Guest post by Leo Woods…
I’m going to make this brief because I have a big day tomorrow (oh, I guess I mean later today), and I want to get this out before an insanely busy weekend arrives.
The thoughts I was wanting to convey were in regard to “real money” and the VALUE it must possess to be “honest money”. Because these thoughts dovetail so well with the following article by Chris Martenson, I feel my brevity is justified.
My point (which has been proposed by numerous decently intelligent economists and financial writers) is that IT IS NOT POSSIBLE TO PRINT YOUR WAY TO PROSPERITY. You see, for the laws of economics and finance to function, they must entail the use of a moral currency that actually has real value or is appropriately backed by something of real value.
Just for simplicity I’m going to use gold as an example of money that has value. So, what gives it value. Besides it’s obvious untarnishable beauty and general rarity, it just takes one hell-of-a-lot of energy (both physical and mechanical), and time, to discover, mine, refine, and mint a unit of it. All of this effort and time is costly and adds value to the finished product. In a similar fashion, much the same could be said about a bushel of wheat or corn. They too have value based on the value creating metrics of effort and time.
Gold however, makes a better form of money than these just mentioned foods (as proven over the last 2500 years) due to it’s durability and a few other critical characteristics of a perfect money. My point is that you CANNOT DICTATE, PRINT, or DIGITALLY CREATE VALUE.
An item possesses real value due to the energy, effort, and time it takes to create it!
Although the Romans may not have been the first to destroy their country (empire) by corrupting the “value” of their money, they certainly are a spectacular example of it.
Now after hundreds of more recent examples have followed the Roman disaster, the United States is following it’s own corrupt leadership down this same well trodden path towards financial destruction by attempting to ignore all economic laws of monetary value, and thus using only a debt based money and a printing press.
The bad news is it’s happening here and right now, the good news is we don’t have to be complete saps and just follow our corrupt leadership.
We still have time to avoid worthless paper assets, (large bank accts. CD’s, excessive amounts of cash, etc.) and instead own things that have real value.
We don’t have to be mental giants here, history is replete with lessons on this, all we have to do is look.
Before I close I want to credit this email’s subject title as having been sourced from the Martenson article immediately following these thoughts. And it’s an excellent article which is well worth your time. Hope you can benefit from some of the following contents.
Why The Fed’s Efforts Will End Badly
We’ve been down this road before. Quite recently, in fact
by Chris Martenson
It’s no secret that I’ve taken the contrarian position for seven long (and frequently frustrating) years.
Why? I happen to believe that if it were possible to print one’s way to prosperity, we’d all be speaking Latin. The Romans would have perfected the practice of money printing and would never have faced their own collapse due to insufficient resources for their empire’s continued maintenance and expansion.
History repeatedly has shown us that every culture and generation that has dabbled with we’ll-just-issue-more-money “solutions” has met with the same miserable fate.
This time will be no different. And if that makes me a ‘contrarian’ then so be it. I’m happy to stand against the tide of popular opinion and boldly declare that there’s no such thing as a free lunch.
More broadly, the Fed is staffed by lunatics. As are the major banks. These are people who fervently believe that endless growth on a finite planet is both desirable and possible. Of course, those of us who look at this empirically know it’s an impossibility.
True leadership, responsible leadership, would recognize that simple fact and be working diligently towards a new monetary solution that does not require perpetual expansion. A monetary approach not founded on debt-based money, which pretty much has only two states: rapid exponential expansion, or collapse.
Of course, expecting the Fed, et al., to recognize this is folly. As Upton Sinclair said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
Look, we’ve been down this road before, and the sheer stupidity of our current situation is that we’ve been down it recently enough to know better. It worked out poorly for us in 2000, again in 2008, and will soon enough again. That’s why I’m currently short the US stock market and plan to increase that short position as time goes on.
“But They Won’t Let It Fall.”
I’m quite familiar with, and even sympathetic to, the idea that the central banks will not ‘let’ the markets fall. And indeed, they’ve done everything imaginable to keep the stock and bond markets magically levitated including, I’m sure, extreme tactics that we’ve not been told about (and maybe never will).
