, however, the wriggle room is rapidly shrinking.
1) The interest charges on the rapidly growing stock of debt are at historically low levels. In the event the US$ needed to be supported by a substantial increase in interest rates (the, thus far, only sure fire method of putting a floor under a currency), particularly given the short duration of the debt stock, it wouldn't be long before interest charges alone exceeded the $1,000B level, assuming no increase in the debt.
2) The debt, however, is not projected to remain stable. Rather, it is projected (by some) to rise by $1,000B per year for the next 10 years. Given the current stock of Federal Public Debt of $7,530B, a $10,000B increase at 12.5% interest would lead to interest charges in excess of last year's receipts. Admittedly, receipts might rise as well over the decade, but we might also find that the 12.5% interest might be too low. Alternatively, especially if economic policy retains its multi-decade "trickle-down" approach of financial system support to pull the real economy behind, receipts might continue their current decline (FY2009 receipts were $400B less than those of FY2007). The higher unemployment becomes, the higher the deficit will be, particularly given the aging demographics of the US population. Gotta love multi-variable analysis.
Of course, long before the classic banana republic type default point is reached, cleverer people than I would have run their spreadsheets (as I have) and stopped buying new debt (unless the price was right, i.e.at a much higher interest rate). Budget constraints, thanks to the large and growing stock of external debt, would be imposed from without and the painful choices, long pushed into the future would need to be addressed.
The question is one of wriggle room. Currently, low interest charges create the illusion that the US can continue to run trillion $ deficits for years. Yet, the US$, as I argued in yesterday's The Fed vs. Gold, is no longer nearly as good as gold. In the not too distant future the Fed will need to defend the value of the $. This rise in interest rates will, other things equal, further hinder the real sector, and, far more ominously, as I argued in From Black-Scholes to Black Holes, push the big banks closer to insolvency.
The time is soon approaching for the government to prioritize its goals. It seems clear to me that the US cannot wage wars, honor its commitments to its population, and support the speculative elements in its financial system from default, all at the same time. Choices need to be made or Senator Gregg will be correct.
Full Disclosure: Long Gold and Silver
Saturday, October 06, 2007
A new head: Imagine there's no social security fund
The language of the Social Security Trust Fund gives the illusion that it is an investment fund with tradable economic assets that can be held until needed to pay the benefits of future employees. But it is a fund in name only. It holds no real assets. Consequently it does not generate funds to pay future benefits. These so-called trust fund “assets” (essentially US Treasury IOUs) simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations. Former Congressional Budget Office Director June O’Neill
Imagine there's no SS Fund
It's easy if you try
No savings below us
Above us only sky
Imagine all the people
Living for today
John Lennon (adapted by Dude)
Apologies for my almost week long absence from the screen...the final stages of my new house are taking more time than I expected.
My previous post was written under the assumption (back when Adam Smith wrote the Wealth of Nations the preferred phrase was "under that head", meaning belief structure, but these days "belief" itself has a negative connotation...now we "know" things...which is to write, are immersed in the metaphysics, or in the patois of the Grateful Dead, have drunk the Kool Aid...but I digress) that Social Security was actually a Fund whose investments included nearly $2T worth of Treasury Securities, albeit of the non-marketable variety, kind of like Savings Bonds.
Yet, as the June O'Neill quote, above, states, this just ain't true.
The Social Security Trust Fund is about as real as Santa Claus. To put it in bond market terms, there ain't no CUSIP numbers on 'dem non-marketable Treasury Securities in the SS Trust Fund.
Of course, just because something isn't real, by which is meant, fills no space in the material plane or as Descartes would have put it, has no "extension," doesn't mean it won't have an effect on our lives. The idea of Santa Claus in the minds of children significantly effects not only their behavior but also that of their parents as they seek to maintain the illusion- an idea to keep in mind as we explore this issue.
In a sense, the 2005 effort by President Bush to use the political capital he earned in the 2004 election to "privatize," "reform," or "fix" Social Security, was really a debate over whether to tell the kids that there really isn't any Santa Claus (perhaps reverse Tooth Fairy would be more apt, i.e. a Tooth Fairy you pay, instead of one from whom you receive). In the event, his effort failed in Congress. The parents decided not to tell the kids there isn't any Santa Claus. If you have children you know what that means....hiding presents, sneaking them under the tree after they go to sleep, and acting surprised in the morning (and paying the credit card bills in January...or whenever, as seems more likely these days).
What's the problem?
