Friday, July 29, 2016

Does Neo-Fisherian Economics Cause Fed to Bark Up the Wrong Tree?

 This article was first published by me on Talkmarkets:

Could it be that Neo-Fisherian economics causes the Fed to bark up the wrong tree. Neo-Fisherian economics is also tied to New Monetarism. I have said before that New Monetarism has captured the thinking of the Fed. I discuss the current Fed situation and get back to the implications of Neo-Fisherian economics through Scott Sumner's insights, and my opinion at the end of the article.

So, here are issues facing the Fed:

If the Fed raises interest rates, the banks will receive the interest payments that should be remitted to the treasury, to the taxpayers! That will be a serious problem. I wrote that the Fed is predisposed to keep interest rates low. One of the reasons is this very problem, that the Fed cannot afford to pay the treasury if rates are raised. That interest will go to the banks and increase as rates are raised because of the 2.4 trillion or so dollars of reserves now held by the banks.

Well, since the Fed will have to pay the banks higher interest on reserves, the Fed cannot raise rates too high.  This is why the Fed cannot let the economy grow faster. In fact, the Fed has political reasons for not being able to raise interest rates. The political reasons relate to the anger of congress if the interest, which amounts to 70-90 billion dollars per year, is not remitted. That would be stealing from the taxpayers to pay the banks. Congressmen could lose their jobs over this issue. They will go along with the cabal most times except when their jobs are at stake!

Banks have never had this level of excess reserves before, except for the Great Depression, so that raising interest rates under normal times never resulted in more money going to the banks.

And we know the Fed is afraid that if it doesn't pay the banks, the 2.4 trillion dollars of excess reserves could be loaned out at 24 trillion dollars, 10 to 1, and cause the Fed to lose its control of an overheated economy entirely. By not paying the banks, it could force the banks to lend at rates that are very low. We know what happened to the S&L's when inflation nullified the profits on their loans. The Fed cannot allow the economy to overheat with all these reserves getting in the way. Big inflation is not a likely scenario but the Fed will always protect against it.  

The Cleveland Fed is aware of the dangers of large excess reserves, but adopts a New Monetarist position of just sitting and waiting:

Does this mean that the Federal Reserve should consider a major policy change that would remove some of the excess reserves as a safety measure? Such a measure might include raising the reserve requirement, charging interest on excess reserves, and removing liquidity from the system.
Here is where the more distant history of the Great Depression provides a cautionary lesson.

In 1936, US banks’ reserves had accumulated to record levels. Although there had not been a dramatic increase in the levels of loans, the Federal Reserve decided to “play it safe” and reduce the flexibility of the banks’ options for using the cash by increasing the reserve requirement. Banks responded by dramatically reducing their loan portfolios. Milton Friedman and Anna Schwartz argued that this action caused the 1937 recession (A Monetary History of the United States, 1867-1960).

So the Federal Reserve has no easy policy choices, particularly in the absence of a large body of accepted theory on how banks can be expected to handle their oceans of cash under changing conditions. Perhaps the best thing to do is what they are doing, that is, to adopt an extremely watchful stance and wait.

The last paragraph is astounding to me. So, anyway, the Fed fears inflation and doesn't want to pay IOR. The Fed fears inflation because of a tight job market, but market monetarists deride that fear. And regarding Neo-Fisherian economics, Scott Sumner says:

The market monetarist view is that easy money leads to higher inflation, and easy money sometimes lowers interest rates and sometimes raises them. Any reductions in interest rates tend to occur in the short run, whereas higher interest rates tend to result in the long run. In addition, it's more useful to think in terms of causation as going from inflation to interest rates, rather than interest rates to inflation. (The one exception is if you hold the money supply and the IOR rate constant, in which case lower rates are deflationary.)
While I think high interest rates are impeded by the massive demand for long bonds in the derivatives markets, causing those bonds to behave differently than in the past, Scott is generally right about inflation causing higher interest rates, not the other way around. Taking the opposite view, the Neo-Fisherians believe higher interest rates are the cause of higher inflation. That makes no sense to the market monetarist. But there is one instance where it could make sense.

The only time that higher interest rates could cause higher inflation, in my opinion, is if banks decided to lend a lot more once rates floated above the zero lower bound. If rates were more normal (we are far from normal), it is possible that banks would lend more.

The Fed likely is afraid of allowing banks to lend out their excess reserves at very low rates because inflation could ruin them as it ruined the S&L's back in the last century. Rates were thought to be high back then, but inflation hit big and Volcker raised rates higher than thought possible, destroying the S&L's.

But we are not there, we are in a low rate environment now. So there may be a thimble full of truth coming from the Neo-Fisherians and the New Monetarists, in my opinion, that banks may lend more to the real estate sector if rates were a little higher, as we are now bumping along the zero.