And I can understand the initial reasons as to why they did this back in 2009 as the global financial market was in full meltdown. But by 2010, they should have backed off. By not doing so, they put on a trajectory into territory from which there is no easy return, if any at all, without massive failures and disruptions.
And that’s where we find ourselves today.
As just one example of our current predicament, consider the degree of difficulty that pensions are in at the moment.
Certainly that after 7 years of a steady, if not ruler-straight, advance in the equity markets, pensions are in as much actuarial difficulty as ever. Many are so badly underfunded that they are mathematically doomed at this point.
They’ve suffered from reverse compounding over the past decade; expecting 7.5% returns (where assets will double approximately every ten years) but instead getting something closer to 2.4% on average (which implies doubling every 29 years…a complete statistical and actuarial disaster).
The nation’s largest public pension fund, the California Public Employees’ Retirement System, has one-fifth of its assets in bonds and is down 1.3% since July 1, according to public documents. The system, known by its abbreviation Calpers, also has 53.1% of its assets in stocks, 9% in real estate and 9.4% in private equity.
In 2015, Calpers posted a return of 2.4%, below its target rate of 7.5%.
(Source – WSJ)
And 2015 was a pretty good year in terms of elevation of market prices! Even worse, to combat the Fed’s ultra-low interest rate policies, pensions have had to chase returns by getting into riskier and riskier territory. From the same article linked just above, we get this chart:
Note the near perfect doubling of risk over the last decade. Compare that expected 7.5% return to the actual 2.4% return funds like Calpers are experiencing, and you quickly realize how on a risk-adjusted basis the Fed has helped to utterly destroy the pension model.
Now, whether the pension model was ever going to perform as expected over the long-term horizons is another debatable matter (again, infinite growth is not possible and all of that), but its early demise as a workable idea was accelerated by the Fed and its idiotic policies.
At any rate, the point I’m laboring towards here is that the Fed simply cannot ‘allow’ a market decline now because the panic-inducing wealth destruction that would accompany it would be too disruptive — especially during an election year!
Of course, next year will have its own reasons for why a market decline cannot be allowed. And so on and so forth until the whole thing just breaks anyways under its own weight.
What’s That Groaning Sound?
Meanwhile with each passing week, the fantastic distortions of the broken price-discovery mechanism that the Fed, et al, have converted our financial markets into grow ever larger.
There are too many to fully cover in this report, but let’s look at a particularly important one: corporate debt.
In the aftermath of the Great Recession and encouraged by the lowest interest rates ever, in all of US history, corporations did the logical thing and borrowed like crazy. The resulting growth in corporate debt has been nothing short of astonishing:
Risky Reprise of Debt Binge Stars U.S. Companies Not Consumers
May 31, 2016
Consumers were the Achilles’ heel of the U.S. economy in the run-up to the last recession. This time, companies may play that role.
Among the warning signs: rising debt, lagging profits and mounting defaults. While the financial vulnerabilities aren’t likely to lead to another downturn soon, economists say they point to potential potholes down the road for an expansion that’s approaching its seventh birthday.
Behind the deterioration in creditworthiness: surging corporate borrowing. Enticed by record-low interest rates, companies increased total debt by $2.81 trillion over the past five years to a record $6.64 trillion. In 2015 alone, liabilities jumped by $850 billion, 50 times the increase in cash by S&P’s reckoning.
Hmmmm…rising debt, lagging profits, debt increasing far (far!) faster than cash, and mounting defaults…where have we heard this story-line before? Oh yeah, in 2008.
But note the chart of corporate debt…it has been compounding since 2009 at an annual rate of 11.4% (!).
Such a debt binge makes sense if and only if profits and investment have been keeping pace but that’s just not the case. As the article continues:
“Companies have been adding to their debt and their debt has been growing more rapidly than their profits,” said John Lonski, chief economist of Moody’s Capital Markets Research Group in New York. “That imbalance in the past has usually led to problems” in the economy as companies cut back on spending and hiring.