According to the White House site from 2005 when the issue was in play:
1. What is the problem?
The Social Security system operates on a "pay-as-you-go" basis, where the payroll taxes of current workers are used to pay for the benefits of current retirees. The system is 70 years old. It was designed at a time when most people didn't live long enough to receive benefits.
We had far more workers per retiree paying into the system than we do now. In 1950, this worker-to-beneficiary ratio was 16 to 1. Today, it is about 3 to 1. By the time today's young workers retire, it will be 2 to 1.
Until about three decades ago, the Social Security system was no different than most private employer pension systems. These "defined benefit" plans promised retirees and other beneficiaries a certain income level, no matter what. For a variety of reasons, including the growing financial literacy of America's workers, most companies have shifted to "defined contribution" plans like 401(k)s. Meanwhile, Social Security has stood still.
As conceived, Social Security was something of a scam- since most people 70 years ago wouldn't live long enough to receive benefits, promising them created a lot of good will towards the government, cheaply. Or so they then thought. And back in 1935- as the Great Depression raged- generating good will amongst the people towards the government, or more broadly, towards the economic system in general, was crucial. When people lose faith in the system, economic growth is tough to come by.
Depressions, as was amply demonstrated 7 decades ago, are not the times to ask people to tighten their belts. At least they aren't if the ruling corporations, be they commercial or governmental, have been channeling a larger and larger share of the national flow of funds into their owners' and leaders' pockets in compensation for the previous good times.
To digress for a moment; in primitive cultures, people often "pay" for rain or sun or even to stop a volcano from erupting (I might even add to stop the globe from warming up...but that's another discussion). In my view, one of the genius aspects of laissez-faire was the separation of the responsibility for economic growth from the government. This allowed governments to transcend economic slowdowns, and allowed people to think of "the economy" as a natural, social, phenomenon- a "head" which led to the production of most of the classic works in the field.
These days, having drunk the Kool Aid, many, especially the Maestro himself, Alan Greenspan, speak of the economy as something which can "collapse" if not maintained. This is, to my mind at least, an odd idea if economics is defined as the study of the manner in which humans cooperate to produce the goods of society. Even in the dark ages after the fall of Rome there was still an economy, albeit one in which trade was in steady decline.
Let's get back to the issue at hand- the unfunded liability that is Social Security, and the effects of maintaining the illusion that it isn't.
Congress just recently raised the debt ceiling to $9.815T. If the SS Trust Fund doesn't really exist, the national debt is at least $2T less than the current $9.05T. Under that head, the debt ceiling hasn't been a "real" issue for many years. In the language of my last post, it isn't that a large portion of the Treasury Market is captive, the US National Debt is actually far smaller, by at least $2T, than assumed. If all intragovernmental holdings are essentially fictitious accounting entries, the US Federal Public Sector debt to GDP ratio is actually 37%. Either "head"- captive bidding or fictitious intergovernmental holdings- explains the recent, anomalously low yields in the US Bond market.
Of course, under that head, foreign control of the Treasury Market rises dramatically. According to the most recent Flow of Funds report, the rest of the world owns $2.184T of the $5.043T debt issued to the public or 43%, which seems to me a serious national security issue.
Bu the tangled webs get even more tangled, and the problem, the real, deep seated problem, is one of tangled webs of deception- the necessity of maintaining the illusion at full force for as long as possible (the bubble phase) and letting the air out as slowly as possible when the illusion runs into reality (the inflationary resolution phase).
As noted above, just because Santa Claus isn't real, doesn't mean the kids won't want presents. They do...and they haven't been paying for them for years, either, as we US citizens have with SS.
The last reform for Social Security, the Greenspan reform, raised taxes significantly to make the system solvent, or so the promise went. But, as June O'Neill told us, those funds actually went to general government expenses. This had the salutatory effect of keeping bond yields, both in the US, and by virtue of the US $'s role as reserve currency, the world at large, quite low, at the potentially tremendous cost of a very pissed off population upon discovery that their SS taxes were actually disguised general payroll taxes.
I suspect the desire to avoid the wrath of a taxed population scorned played a large part in Congress' decision to maintain the illusion of Santa Claus. Another factor which, I suspect, weighed in the decision, is the fear that such a deception exposed would inspire a more general desire to "peer under the financial hood" so to write, and that wouldn't be a good idea at all- the SS Fund is not the only fund (bank..financial institution) which is un (or under) funded.
Far, far more now than in the 30s, when the currency still had some real backing, faith in the health of the system is paramount. The assumptions underlying the system cannot be questioned for if they were, the recent queues around Northern Rock would become wide spread and the waves of selling would become too powerful for the CBs to contain- cascading defaults, here we come.