The questions then are these, will this rise in rates:

1. destroy world economies that are fragile, like China. China needs a weaker dollar and thus low US interest rates. Japan needs a stronger dollar and the Fed to raise rates.

2. cause house prices to rise or fall,

3. cause the treasury to be left out from remittances,

4. cause a real boost to the American economy and inflation above the 2 percent target or a slowing of economic activity?

These should all be observed as the Fed decides to raise rates in the next few years. We just want the Fed to start barking instead of talking. Instead of talking about raising rates, the Fed should raise rates if it believes banks would lend more. If it doesn't want the banks to lend more it should not raise rates.

Perhaps the only really effective barking will be real helicopter money that does not increase the debt of the treasury. It seems that the Fed is a lot more fearful of barking up the wrong tree than are our canine friends.

Tuesday, July 26, 2016

Does Vladimir Putin Own Donald Trump?

Does Vladimir Putin own Donald Trump? Upfront I want to say three things:

1. I don't have a problem with a US president being friends with Vlad Putin. But that is not the same as being financially entangled with him.And there is no proof as this article is written that Trump owes money to any Russian business or to the Russian government as far as I can tell.

2. I am uncomfortable with Hillary Clinton's Neocon efforts to destabilize Russia, and the Ukraine, similar to what Richard Cheney did by inflaming Georgia against Russia. Regime change can take the form of military action, NGO influence, or just plain money to the opposition. Regime change has caused chaos in the middle east, with many innocent women and children dying  and suffering hardship with no escape, except those who have become refugees due to our unfortunate policy. Regime change has been, simply put, a very bad idea.

3. I would even go so far as to say that my country, the United States of America, is more empire-like and more aggressive in world affairs than even Russia, most of the time, is because our neocons are still in charge and are, as Pat Buchanan has said, are the War Party. 

But the article in New York Magazine is disturbing as much for what we don't know about Trump as for what we know. The author, Jonathan Chait, says that:
Trump’s campaign manager, Paul Manafort, helped orchestrate Putin’s intervention in Ukraine. His Russia adviser Carter Page has deep ties to Russia and owns stock in Gazprom, the state-controlled firm that is a major source of the Kremlin’s financial and economic power. Michael Flynn, another Trump adviser, appears regularly on RT and refused to answer questions about whether he is paid to do so. Trump and Putin have exchanged lavish compliments.
Trump’s own financial ties to Russia are completely non-transparent and will remain so as long as he refuses to release his tax returns.
Certainly, more information about the Trump/Russia relationship is needed, but the flaws of both candidates seem to be revealed almost daily.  

The problem with being owned by Putin is that Trump could make mistakes in judgement, or he could fail to pay back loans, or he could just lose focus on the real issues. Let's hope that he reveals his returns so we can clear this up. And soon.

Trump may have increasing debt, and if that is the case he could be strapped for cash. Would a guy run for president just to heal his bottom line?

I won't even get into potential connections between Trump and the DNC email hack. The DNC is so sleazy that lots of people are for that hack. That complicates an already complicated election because I cannot imagine conservative Republicans being happy that their man, Donald Trump, could actually be an associate of Vlad Putin.

I am not a Putin hater. But I imagine many of the Republicans who support Trump are. Wait til they find out that their man could be entangled with Russia over money. We need to know if it is just 1. private investment, or 2. if it is with Russian banks or 3. with the Russian government. I would imagine that the latter two are more serious to national security, but I am not in a position to be certain about the bar Trump must clear.

The latter two are not proven yet, but it all must be investigated and we must find out the truth. Trump has to prove he is not involved with Russia financially, in a way that could compromise him, as just a denial won't cut it.

For further reading:

Five Facts About Trump and Russia

Trump Denies Having Business Dealings with Russia

Saturday, July 23, 2016

Is Japan Falling Back Into Deflation? Only One Monetary Solution Left

This article was first published by me on Talkmarkets:

One has to ask if Japan is falling back into deflation. Certainly the dollar failed to strengthen as promised, and that would have helped the BOJ. The Fed is probably going to try to raise rates to help Japan. That could cause a devaluation in China, and that would be a shock. The fragility of the world economy is pretty evident right now. Japan needs a stronger dollar and China could use a weaker dollar.

Here is a Japanese inflation chart:


The policy of creating inflation is slipping. Inflation is becoming something longed for, not something clearly attainable. Japanese risky bets are an indication that banks are expecting inflation, taking the inflation side of bets, while investors are still expecting deflation, taking the floating, low rate side of the bets.  