Case in point: Last week’s news that so-called core capital goods bookings fell for the third straight month in April. The seasonally-adjusted total of $62.4 billion for non-defense orders excluding aircraft was the lowest in five years, prompting Neil Dutta of Renaissance Macro Research to label business investment “pathetic.”
So the story is developing like this: companies have used ultra-low interest rates to pile on debt and buy back shares, but not to re-invest in their own future growth.
Even worse, it’s not like the debt and low-cash situation is evenly spread across the S&P 500 universe. In fact, what cash there is happens to be heavily concentrated in a few hands, as the article explains:
Take away the $945 billion the 25 richest companies rated by S&P hold, and the picture doesn’t look particularly pretty for the bottom 99 percent of non-financial corporations.
In fact, their cash-to-debt ratios are at their lowest levels in a decade, according to S&P. And more than 50 U.S. companies have defaulted on their debt so far this year.
The daily ‘rescues’ seen in the stock market, the ones that seem to arrive in the middle of the night or right at 3:30 p.m. are not terribly mysterious to me. They represent concerted attempts by official actors and their proxies to keep a happy face on the equity markets for as long as possible.
While these tactics were once used to engineer a shift in social mood that would then lead to higher borrowing and spending, they are now locked into a cage match where failure is not an option.
To fail here is to permanently ruin pensions, risk social upheavals, destroy political ambitions and careers, and have all of the central planners’ prior mistakes exposed as being morally and intellectually bankrupt.
Greenspan, Bernanke and now Yellen are all frauds. None of them has the slightest clue what they are up to or why. None of our central bankers understands the age of limits, or behavioral economics, or the importance of fairness in markets.
They’ve simply done what they’ve done to get through another day — another week, another night — without a market correction. They’re clearly afraid of the beast they’ve created, and now will do anything to prevent even a slight correction, which might send it berzerking across the financial landscape.
And because they’ve managed to prolong the status quo for soooo long, many observers are throwing in the towel on old tried-and-true strategies and models and are now embracing the “new normal”:
Stocks, Bonds, Oil Confounded Experts in May
May 31, 2016
Sell in May, they said. A strong dollar is bad for stocks and oil, they said. Everyone will get scared if China’s renminbi weakens again, they said. Avoid dangerous growth stocks, they said. Stick with safe, quality defensive shares with a yield, they said.
It didn’t turn out that way. As so often, markets confounded conventional wisdom last month.
At times, markets seem to move just to spite those of us who painstakingly build explanations. Sometimes we should accept that market moves don’t fit calendar months especially well, with May featuring sharp turnarounds in several asset classes due to comments by Fed policy makers. Most of all, we should be humble about our ability to forecast what will happen to markets, or why, because the patterns change so often.
Yes, or maybe we should also accept the fact that these “markets” are no longer entirely controlled by explainable forces because there’s the hidden hand of scared monetary policy wonks on a lever or two.
You know, for the good of the nation and all that.
However, be this as it may, the Fed will fail and it will fail badly. If it doesn’t, that will mean that they’ve finally managed to succeed where the Romans and every civilization since has failed. They will have managed to print our way to prosperity.
But all the data (and pesky things like ‘math’) suggests otherwise. Moreover, the US election cycle dynamics should also put a dagger into any hopes that actual prosperity for any but the protected classes has been achieved. The people are understandably angry: we’ve been lied to and brazenly so.
When the last insane central bank attempts finally fail, and they will, the impacts will be awful and lasting. The corporate debt and pension data presented above are just a few of the many examples I can cite where central bank policy has merely bought time at a horrible expense.
Only a truly inept organization is blind to the accumulating unintended consequences that we now see laid about like so much tinder awaiting a proper spark.
Perhaps the Fed is aware, or perhaps not. Either way I cannot find a way to imagine that they’re actually clever enough to have finally cracked open the printed prosperity nut.
~ Chris Martenson
https://www.youtube.com/watch?v=AMld73bNCMQ&feature=youtu.be This is a very interesting interview of Bill Holter where he discusses the important role he sees gold playing in the future monetary system.