What a dilemma. It's a good thing the old economic tool used to get around the problem of sticky wages (in this case sticky pension expectations seems more apt) is still available- inflation.
In my view, the inability of the Bush administration to pass SS reform in 2005, when the housing bubble was still inflating, general economic growth expectations were high, and public faith in his administration, and the Republican Party, was still high, set the stage for (but did not cause) a great inflation ahead. Perhaps the defeat of SS reform in Congress and the peak of the housing bubble are more than just coincidental? If the loss couldn't be faced, it would have to be hidden, and the resolution phase begun.
Regardless, the stage, in my view, is set. If SS reform was a non-starter in 2005, it's truly dead now. The idea of taking ownership of one's retirement savings (a clever way to get around the unfunded liabilities) which seemed so alluring in the late 90s when the equity bubble made geniuses out of dart throwers, and, to a lesser degree, more recently, when faith in the greater real estate fool was still strong, will seem, more and more over time, downright scary. I wonder how many people across the country have said, "well, at least I can depend on Social Security (or should I write Santa Claus?)."
Assuming the War on Terror is going to continue and perhaps even expand, I find it hard to believe that a public already dissatisfied with the war will accept a breech of trust of this magnitude gracefully, or that the financial world could withstand the scrutiny that would follow such a breech.
A quick check of the St. Louis Fed site, recommended by Gary North, tells me (to the extent one can draw a meaningful conclusion from one data point, and I don't think you can) that the most recent flirtation with "monetary tightness" might have come to an end- the adjusted MBase rose by 1% over the past 2 weeks. The recent strength in the price of Gold, which seems much more able to withstand the curiously timed selling, also, perhaps, speaks to a growing realization that inflation is the only way out, and Gold then a most useful protection.
As an aside, I'm eagerly awaiting the realization that the inflation rate for TIPS is absurdly low, which should really give the precious metals complex a shot in the arm.
In sum, if the authorities want to maintain a degree of control as the losses of the unfunded pension liability problem, which, I suspect, extends far beyond SS, are apportioned, a controlled inflation will be required. Such are the costs of maintaining illusions.
I'm quite interested to see if they can control it.
I hope to write a bit more regularly this coming week.
Imagine there's no SS Fund
It's easy if you try
No savings below us
Above us only sky
Imagine all the people
Living for today
John Lennon (adapted by Dude)
Apologies for my almost week long absence from the screen...the final stages of my new house are taking more time than I expected.
My previous post was written under the assumption (back when Adam Smith wrote the Wealth of Nations the preferred phrase was "under that head", meaning belief structure, but these days "belief" itself has a negative connotation...now we "know" things...which is to write, are immersed in the metaphysics, or in the patois of the Grateful Dead, have drunk the Kool Aid...but I digress) that Social Security was actually a Fund whose investments included nearly $2T worth of Treasury Securities, albeit of the non-marketable variety, kind of like Savings Bonds.
Yet, as the June O'Neill quote, above, states, this just ain't true.
The Social Security Trust Fund is about as real as Santa Claus. To put it in bond market terms, there ain't no CUSIP numbers on 'dem non-marketable Treasury Securities in the SS Trust Fund.
Of course, just because something isn't real, by which is meant, fills no space in the material plane or as Descartes would have put it, has no "extension," doesn't mean it won't have an effect on our lives. The idea of Santa Claus in the minds of children significantly effects not only their behavior but also that of their parents as they seek to maintain the illusion- an idea to keep in mind as we explore this issue.
In a sense, the 2005 effort by President Bush to use the political capital he earned in the 2004 election to "privatize," "reform," or "fix" Social Security, was really a debate over whether to tell the kids that there really isn't any Santa Claus (perhaps reverse Tooth Fairy would be more apt, i.e. a Tooth Fairy you pay, instead of one from whom you receive). In the event, his effort failed in Congress. The parents decided not to tell the kids there isn't any Santa Claus. If you have children you know what that means....hiding presents, sneaking them under the tree after they go to sleep, and acting surprised in the morning (and paying the credit card bills in January...or whenever, as seems more likely these days).
What's the problem?
According to the White House site from 2005 when the issue was in play:
1. What is the problem?
The Social Security system operates on a "pay-as-you-go" basis, where the payroll taxes of current workers are used to pay for the benefits of current retirees. The system is 70 years old. It was designed at a time when most people didn't live long enough to receive benefits.
We had far more workers per retiree paying into the system than we do now. In 1950, this worker-to-beneficiary ratio was 16 to 1. Today, it is about 3 to 1. By the time today's young workers retire, it will be 2 to 1.