Clearly, two months do not indicate a trend, but the higher inflation trend of early 2015 has been crushed. Abenomics is simply not succeeding. In the face of a stronger dollar, it is time for helicopter money in Japan. The population is shrinking, and therefore each citizen needs more money to spend.There is too much debt, so base money that bypasses traditional QE is simply the only sensible tool the BOJ has left. The BOJ has nothing else left except to threaten the world with a Lehman Brothers moment.

But here is what Japan really needs right now:

The helicopter money (HM) debate that he (Eric Lonergan) started was based on the concept made famous by Milton Friedman. Whatever you think about Friedman, or about neoliberalism, or about monetarism in general, put that all aside. HM is different and better and more fair, and could at least slow the divide between rich and poor. Helicopter money has been called QE for the people but that is not quite right...

...It is important to understand that some in central banking appear to be in love with the concepts of negative interest rates and breaking the zero lower bound with nominal rates. If that is the case, then helicopter money, though a far better idea, will never be implemented.
This would be a big mistake for monetary policy. I hope this love affair with negative is not a sinister plan on the part of some in central banking. If it is sinister, we will have to all shout louder in our commitment to helicopter money, but understand clearly what it is and what it does.

Let's put it into an easy to understand concept. You are a kid and you are with your buddies playing Monopoly. It is 100 degrees outside and you want to stay indoors. You want to keep the game going, but some players are washing out. The banker simply gives them more money to continue the game, with a one time gift to everyone equally, and in the real world it would be the central banker who controls base money. The Monopoly game continues on until sunset when everyone can go outside.

The only limits of the Monopoly game is that the creators of the game do not make a large enough bank. Maybe that is why I liked the Easy Money game better. More liquidity. 

Central bankers have big enough banks, unless you are trapped in the Eurozone. But most often these bankers would rather push everyone outside when it is hot, and then wonder why their policies are not working. They are like the monopoly creators, and don't create enough money for people who will spend it. The only thing different from Monopoly that I can see in my analogy, is that Helicopter Money money will go equally to the renters of those little green houses on the Monopoly board, not just to the investors playing the game! (There really are not any renters because those houses are just too tiny! But if there were they would have received Monopoly HM.)

I don't feel sorry for Japan, in a way. Here is a nation that has a slow birth rate, and an aging population, ripe for deflationary pressures. Yet the government has allowed the nation to engage 40 percent of the entire population in temporary work and in contract work. Wages in those jobs are 60 percent below regular, full time wages.  Equal pay for equal work has gone by the wayside in the USA, as home workers are paid less than their regularly employed counterparts. But Japan has taken this temp work to the extreme. Some of that can be fixed.

And it would not hurt for the safety net to be expanded for legal residents. Japanese often look down upon foreign workers. For a nation slowly declining in population that is just crazy.

Expanding the money supply is key to Japanese prosperity. There is plenty of money at the top for investment. There is not enough money for main street. Sounds like the USA, only worse.

Mitsumari Kumagai has written a piece in the Japan Times detailing problems and solutions for Japan as he sees them. He complains that government policy has allowed the hollowing out of industry by not pursuing growth in industry. Many industries thus moved offshore.

But then, Abenomics corrected some of the issues, and got the economy and job creation going again. But alas, Mr Kumagai says that fiscal policy must now take over from monetary policy. But then he says fiscal responsibility must temper this fiscal aggressiveness. Getting fiscal does not sound like a solution to me. And more austerity doesn't sound like a solution either.

Everyone, including Mr Kumagai, wants to give up on monetary policy without trying helicopter money. Real HM does not require debt based spending, but rather base money creating demand in the economy.

The author is correct that Abenomics has not given small business the same breaks that we see in large companies in Japan. That is true in the USA as well. Helping small business helps those who create the most jobs. There is nothing wrong with that.

But when you are bumping along the zero lower bound you need to start dropping the money from the Skytree, before you say monetary policy is now failing.

There is hope, of course, that the Fed may try to accommodate Japan some. The Fed is predisposed to keep the economy in the US slow, because all the banks bet on lower rates, among many reasons. But the Fed sees how Donald Trump is doing and sees the unhappiness of many rank and file Americans. So, a little growth is likely in the cards, but not much. I doubt if our Fed will solve the Japanese deflationary problem.

For further reading:

Nick Rowe, Willem Buiter*, Paul de Grauwe and Simon Wren-Lewis
(These are the economists who agree with Lonergan that base money is not a debt)

QE For the People
(Lonergan's helicopter money articles on his blog)

Pros and Cons of Helicopter Money-Bernanke Misunderstood

Federal Reserve Mandates Slow Growth. So Fed Must Finance American Infrastructure 

Central Banker ProCyclical Craziness

China Could Be the Next Basel Victim or Not 

Larry Summers 100 Dollar Bill Ban and Westfalia Lost

Clearing Up Negative Interest Rate Confusion. Kocherlakota Weighs In

*Buiter, some will remember, has also called for a cashless society. That cashless concept, an attack on main street, would be rendered completely unnecessary if helicopter money were implemented.

