China's Debt Problem Grows More Ominous!

The last few weeks Brexit has been sighted as the reason for much of the volatility roiling markets across the globe, however, it is possible much of the problems are actually flowing from China. Could it be that Britain is merely being used as the excuse of the day? In finance, volatility is the degree of variation and distortion in trading prices. The ongoing efforts of China to stabilize their sagging economy by flooding the markets with liquidity have resulted in a ripple effect and added to the nervousness of markets. At one time I felt that it was only when we look back on events that we get a clear picture of just how events unfolded, sadly I have come to realize that even then the is truth difficult to identify. History is generally written by the victor and shaped by those with an agenda to fit their narrative.

China has a massive problem in that growing debt has hamstrung its economy. When coupled with the overcapacity that developed as the country raced ahead on a wave of easy and cheap money it now finds itself in a situation similar to that which America faced in 1929 following a period of rapid growth and credit expansion. Time and time again history has shown that when an economy has overbuilt, over-leveraged, and overreaches a reset occurs. As of late, all indications are China has again started flooding the market with money and liquidity to halt their collapse and this appears to be what is driving commodity and other prices higher while economies struggle. In the past year alone, China has spent nearly $200 billion to prop up its stock market, $65 billion of bank loans have gone bad, financial frauds have cost investors at least $20 billion, and $600 billion of capital has fled the country.

Money Supply And Debt Has Surged

A question we must ask is just how large this newest wave of liquidity really is and where it will lead. For years the numbers flowing out of China have been viewed with suspicion. Questions of just how much these numbers are tinkered with for political reasons and concerns the system supporting economic data collection is not fully developed has caused many people to discount their accuracy. Few China watchers, however, question that debt has soared and credit expansion has unleashed a huge amount of new money into the system.

Debt May Be Larger When All Shadow Banking Is Counted

The chart to the left shows how debt has soared from 150% of GDP in 2008 to 258% at the end of 2015. Since that time the trend has continued and China has seen a dramatic rise in debt. Few countries have gone on borrowing binges of that magnitude without hitting a crisis. Many people feel a large part of China's problem lies in the shadow banking system that is often misunderstood. Part of the issue is that much like the derivatives market shadow banking can be hard to define and how extensive it is can be blurred by this limitation.

For a long time, I have contended if anything the debt problem is much larger than indicated because of the large role the mostly unregulated shadow banking system plays in China's economy. Even local governments borrow from the shadow banking system. Shadow banking is a slightly sinister name for trusts, leasing and insurance companies and other non-bank financial institutions which perform banking functions without a banking license. No one really knows how big the shadow banking sector in China is because it is largely unregulated by the banking authority, but shadow loans are estimated to make up 20% of all loans. The shadow banking sector is so large that concerns exist about contagion and a domino series of defaults that might rack the economy as savers lose money. It is reported that 89% of households and 57% of firms have borrowed money from these groups, however, it is not just about size, it is how deep, and where the roots of this system run.

Shadow bank loans can charge as much as 24-30% in interest and be for as short a period as just three to five days if someone really is in need of cash. One shadow banker confessed that he charged interest rates of up to 100% and lent on average 6m yuan per month, which is around one million U.S. dollars. Many people see the shadow banking system as a channel to get money to solve business problems as it's efficient and quick even if the rate is much higher than the banks. It seems these shadow banks have been selling wealth management products (WMPs), which offer returns that far outstrip the official deposit interest rate of 3%. A big problem is these unregulated products are riskier and reminiscent of some of the horrifyingly complicated products sold in the U.S. and Europe before the global financial crisis that started in 2007.

This is not just about writing off a few bad loans, it is important to remember the money fueling these loans come from Chinese savers who have taken on more risk to get a better yield on their savings, when loans go bad they are the losers when the smoke finally settles. One of China's most notorious shadow bankers is now in jail serving a life sentence but this does not help those who loaned this person money because of the high rates he paid. The "investors" become victims and often lose everything they have saved to retire on when a shadow bank goes bust. In some cases, people lend money to someone like their boss to earn more interest than the meager rate offered by the bank. During the global financial crisis the central government launched a spending program, however, rather than provide funding for this it left getting financing for projects up to local governments, the fact that some of them borrowed from the shadow banks is proof of just how extensive shadow banking is.

China’s debt mania, by this I mean madness, craziness, and frenzy is now the largest ever experienced in the postwar emerging world. After holding steady at around 150 percent of GDP for much of the boom, China’s public and private debts surged after 2008. While governments can never get rid of the borrowing in society they can ban the very high-rate loans.  In the case of any banking crisis, the shadow banking sector would act as a destabilizing factor and have a massive impact on the economy. Cracks have developed in the Chinese financial system in recent years. They include a cash crunch in 2013, a wave of shadow-banking defaults in 2014, a stock market collapse in 2015 and a surge of capital flight at the start of 2016.