Until about three decades ago, the Social Security system was no different than most private employer pension systems. These "defined benefit" plans promised retirees and other beneficiaries a certain income level, no matter what. For a variety of reasons, including the growing financial literacy of America's workers, most companies have shifted to "defined contribution" plans like 401(k)s. Meanwhile, Social Security has stood still.
As conceived, Social Security was something of a scam- since most people 70 years ago wouldn't live long enough to receive benefits, promising them created a lot of good will towards the government, cheaply. Or so they then thought. And back in 1935- as the Great Depression raged- generating good will amongst the people towards the government, or more broadly, towards the economic system in general, was crucial. When people lose faith in the system, economic growth is tough to come by.
Depressions, as was amply demonstrated 7 decades ago, are not the times to ask people to tighten their belts. At least they aren't if the ruling corporations, be they commercial or governmental, have been channeling a larger and larger share of the national flow of funds into their owners' and leaders' pockets in compensation for the previous good times.
To digress for a moment; in primitive cultures, people often "pay" for rain or sun or even to stop a volcano from erupting (I might even add to stop the globe from warming up...but that's another discussion). In my view, one of the genius aspects of laissez-faire was the separation of the responsibility for economic growth from the government. This allowed governments to transcend economic slowdowns, and allowed people to think of "the economy" as a natural, social, phenomenon- a "head" which led to the production of most of the classic works in the field.
These days, having drunk the Kool Aid, many, especially the Maestro himself, Alan Greenspan, speak of the economy as something which can "collapse" if not maintained. This is, to my mind at least, an odd idea if economics is defined as the study of the manner in which humans cooperate to produce the goods of society. Even in the dark ages after the fall of Rome there was still an economy, albeit one in which trade was in steady decline.
Let's get back to the issue at hand- the unfunded liability that is Social Security, and the effects of maintaining the illusion that it isn't.
Congress just recently raised the debt ceiling to $9.815T. If the SS Trust Fund doesn't really exist, the national debt is at least $2T less than the current $9.05T. Under that head, the debt ceiling hasn't been a "real" issue for many years. In the language of my last post, it isn't that a large portion of the Treasury Market is captive, the US National Debt is actually far smaller, by at least $2T, than assumed. If all intragovernmental holdings are essentially fictitious accounting entries, the US Federal Public Sector debt to GDP ratio is actually 37%. Either "head"- captive bidding or fictitious intergovernmental holdings- explains the recent, anomalously low yields in the US Bond market.
Of course, under that head, foreign control of the Treasury Market rises dramatically. According to the most recent Flow of Funds report, the rest of the world owns $2.184T of the $5.043T debt issued to the public or 43%, which seems to me a serious national security issue.
Bu the tangled webs get even more tangled, and the problem, the real, deep seated problem, is one of tangled webs of deception- the necessity of maintaining the illusion at full force for as long as possible (the bubble phase) and letting the air out as slowly as possible when the illusion runs into reality (the inflationary resolution phase).
As noted above, just because Santa Claus isn't real, doesn't mean the kids won't want presents. They do...and they haven't been paying for them for years, either, as we US citizens have with SS.
The last reform for Social Security, the Greenspan reform, raised taxes significantly to make the system solvent, or so the promise went. But, as June O'Neill told us, those funds actually went to general government expenses. This had the salutatory effect of keeping bond yields, both in the US, and by virtue of the US $'s role as reserve currency, the world at large, quite low, at the potentially tremendous cost of a very pissed off population upon discovery that their SS taxes were actually disguised general payroll taxes.
I suspect the desire to avoid the wrath of a taxed population scorned played a large part in Congress' decision to maintain the illusion of Santa Claus. Another factor which, I suspect, weighed in the decision, is the fear that such a deception exposed would inspire a more general desire to "peer under the financial hood" so to write, and that wouldn't be a good idea at all- the SS Fund is not the only fund (bank..financial institution) which is un (or under) funded.
Far, far more now than in the 30s, when the currency still had some real backing, faith in the health of the system is paramount. The assumptions underlying the system cannot be questioned for if they were, the recent queues around Northern Rock would become wide spread and the waves of selling would become too powerful for the CBs to contain- cascading defaults, here we come.
What a dilemma. It's a good thing the old economic tool used to get around the problem of sticky wages (in this case sticky pension expectations seems more apt) is still available- inflation.
In my view, the inability of the Bush administration to pass SS reform in 2005, when the housing bubble was still inflating, general economic growth expectations were high, and public faith in his administration, and the Republican Party, was still high, set the stage for (but did not cause) a great inflation ahead. Perhaps the defeat of SS reform in Congress and the peak of the housing bubble are more than just coincidental? If the loss couldn't be faced, it would have to be hidden, and the resolution phase begun.