Tuesday, July 19, 2016

Japan Is Practicing Tranche Warfare. Abe is Frightened!

 This article was first published by me on Talkmarkets:

Japan is the perfect example that shows  the real economy does not matter anymore. Japanese Prime Minister Shinzo Abe likened the current crisis of low commodity prices to that of the 2008 crisis that took down Lehman.

Japan's banks are playing the worldwide casino in a big way. It appears that these banks are just too big for the Japanese economy and they are reckless in their investing practices. Really reckless! When was the last time some of you heard about tranches? More on that at the end of the article.

So, we have to understand that Japan imports raw materials and processes them into finished goods. As of the article publication these were the major imports procured by Japan:

Primary imports - commodities: petroleum (15.5 percent of all imports); liquid natural gas (5.7 percent); clothing (3.9 percent); semiconductors (3.5 percent); coal (3.5 percent); audio and visual apparatus (2.7 percent)
 Primary exports are as follows:

Primary exports - commodities: motor vehicles (13.6 percent); semiconductors (6.2 percent); iron and steel products (5.5 percent); auto parts (4.6 percent); plastic materials (3.5 percent); power generating machinery (3.5 percent)
So, we can see that even some petroleum imports are turned into a major export, plastics. You would think that most nations that import a large portion of raw materials, commodities, would want cheap imports, cheap commodities.

But not Japan. It is true that many Japanese products are now produced outside of Japan, making the real economy that much more complicated. But above all, Japan fears a Lehman type meltdown. The real economy becomes secondary to the banking economy. Japan's banks may face a crisis over wrong sided bets on raw resources.

And it appears that the BOJ intervened in currency in order to push prices of commodities, namely oil, upward from the bottom. And of course, the Japanese don't want a stronger Yen, as that ultimately hurts exports. But protecting the banks is more important than exports.

A stronger Yen hurts the banks even more than the exports. Proof of that was the Japanese bank stocks plunge in February, 2016 in reaction to European bank price declines over low energy prices.

It appears that Japanese banks bet big on trades they think will win. They bet big on French bonds back in 2014:
If you want to make money investing, you have to take the largest position you can take on the most important event of the year – that’s how you win," said the Tokyo director of fixed income at a European brokerage. Japanese investors “think the ECB's easing is the biggest event of the year.”
If Japan is now worried about a Lehman type episode, perhaps the nations' leaders understand that the higher commodity prices are unsustainable. Why else would they worry so much about it? They fear that without global help in speculating on commodities, that they may find themselves on the wrong site of the trade?

Large Japanese banks are making big bets on troubled US brands, desperately seeking yields. They take risky tranches of the debt and convert them into derivatives at home. Wow.

They’re snapping up pools of the debt that have been sliced into pieces of varying risk and return, and converted into yen-denominated securities.
Sliced up debt that is in little pieces is called a tranche. Tranches are back in a big way for Japanese banks. It is likely that Japaneses banks are taking the more risky tranches searching for yield. No wonder Abe is frightened!

Then, add to the bank behavior the fact that Japanese investors are taking the low floating side of bets, in order to guard against inflation (that may never come), and you see that this could turn ugly fast. Does this mean that the banks themselves, who are selling these loans, are taking the fixed, high side of the bet? Are they betting on inflation? 
I am sure we are only looking at the tip of the iceberg when it comes to Japanese bank investments.

It just looks like the Japanese banks are playing a very dangerous game of investing, exercising a very greedy form of investing. It is all or nothing with them. When it turns to nothing, Abe panics.

The Japanese have too many too big to fail banks. They are too powerful for the nation to handle if major meltdowns come. Japanese banks are the biggest cross border lenders in the world. They care about their loans and bets, and apparently so does the government, more than about the health of the Japanese import/export economy.


Monday, July 18, 2016

Donald Trump Cannot Make America Great Again But He Could Destroy It

 I posted this article to my personal blog at Talkmarkets:

Donald Trump is all over the place when it comes to his economic plan to make America great again. But he has made some statements that we can show would not make America great again. The story is not given to Americans in full as to why his plans could be disastrous.  He has two plans, that are shared here. I encourage people to read the entire article because the issues speak to the economic problems of our time.

The closest explanation as to why Trump's plan would fail is the article found in Business Insider, dated May 6, 2016. Trump threatened a haircut on treasury bonds. He threatened to not pay part of the debt back, buying the bonds back for a lower price than at the price they were issued!