As the China story unfolds it is clear the scope for a debt meltdown in China remains immense. China's banking sector is the biggest in the world, with assets of $30 trillion, this is equivalent to 40% of global GDP. China’s four biggest banks are also the world’s four biggest. Its stock markets, even after the crash, are worth $6 trillion, second only to America’s, and its bond market, at $7.5 trillion, is the world’s third-biggest and growing. Keynes' theory was the government should create demand when the economy starts to contract and reverse when the economy recovered. Increase the debt to stimulate and decrease debt once the economy recovered. It appears China as in the U.S. has only followed half that theory and encouraged debt to stimulate the economy. Do not expect this to end well.

Soaring Healthcare Sector Wrongly Feeds Our GDP

Note; Healthcare Is Growing As Share Of GDP

Something seems very wrong with the fact that soaring healthcare costs are a big factor in pushing America's GDP higher. This healthcare spending has slipped into the false narrative of a "growing economy" spoken by people with a poor understanding of what constitutes real growth. All this money being spent on healthcare feeds the illusion of growth, however, what we are really seeing is a transfer of wealth from one sector of the economy to another, then it is simply being recycled back into the system. Many people have seen large increases in their health insurance payments as a result of  Obamacare requirements. As it created a boom in the healthcare sector it has siphoned money away from other areas of the economy.

Over the last several years we have witnessed a shift in consumer spending. In many ways, the ACA often referred to as Obamacare feels like a tax on middle-class families and many businesses that have seen insurance cost rise. This started in the fourth quarter of 2013 as consumers rushed to beat projected increases in co-pays and premiums spurred on by Obamacare. While millions of people have gained insurance because of the Affordable Care Act, this has come at a cost, and it has also unleashed pent-up demand for medical procedures that have been delayed sometimes for years. All this has resulted in boosting out-of-pocket household spending on co-payments and soaring prescription costs. Americans spend more on healthcare than people in other developed countries with very poor results.

Floyd-Memorial Hospital New Albany, Indiana

Part of the problem is that over the last several decades doctors, hospitals, and the healthcare industry has undergone tremendous change. Government policies were a huge driver in the trend towards consolidation in what was to yield higher efficiency and lower cost. Construction of expensive new hospitals over the last decade is resulting in higher bills for consumers. We should remember after the building ends so do the jobs in construction. Today we see hospitals backed by big government involved in a lot of activities in communities that extend far beyond their role as healthcare providers. In my community, it extends to sponsorship of the baseball stadium, ads on the side of buses, and a barrage of self-promotional "so-called" public service messages.

The BLS reported 71,000 new jobs in the general area often defined as health, education and social service, including state and local education jobs during May. We should be careful this does not give us a false sense that all is well.  This means the reported number of new jobs in this sector was close to double the net jobs gain of 38,000 jobs for the entire non-farm payroll. It is difficult to argue that low-interest rates or anything else the Fed is doing has anything to do with jobs growth in either of these sectors but rather a direct result of the government sector’s $3.5 trillion annual funding of medical entitlements and education, including the tax-driven provision of employer-funded health benefits to 160 million Americans. While these programs are all adding to our GDP they do not signal robust private sector expansion.

All the money spent by the pharmaceutical companies, hospitals, and insurers on things like advertising and promotion does indeed feedback into the GDP, but it also allows these companies to raise prices while adding little or questionable real value to the economy. Unlike manufacturing jobs that have long-term positive benefits such as building value that curbs imports and the flow of dollars away from America we find jobs in the healthcare sector often represent a transfer of wealth that drains assets from more promising areas. Also, adding to our concerns should be the trend that in future years more of the workforce will be herded into the health sector and the fact that many of these jobs are low paying. To make matters worse robots are being created to eliminate even these jobs.

Last year an article titled "GDP Number Is A Master Illusion" explored how the GDP number was in truth a very poor reflection of true economic growth or its quality. A slew of fancy commercials and ads that urge and encourage consumers to see their doctors to inquire whether an expensive new drug with side effects that will have dubious benefits if any highlights the fact we are on a slippery slope. The long-term effects of Obamacare are slowly becoming apparent and by far the biggest problem is that it has driven healthcare cost through the roof for many Americans. The promise that this law would give the average family better coverage at a lower price has vanished into thin air. Much of the spending we see is driven by a huge and growing national deficit that lurks in the future.