Regardless, the stage, in my view, is set. If SS reform was a non-starter in 2005, it's truly dead now. The idea of taking ownership of one's retirement savings (a clever way to get around the unfunded liabilities) which seemed so alluring in the late 90s when the equity bubble made geniuses out of dart throwers, and, to a lesser degree, more recently, when faith in the greater real estate fool was still strong, will seem, more and more over time, downright scary. I wonder how many people across the country have said, "well, at least I can depend on Social Security (or should I write Santa Claus?)."
Assuming the War on Terror is going to continue and perhaps even expand, I find it hard to believe that a public already dissatisfied with the war will accept a breech of trust of this magnitude gracefully, or that the financial world could withstand the scrutiny that would follow such a breech.
A quick check of the St. Louis Fed site, recommended by Gary North, tells me (to the extent one can draw a meaningful conclusion from one data point, and I don't think you can) that the most recent flirtation with "monetary tightness" might have come to an end- the adjusted MBase rose by 1% over the past 2 weeks. The recent strength in the price of Gold, which seems much more able to withstand the curiously timed selling, also, perhaps, speaks to a growing realization that inflation is the only way out, and Gold then a most useful protection.
As an aside, I'm eagerly awaiting the realization that the inflation rate for TIPS is absurdly low, which should really give the precious metals complex a shot in the arm.
In sum, if the authorities want to maintain a degree of control as the losses of the unfunded pension liability problem, which, I suspect, extends far beyond SS, are apportioned, a controlled inflation will be required. Such are the costs of maintaining illusions.
I'm quite interested to see if they can control it.
I hope to write a bit more regularly this coming week.
Sunday, September 30, 2007
Captive bidding at the auction: How bond vigilantism was swamped
Time flies when you're making money: 19 years have sped by since the start of the great bond bull market. So traumatic was the preceding bear market (it spanned the administrations of U.S. Presidents from Harry Truman to Ronald Reagan, 1946 to 1981) that fixed-income investors took a pledge: Never again would they be the dupes of a central bank. They would henceforth sell at the first sign of inflation.
So market interest rates would increase before the U.S. Consumer Price Index could spurt. The Fed might nod off, but the bond market vigilantes pledged they would never sleep again.
Now look at them. With a generation's worth of capital gains tucked under their ample belts, they are snoring in hammocks or swatting golf balls. Financial markets the world over are worse off for their unannounced retirement. James Grant
Many financial commentators have opined on the absence of the "bond vigilantes" from the US Treasury market. Bond traders now willingly accept low yields in the face of broad based commodity inflation, which hitherto would have, according to Mr. Grant, whose views I highly respect, above, inspired significant selling from the now "sleeping" bond vigilantes. I've been doing a bit of checking on the US bond market and think I have a few answers to the question, "where did the bond vigilantes go?," although a better question might be, "whose efforts have swamped bond vigilantism in the Treasury markets?"
The good old days
In 1955, US federal debt totaled $234B, of which $163B (70%) was tradable on the open market. The biggest single player was the Fed, which, in 1955, carried $24.4B worth of Treasury Securities on its balance sheet, or just under 15% of marketable debt.
Is the Fed the culprit?
Federal Reserve acquisitions of debt rose steadily from 1955 to 1970, when holdings peaked at just over 25% of marketable debt. But, as standard closed system economic theory argues, Fed purchases, i.e. debt monetization, did not keep yields down. 10 year yields rose from under 3% in 1955 to well over 7% in 1970 while consumer price inflation rose from -0.4% in 1955 to 5.7% in 1970. Bond vigilantism was apparently alive and kicking back then and Federal Reserve debt monetization led, as it should, to inexorable inflation.
Thus, we can chalk off the Fed as player whose efforts swamp bond vigilantism.
Are the foreigners to blame?
Of late, the presence of foreign purchasers, in particular, foreign official purchasers, have been cited as a reason behind the lack of bond vigilantism, even (in hindsight, partially erroneously) by me.
In 1955, foreign official holdings (the foreign private sector was not yet involved) of Treasury debt totaled $5.8B, or 3.6% of marketable debt. Foreigners were not yet players.
By 1980, this had changed. Foreign official holdings rose to just under 18% of marketable debt, while total foreign holdings rose to 20.4% of marketable debt. Despite this support, 10 year yields rose from 4.2% in 1965, when foreigners began to ramp up their purchases, to well over 12% by 1980. Consumer price inflation rose from 1.6% in 1965 to 13.5% in 1980. The decline in real yields at the back end of the curve, excluding other factors (which is rarely wise), suggests that foreign buying might have kept rates lower than they otherwise would have been, in a closed system.