Permission Michael Vadon Wikipedia

Of course, the author, Josh Barro, only offered the explanation that Trump's plan would cause interest rates to rise, destroying the perception of safety. He said it would cause an economic crisis, which is very true, but did not explain why.

We know why. Trillions of dollars of bonds are used as collateral in the derivatives markets. If these bonds decline in value, in price, and yield goes up, all those deals and swaps will trigger margin calls and more bonds or gold or money will have to be fronted to bolster the weakened collateral. Banks and counterparties own that collateral, and are responsible for those margin calls should they take place.

That is the reason why Trump's plan would put in danger the financial system, and I personally believe Josh Barro knows it. Yet he didn't say it. The American people as a whole have no idea that treasury bonds are simply collateral in a giant financial market bigger than any market found in the real world, in the physical economy. 

And did Donald Trump surely know about this massive use of derivatives? He seems to want to say that the financial markets will collapse in 2016. Why would he advocate a financial solution for America that would hasten a collapse? Truth is, America cannot be made great again by destroying the financial system.  

And the big secret I share with you is that the US economy cannot be made great again (through robust growth seen in the last century) even if the status quo remains, even if the financial system stays intact. Slow growth is a necessary function of low yields and big demand for bonds as collateral!

The Fed cannot allow unbridled growth because it no longer has the tools to stop inflation if the genie gets out of the bottle. Interest rates must, must in this somewhat diabolical financial system, remain low as long as these bonds are used as collateral. Think about that.

People have to realize that treasury bonds are more senior, as collateral, than gold! They are, as I have written before, the new gold. 

Then, Donald Trump rolled back his threat to give investors less than they paid for treasury bonds. But he offered a second plan. He said that the government could create inflation to make the debt already incurred less expensive. Well, certainly, over time, the Fed targets inflation at 2 percent and rarely reach that target. So, over time, the debt incurred is diminished in value. But this is not a quick fix. A quick fix would require massive inflation, which may go out of control.

Remember when I said that collateral must remain of good value, of stable price, even going up in price, with little rise in yield and little diminishing of that price? Well, as long as bonds are used as collateral, are allowed to be used as collateral, in a derivatives market that is valued at well over 500 trillion dollars, massive inflation cannot be allowed. 

If rampant inflation were allowed, the Fed could not abruptly raise rates, or the Fed itself would destroy the banking system. It would also destroy the government's budget, with entitlement programs tied to inflation. But don't be mislead, the private banking system and collateral would take a beating if bonds suddenly exploded in yield. 

Trump did mention in his second plan that the money supply could be expanded. Well, that could be done in a controlled environment through helicopter money. But Trump's version of money supply expansion was not well thought out by him. The idea of massive inflation as a means to push down the value of debt is dangerous to the system that is in place. This is a system that requires collateral stability, whether it be for the good or ultimately a dangerous experiment in the new normal, in the newest version of the world order. 

The one thing we know is this. The economic system we have, that is now subjugated to the derivatives market, is not set up to allow robust growth in the economy, and Trump cannot make America's economic growth robust again. But he could harm the economy even more through some of his bogus plans.

Saturday, July 16, 2016

The Real Problem with Real Estate Understood by Market Monetarists

 This article was first published by me on Talkmarkets:

The real problem with real estate as understood by Market Monetarists requires understanding the concept of closed access versus open access cities. No, I am not talking about cities with restricted travel because there is a military base on the city, as we see in the old Soviet Union or even in modern Russia. For purposes of real estate, closed access cities are those that produce high quality products through having a highly trained workforce.

Salaries are high in closed access cities. It is difficult to move to a closed access cities as even rents are very high. Some tech people have actually lived in the Google parking lot because of cost. The Tiny House movement seeks an escape from closed access cities or at least an escape from their high living costs. Multigenerational households have increased in closed access cities

And poor people try to get away from closed access cities, as we see in this discussion by MM Kevin Erdmann, who has done lots of research on the issue.

The Market like Erdmann, Sumner and Benjamin Cole want more building in closed access cities. I could almost buy into that if the governments would improve the roads, but really, what could be done with the 405 in Los Angeles? You think traffic is bad now. Wait till they build massive projects in SF, or in Santa Monica! And you have the problem of building high rises in earthquake prone closed cities up and down the west coast.

But if access to these cities is closed, upward mobility becomes an issue.  As Erdmann says in the article cited above, there are pockets of abject poverty interspersed within the gentrified whole in the closed cities. 

Skid Row Los Angeles (Wikipedia)

We had seen riots in those cities in the past. We have noted that those cities have serious issues of rich and poor more than other cities. At least in open access cities, people could have a chance of finding a job and afford to get to it. Even transportation costs in closed access cities are a barrier to work for the poor that live there.

Erdmann says more of the closed access poor try to escape, moving to red states, where poverty is not addressed, but at least poverty is more affordable!

In the article cited above by Erdmann, he makes an astonishing statement, and a sobering one when trying to grasp the enormity of the problem. He says:

But, the worst repercussions are for those pockets of the most poor, dysfunctional neighborhoods in the closed access cities.  If I look at a map of New York City, or Los Angeles, or Washington, DC, one of the things I find striking is how in these cities where housing is so expensive and the demand to get access is so high, there will be pockets of very low value real estate and very poor neighborhoods.  Why, for instance, didn't the Bronx gentrify decades ago?  And, the sad reason is that the only possible way to live affordably in those cities is to live in a neighborhood that is so crime ridden and rotten that any reasonable outsider with any other options would be too frightened to live there.  Think about the implications of that, and the horrors that many low income urban people live through because of this whole complicated state of affairs.

[As an aside, I wonder sometimes when Donald Trump talks about cleaning up ghettos in the cities, mostly ghettos in closed access cities, if he is talking about development that would push the poor out. That does not solve the problem but just makes the lives of the poor more difficult.]

As to housing costs, it appears for now that costs in closed access cities are going to continue to remain high. So, even in an economic downturn, they suffer less price decline than open access cities. We saw that in the Great Recession, where coastal cities Perhaps this is a reason why builders want to build in closed access cities but can't, and builders are skittish about building in open access cities, because prices can decline or people may decide simply not to buy.

Baby boomers retiring could offer a boost to selected open access cities like Las Vegas and Atlanta, but here are a few boomer retirement towns that are smaller. The issue for boomers is the same as for the poor, and being able to live a quality life in retirement may not permit one to stay in a closed access city.

One cannot ignore the growing economic divide from region to region that speaks to open and closed access.  As the author says, in 1980, income reached its most widespread convergence across the geographical landscape of the nation , but that this is no longer the case. While the growth of the service sector led to this common equalization of income, the tech and financial revolutions that grew those businesses have given rise to the closed access city and the gap between different areas of the country as to prosperity.

The merger of big finance and big tech continues to this day, making closed access cities even less affordable, and the business of this merger shows up in massive litigation by Google and Apple, and through new payment systems being developed, with threats to create a cashless society and through the attempt to create driverless cars, etc. The innovation leaders are located in the closed access cities. Rents have skyrocket in the closed access cities due to lack of affordable alternatives.

America became great because the entire geography of the nation showed a growing prosperity. If that was the American dream it is less evident today. But we now have the optimists saying that the cost of living in Los Angeles is high, but the sunshine and avocados are worth it.

The author of that viewpoint paints a dreadful picture of the cost of living in LA, so don't be fooled. Closed access cities are closed for a reason. Price shuts them down to outsiders. The Market Monetarists quantify what many of us know from personal experience.

So, closed access is the central problem facing housing creation and affordability in America going forward. 

When I talk to guys at the Infiniti dealership in Las Vegas, more than a few have said they would love to live in LA or San Diego, but they just cannot justify doing so because of the cost of living. Yet they do appear to prosper in an open access city, holding jobs that pay well as long as they stay in open access cities.

As long as building is allowed in the open cities, it is up to the leaders there to make sure builders want to continue to build, allowing people to continue to escape from high priced areas. Remote employment often makes moving a lot easier.

But as boomers and millennials show little interest in buying and selling of houses (it has been said that 2/3rds of millennials don't even have a credit card), what will the landscape look like as time goes on?

Tuesday, July 12, 2016

Billionaire Fascism Is on the Rise Risking Financial Instability

 This article was first published by me on my personal blog at Talkmarkets:

How much influence the bigoted billionaires have in the eventual meltdown of world civility and financial stability,  with the goal of a totally dominant empire is unknown, but it could be a huge influence. Here are three billionaires we need to look at:

1. Ihor Kolomoyskyi. This man has sought a fusion between Jewish people in the Ukraine and eastern Europe with right wing fascists. Most Jewish people in eastern Europe do not want to war against Muslims. They would prefer to live in peace. So, they have wisely rejected the bigoted billionaire, Kolomoyskyi. But his money and influence continue.

2. Sheldon Adelson. This famous owner and creator of the wonderful Venetian Hotel in Las Vegas has called for Donald Trump to go to Israel. He supports Trump, who has said the settlements on Palestinian lands should continue. Adelson himself has said that the Palestinians are not an occupied people. Chris Christie, who supports Trump, was forced to apologize for saying that the Palestinians were occupied.