Foreign acquisitions of US debt have increased dramatically since 1980. As of Q2 2007, 44% of marketable US Treasury securities are in foreign hands. 31.3% of marketable US Treasury securities are in foreign official hands. The coincident rapid increase in foreign holdings of US debt with a multi-decade decline in yields suggests that these purchases kept yields lower than they otherwise would have been. Yet, the data from the 70s, when bond yields rose despite foreign inflows, suggests that this is not the whole story.
Enter the captive bidders
Something besides increased foreign acquisitions of US debt, happened between the early 80s and the present day which slowly but inexorably swamped bond vigilantism. That something was an increase in social security (and related programs) net income which, I argue, dramatically changed the US bond market.
From 1955 through 1980, the US Treasury market was a mainly open affair, by which I mean, most of the issued debt was marketable. In 1955, non-marketable debt made up 30% of the total and in 1980 non-marketable debt made up 33% of the total. Bond prices were, in the main, set in open markets.
Captivating the Trust Funds
In the mid 80s, in accordance with the recommendations of ex Fed Chairman Greenspan's Commission of Social Security (boy this guy's fingers are in a lot of pies), social security taxes were raised which raised the percentage of national income flowing into social insurance programs from 7.2% to 8.5% (source BEA). While a 1.3% increase in national income flow (it amounts to an increase in income from 4.8% of GDP in 1987 to 5.6% of GDP in 2006) is substantial, it doesn't fully explain the substantial rise in social insurance assets.
If changes to the income side don't fully explain the dramatic rise in social insurance holdings, something must have coincidentally reduced the outflow, which fell from 4.6% of GDP in 1993 to 4.1% in 2006. That something was a change to inflation calculations upon which cost of living adjustments (COLAs) in social security payments are made.
According to John Williams' Shadow Stats site:
In particular, changes made in CPI methodology during the Clinton Administration understated inflation significantly, and, through a cumulative effect with earlier changes that began in the late-Carter and early Reagan Administrations have reduced current social security payments by roughly half from where they would have been otherwise. That means Social Security checks today would be about double had the various changes not been made.
Assuming Mr. Williams' estimate is correct, a doubling of SS outflow from the actual $549B, which produced a SS surplus of $185B, to $1,097B, assuming no changes on the income side, would have created a deficit of $363B. In turn, this would have forced the US Treasury to sell about $800B of securities into the market instead of the $250B they actually sold in 2006. I doubt current US Treasury yields would be at such low levels if such was the case.
But it is the case. Non-marketable debt has risen from the afore noted 33% of total debt to 49%. That's right, half of Treasury bidding comes from captive bidders. So much for a free and open market in US Treasuries.
In sum then, the cumulative effects of SS tax hikes, which inflated SS income, and reductions in outflow due to recalculated COLAs are, I believe, the primary cause of our strangely low bond yield environment in the US. As one who has cited with alarm the growth of Chinese reserves to and above the $1Tln mark, I was amazed to find that Social Security holdings have grown even faster, and now total some $2Tln.
Forget about China's, here's a sovereign wealth fund just waiting to happen.
But, as the saying goes, it isn't just the size of the ship that matters, the motion of the ocean does as well. Many financial commentators have (rightly so, in my view) worried about diversification out of $s among foreign countries with large reserves, yet few worry about a similar risk consciousness coming from within the US.
Imagine a financial world in which the managers of the SS Trust were able to diversify out of US assets. Minimally imagine a financial world in which the managers of the SS Trust were able to pick and choose amongst domestic investments. In that world, I doubt the chosen mix would be (as is currently the case) a virtually all US Treasury portfolio with an average interest rate of 5.2% and duration of 7.2 years. Simply shifting to a much shorter duration fund would cause the US yield curve to steepen dramatically.
Captive bidders and the Enron effect
That is, I argue, the captive nature of the SS Trust fund in conjunction with its size has been the main cause which engendered our low and reasonably flat curve yield environment. For it is the US Treasury itself which manages these funds. As those who lost all their retirement funds at Enron could tell you, captive trust funds invested in the company itself does not a diversified portfolio create- just the opposite effect is, in fact, created. When foxes (invariably from Goldman Sachs these days) guard the chicken coop, ultimately you have no chickens.
This too, however, shall pass. According to the SSA (Social Security Administration) by 2017, barring any further increases in taxes or calculation changes in COLAs, outgo will exceed income for SS and DI (Disability Insurance). National Health Insurance (HI) costs will deplete the funds even more rapidly. By 2041 SS and DI will have exhausted their funds and by 2019 HI funds will be depleted. So, within a decade there will no longer be additional surplus funds to be used to purchase US bonds which will have to then be sold on the open market. Call it peak SS Trust Funds, although peak trust might be even more apt.
In Greenspan we trusted
It is, perhaps, fittingly ironic that the same Greenspan who bemoans increased federal spending, recommended and oversaw the conditions which allowed such spending to occur outside of a free market mechanism. The same man who proclaimed, in his oft cited, Gold and Economic Freedom:
oversaw a tremendous confiscation of wealth, but not from the wealthy, from the common man. He has repeatedly said that he still stands by the views he expressed back in 1966 and I believe him. He (and others) used the lack of a monetary standard to confiscate wealth from us- wealth which was used, inter alia, to finance the current wars. Atlas, in this case, didn't shrug, he stole.
I expect, as increases in trust fund surpluses slow, US interest rates will rise, most likely dramatically in the years to come.
So market interest rates would increase before the U.S. Consumer Price Index could spurt. The Fed might nod off, but the bond market vigilantes pledged they would never sleep again.
Now look at them. With a generation's worth of capital gains tucked under their ample belts, they are snoring in hammocks or swatting golf balls. Financial markets the world over are worse off for their unannounced retirement. James Grant
Many financial commentators have opined on the absence of the "bond vigilantes" from the US Treasury market. Bond traders now willingly accept low yields in the face of broad based commodity inflation, which hitherto would have, according to Mr. Grant, whose views I highly respect, above, inspired significant selling from the now "sleeping" bond vigilantes. I've been doing a bit of checking on the US bond market and think I have a few answers to the question, "where did the bond vigilantes go?," although a better question might be, "whose efforts have swamped bond vigilantism in the Treasury markets?"
The good old days
In 1955, US federal debt totaled $234B, of which $163B (70%) was tradable on the open market. The biggest single player was the Fed, which, in 1955, carried $24.4B worth of Treasury Securities on its balance sheet, or just under 15% of marketable debt.
Is the Fed the culprit?
Federal Reserve acquisitions of debt rose steadily from 1955 to 1970, when holdings peaked at just over 25% of marketable debt. But, as standard closed system economic theory argues, Fed purchases, i.e. debt monetization, did not keep yields down. 10 year yields rose from under 3% in 1955 to well over 7% in 1970 while consumer price inflation rose from -0.4% in 1955 to 5.7% in 1970. Bond vigilantism was apparently alive and kicking back then and Federal Reserve debt monetization led, as it should, to inexorable inflation.
Thus, we can chalk off the Fed as player whose efforts swamp bond vigilantism.
Are the foreigners to blame?
Of late, the presence of foreign purchasers, in particular, foreign official purchasers, have been cited as a reason behind the lack of bond vigilantism, even (in hindsight, partially erroneously) by me.
In 1955, foreign official holdings (the foreign private sector was not yet involved) of Treasury debt totaled $5.8B, or 3.6% of marketable debt. Foreigners were not yet players.
By 1980, this had changed. Foreign official holdings rose to just under 18% of marketable debt, while total foreign holdings rose to 20.4% of marketable debt. Despite this support, 10 year yields rose from 4.2% in 1965, when foreigners began to ramp up their purchases, to well over 12% by 1980. Consumer price inflation rose from 1.6% in 1965 to 13.5% in 1980. The decline in real yields at the back end of the curve, excluding other factors (which is rarely wise), suggests that foreign buying might have kept rates lower than they otherwise would have been, in a closed system.
Foreign acquisitions of US debt have increased dramatically since 1980. As of Q2 2007, 44% of marketable US Treasury securities are in foreign hands. 31.3% of marketable US Treasury securities are in foreign official hands. The coincident rapid increase in foreign holdings of US debt with a multi-decade decline in yields suggests that these purchases kept yields lower than they otherwise would have been. Yet, the data from the 70s, when bond yields rose despite foreign inflows, suggests that this is not the whole story.
Enter the captive bidders
Something besides increased foreign acquisitions of US debt, happened between the early 80s and the present day which slowly but inexorably swamped bond vigilantism. That something was an increase in social security (and related programs) net income which, I argue, dramatically changed the US bond market.
From 1955 through 1980, the US Treasury market was a mainly open affair, by which I mean, most of the issued debt was marketable. In 1955, non-marketable debt made up 30% of the total and in 1980 non-marketable debt made up 33% of the total. Bond prices were, in the main, set in open markets.