Adelson seeks to stamp out the boycott movement against Israel. But with former Israeli officials calling the Israeli government fascist, that boycott movement will continue to look more and more righteous, as long as it remains a peaceful movement. This cannot be good for the economy of Israel going forward. Adelson continues to cling to the mistaken notion that the Palestinians were an "invented people". Most of the world does not hold to that view because it is a view representing colonization. More on the concept of invented people as we continue.

3. Donald Trump. Donald Trump approves of continued settlement building on what is left of Palestinian land. This is the same Donald Trump who has criticized and insulted almost everyone, including women, blacks, Mexico, Muslims, Asians, undocumented workers, fellow candidates, calling them ugly (Fiorina) and ugly eater (Kasich), etc.

This is the same Donald Trump who had nothing bad to say about the KKK, saying he didn't know enough about them. 

Here is a billionaire who has criticized almost everyone under the sun except for the KKK and Israel! I don't know if the Donald has put together the idea of fusing the KKK and Israelis to fight Muslims, similar to thoughts of Kolomoyskyi. The only thing holding that concept back is location. Yet that could be overcome through right wing and globalist websites dedicated to hatred of Muslims and blacks. Many of you know some of those websites. They represent the opposite of tolerance, a key value in our nation.

The world is incrementally becoming a more dangerous place. However, the fear and the increased destabilization danger are often manufactured by our own governments and our own politicians and our own billionaires. CNN has shown Donald Trump, for example, speaking to the issue of more 9/11's coming, warning that we should all be afraid. CNN is frightening us again.

This is exactly what Condi Rice did when she lobbied for our participation in the invasion of Iraq! She warned us of a mushroom cloud, remember? Of course, there never were nukes in Iraq, but that was hardly a reason for Rice to skip the opportunity to frighten Americans.

These events, and the behavior of the billionaires and their politicians, should be tracked carefully by anyone who has investments in stocks and bonds, and anyone who has a concern for world peace. It will be more difficult for the United States to support fascism abroad now that it is coming more out in the open for everyone to see. That is, of course, unless we come to support fascism at home by electing known haters to high office.

The concept of empire was put forward most forcefully by Cecil Rhodes, who succeeded in forcing  blacks to be driven off the land in Africa. Rhodes eventually established the Rhodes Scholarships with the primary goal of bringing Americans back into the fold of Empire.

Israel was founded by colonists and Herzl communicated with Rhodes. The Palestinians, then, were a real people with homes, villages, and property, in Palestine. Haaretz has even said 600 thousand were driven away from their homes. Even the Democrats have recently called for the concept of Palestine occupation to be part of the party's platform, as the Palestinians were sent back to Israel after being driven away, only to be confined to Gaza and the West Bank.

Israel is not the only western nation guilty of these crimes. It is the only western nation continuing these crimes. However, here are other colonial nations.

In Australia, the Aborigines were considered to be native wildlife, not even human, until 1967. They were almost eliminated by the Australians, and they had numbered 750 thousand.

And in the United States, blacks were considered less than human. Strange little people like Mike Huckabee, still believe that court ruling is the law of the land. He is wrong, but he represents empire.

It is a pattern of the Anglo colonists, all springing from the same source, Cecil Rhodes, who believed in a New World Order, to denigrate the native populations. The victims are either subhuman, or an invented people, as Sheldon Adelson has said. This Anglo centered empire building is still taking place in Israel.

Officials in Israel have labeled the fusion of Netanyahu's government with the extreme right wing, and Ehud Barak has called it fascism. In my view, this fusion was inevitable, because the goal of Ben-Gurion was world domination. He wanted a court of justice to govern all the nations, being located in Jerusalem. Those who want a more peaceful life in and for Israel are in the minority there.

As more and more Americans and citizens of other nations realize the brazen injustice of colonization, the BDS movement will gain steam. I reject violence against Israel. There is no rule that BDS must be violent!

Jewish people outside of Israel are not inherently supporters of empire. Many are not. Many just ignore Israel and go about their lives, as we see with the reaction to Kolomoyskyi. It is unfair to single the entire Jewish population out for the misdeeds of a cabal of globalists that is clearly multiracial worldwide.

Perhaps cooler heads will prevail in Israel, but the expansion into Palestinian land must stop. And much land must be given back to the Palestinians if we are ever to have real peace and cooperation among the nations. There is simply no other way. But billionaires are influencing the dark side of all this by seeking to agitate the circumstance. The outcome will be hurtful.

Israel can settle with the Palestinians, and that would neutralize the anger of Muslims, to see the Palestinians prosper.

As for investors, balancing the strength and endurance of empire, with the erratic behavior of the bigoted billionaires, will be something to consider going forward.