Captivating the Trust Funds
In the mid 80s, in accordance with the recommendations of ex Fed Chairman Greenspan's Commission of Social Security (boy this guy's fingers are in a lot of pies), social security taxes were raised which raised the percentage of national income flowing into social insurance programs from 7.2% to 8.5% (source BEA). While a 1.3% increase in national income flow (it amounts to an increase in income from 4.8% of GDP in 1987 to 5.6% of GDP in 2006) is substantial, it doesn't fully explain the substantial rise in social insurance assets.
If changes to the income side don't fully explain the dramatic rise in social insurance holdings, something must have coincidentally reduced the outflow, which fell from 4.6% of GDP in 1993 to 4.1% in 2006. That something was a change to inflation calculations upon which cost of living adjustments (COLAs) in social security payments are made.
According to John Williams' Shadow Stats site:
In particular, changes made in CPI methodology during the Clinton Administration understated inflation significantly, and, through a cumulative effect with earlier changes that began in the late-Carter and early Reagan Administrations have reduced current social security payments by roughly half from where they would have been otherwise. That means Social Security checks today would be about double had the various changes not been made.
Assuming Mr. Williams' estimate is correct, a doubling of SS outflow from the actual $549B, which produced a SS surplus of $185B, to $1,097B, assuming no changes on the income side, would have created a deficit of $363B. In turn, this would have forced the US Treasury to sell about $800B of securities into the market instead of the $250B they actually sold in 2006. I doubt current US Treasury yields would be at such low levels if such was the case.
But it is the case. Non-marketable debt has risen from the afore noted 33% of total debt to 49%. That's right, half of Treasury bidding comes from captive bidders. So much for a free and open market in US Treasuries.
In sum then, the cumulative effects of SS tax hikes, which inflated SS income, and reductions in outflow due to recalculated COLAs are, I believe, the primary cause of our strangely low bond yield environment in the US. As one who has cited with alarm the growth of Chinese reserves to and above the $1Tln mark, I was amazed to find that Social Security holdings have grown even faster, and now total some $2Tln.
Forget about China's, here's a sovereign wealth fund just waiting to happen.But, as the saying goes, it isn't just the size of the ship that matters, the motion of the ocean does as well. Many financial commentators have (rightly so, in my view) worried about diversification out of $s among foreign countries with large reserves, yet few worry about a similar risk consciousness coming from within the US.
Imagine a financial world in which the managers of the SS Trust were able to diversify out of US assets. Minimally imagine a financial world in which the managers of the SS Trust were able to pick and choose amongst domestic investments. In that world, I doubt the chosen mix would be (as is currently the case) a virtually all US Treasury portfolio with an average interest rate of 5.2% and duration of 7.2 years. Simply shifting to a much shorter duration fund would cause the US yield curve to steepen dramatically.
Captive bidders and the Enron effect
That is, I argue, the captive nature of the SS Trust fund in conjunction with its size has been the main cause which engendered our low and reasonably flat curve yield environment. For it is the US Treasury itself which manages these funds. As those who lost all their retirement funds at Enron could tell you, captive trust funds invested in the company itself does not a diversified portfolio create- just the opposite effect is, in fact, created. When foxes (invariably from Goldman Sachs these days) guard the chicken coop, ultimately you have no chickens.
This too, however, shall pass. According to the SSA (Social Security Administration) by 2017, barring any further increases in taxes or calculation changes in COLAs, outgo will exceed income for SS and DI (Disability Insurance). National Health Insurance (HI) costs will deplete the funds even more rapidly. By 2041 SS and DI will have exhausted their funds and by 2019 HI funds will be depleted. So, within a decade there will no longer be additional surplus funds to be used to purchase US bonds which will have to then be sold on the open market. Call it peak SS Trust Funds, although peak trust might be even more apt.
In Greenspan we trusted
It is, perhaps, fittingly ironic that the same Greenspan who bemoans increased federal spending, recommended and oversaw the conditions which allowed such spending to occur outside of a free market mechanism. The same man who proclaimed, in his oft cited, Gold and Economic Freedom:
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.oversaw a tremendous confiscation of wealth, but not from the wealthy, from the common man. He has repeatedly said that he still stands by the views he expressed back in 1966 and I believe him. He (and others) used the lack of a monetary standard to confiscate wealth from us- wealth which was used, inter alia, to finance the current wars. Atlas, in this case, didn't shrug, he stole.
I expect, as increases in trust fund surpluses slow, US interest rates will rise, most likely dramatically in the years to come.
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