Monday, July 4, 2016

LIBOR Triple Damages Loom. Chart Shows How the Banks Won Bets

This article was first published by me on Talkmarkets:

The biggest banks in the world are in real trouble. They may have won too much when they won their derivatives bets. At issue is whether these big banks manipulated the LIBOR rate downward, increasing the gap between the floating rate they bet on, and the fixed rate their counterparties bet on to protect against inflation.

I have used the following chart many times to show the relationship between the fixed high rate and floating low rates that banks use. When the fixed rate drops below the floating rate the banks are compromised. They want the floating rate, designated by the red line, to always float below the blue line.

The long simmering LIBOR cases against the big banks may have hit a danger point according to reports by Fortune Magazine and others.

Fortune said: on Monday, a judge pushed an anti-trust case against the banks forward, warning that if the case ends up being successful it could be devastating, potentially bankrupting 16 of the 17 largest banks in the world. 
“Requiring the banks to pay treble damages to every plaintiff who ended up on the wrong side of an independent Libor‐denominated derivative swap would, if appellants’ allegations were proved at trial, not only bankrupt 16 of the world’s most important financial institutions, but also vastly extend the potential scope of antitrust liability in myriad markets where derivative instruments have proliferated,” 

The following chart that I have used many times, shows the tracking of the fixed rates by the blue line. Tracking the floating rates that the banks took is shown by the red line.

So, the claim is, that the red line in the chart was artificially manipulated downward, price fixed downward if you will. It may be, if proven in court, that the red line should have been closer to the blue line or even above the blue line for longer. The banks took the low floating red line rate, and they won against the cities and investors because those investors took blue line fixed side of the bet in order to protect against inflation. Some investors were forced to take the fixed blue side of the bet to even get a loan in the first place. Of course, as anyone can see, when the blue line dipped below the red line, banks were in trouble, and the recession was upon us. This crossing of the lines helped lead to the Great Recession. Here is an example:

 If the interest rate tied to the benchmark LIBOR went below 5.6%, then Oakland had to pay Goldman, and if it went above 5.6% Goldman had to pay Oakland. Since then, however, the Federal Reserve has kept interest rates near zero so Goldman had made out like a bandit and Oakland has had to pay through the nose taking money away from teachers, firefighters, policemen and garbage workers and funneling it to Goldman.
Now, the banks won on LIBOR bets partly because the Federal Reserve manipulated interest rates which LIBOR mimics and once the blue line went back above the red line, the banks were in a better position to continue to make loans. No one is saying that the Fed was engaging in criminal behavior for manipulating interest rates, although we know it acts as an agent of the banks to save the banks. This is probably the single greatest argument that the Fed must go, must be banished off American soil.

And the Fed could have engaged in criminal behavior if it tipped off the banks as to the direction of interest rates. Perhaps the governments and investors who were harmed could look into that someday. 

But no, the lawsuits focus on the big banks manipulating LIBOR beyond what lower interest rates did. The banks forced LIBOR lower than would otherwise had happened, the lawsuits allege.

But the precipitous drop in LIBOR at that point just financially killed the counterparties, some small banks literally died according to Reuters, forcing them to pay way more than they otherwise would have had to pay. Indymac Bank and WaMu were two of those banks. Your state and city governments in Alabama, California and elsewhere suffered enormously. Investors suffered massive losses.

Reuters listed 14 of the 16 banks and also the other two, Barclays (Got that Phil?) and UBS:

The banks named as defendants include Bank of America Corp, Citigroup Inc, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, JPMorgan Chase & Co, and Royal Bank of Scotland Group PLC.
Other defendants in the lawsuit are Rabobank, Lloyds Banking Group plc, Societe Generale, Norinchukin Bank, Royal Bank of Canada, Bank of Tokyo-Mitsubishi UFJ and WestLB AG.

So, again, to be clear, the Fed lowered interest rates, but banks may have manipulated LIBOR below what would have happened simply with Fed involvement. If it is found those banks are liable for losses to the counterparties, they will have to pay triple damages, and that will put 16 of the 17 largest banks doing business in the United States under. It will bankrupt them if they are forced to pay it all at once.

And if they deserve it, what will our "criminal" government then do? What will the Fed and regulators, who should never have allowed the banks to all crowd in to bet on the low floating rate do? What will be done to them?

As corrupt as all of this has been, with just pennies paid upon dollars of corruption in other settlements, I figure that the powers that be will not permit all these banks to fail. But if they are spared they should be saved within an inch of their lives, in my opinion. And they should pay monthly, you know, like their borrowers do, for the next decades, to fix this fraud, if it is proven.

Clearly, problems with LIBOR destroyed the subprime market, whether manipulation can be proven or not. I wrote about it using that same chart above:

LIBOR Destroyed Subprime. But the Fed Deepened the Great Recession 


Proof the Fed Was Responsible for the Housing Bubble and Crash