The goal of this article is to highlight and make it clear healthcare spending that appears as growth, in reality, can mask a great deal of wasteful wheel-spinning, rather than a force that propels the economy forward to make America more competitive as a nation. The truth is that within an economy, how money is spent, what is being bought, and where the money comes from greatly influences the final economic outcome and defines the resulting wealth effect. Like a man paid to dig a hole then refill it with dirt, again and again, little of value is produced other than physical exercise. Americans should not become too exuberant about jobs being created in the healthcare sector if in the long-run we are forced to pay for them on the back end. We only gain if these jobs make us more productive, produce "real economic growth" or substantially improves both the health of the economy and Americans overall.


 Footnote; Thanks for reading, your comments are encouraged. This post dovetails with several other recent writings. Related articles may be found in my blog archive. Below are two posts that you might find interesting. The first deals with the fact that healthcare in America is still a broken system and explores why Obamacare is destined to collapse under its own weight. The second argues that not all economic growth is created equal and that when you spend money but afterward have little to show for it, you have wasted it. When we look at government spending it becomes clear a lot of our problems come from the poor quality of growth.
http://brucewilds.blogspot.com/2015/11/healthcare-is-still-broken-system.html http://brucewilds.blogspot.com/2013/08/the-wrong-kind-of-growth.html

Italy's Future Hampered By Debt

For years the world has focused on the "Greek Tragedy" that is far from over. While the ongoing misery of Greece continues to play out our eyes have been diverted from economic problems that fester and brew in Italy. Many people have failed to notice the Euro-zone debt crisis has taken a heavy toll on Italy where consumption and investment are expected to remain weak. The country’s economy has shrunk by around 10% since 2007 and output has regressed to levels not seen in more than a decade. While overall unemployment is around 12%-13%, with youth unemployment hovers around 40%. To worsen the overall situation an increasingly large number of refugees from North Africa are landing on Italy's shores.  

Smaller enterprises that are the country’s backbone continue to suffer from low sales, declining profitability, and lack of financing. Italy's banking system reflects the problems hampering future growth. Italian banks carry on their books around 200-300 billion euros of bad or doubtful loans, which has exposed inadequate capital and reserves. While counterparts in the U.K. and the U.S. have been able to deal with such loans Italian banks have been unwilling or unable to confront the asset quality problem. This has affected their ability to lend. Large companies can use capital markets for financing, but this option is less available to crucial smaller companies. This lack of credit in combination with the general erosion of Italy’s industrial structure creates little hope of a recovery and paints a grim picture going forward.

Italy Is One Of Several Nations With A Heavy Debt Load

Italy is the third largest economy of the Euro-zone after Germany and France, unfortunately, it holds the largest public debt totaling over 2 trillion euros. While Italy talks about its commitment to fiscal reform it continues to run a budget deficit of 3%. With government debt standing at $2.4 trillion dollars around 140% of GDP other problems are sighted. We see a government slow to pay its suppliers and weak in its ability to collect taxes, each year there is an estimated $160 billion in taxes uncollected.

Still, while this debt is a major factor hampering growth Italy’s problems are deep-rooted and fundamentally the economy has grown little since the introduction of the euro in 1999. It is clear that Italy still suffers from the legacy of its powerful Italian Communist Party in the time following World War II. This left Italy with rigid, high labor costs and multiple barriers to hiring and firing workers. A long-running government regulation requires the state to pay laid-off workers up to 80% of their normal salary while their employer restructures. Productivity improvements are also slow.  Italy’s economy is increasingly unbalanced. High-end producers, such as those in luxury products, and also advanced manufacturing have benefited from demand from emerging markets while other sectors, such as standard automobiles, domestic appliances and low-priced fabrics and clothing have found it difficult to compete with rivals from those countries.

Domestic appliances or white goods exemplify Italy’s decline. In 2007, Italy, once a world leader in the sector, produced 24 million appliances. By 2012, that was down to 13 million, the output of washing machines, dishwashers, refrigerators, and cooking appliances were down, respectively, by 52%, 59%, 55% and 75%. Italian manufacturers have been forced to shift production to lower-cost countries, resulting in large job losses. Italy ranks 65th out of 189 countries for ease of doing business in recent World Bank studies. Several key sectors are an issue, infrastructure, is in need of renewal lagging that of leading economies, and energy costs are high. Italy spends less than 5% of GDP on education, compared with a 6.3% average across OECD countries. As a result, only one-in-five Italians aged 25-34 completes higher education versus 39% for the broad OECD. 

In addition to Italy's other problems. it is burdened with a large corrupt and bureaucratic public sector. Italy is ranked 69 out of 175 countries by Transparency International in perceived levels of public corruption, comparable to Romania, Greece, and Bulgaria. Tax and other revenues are around 46% of GDP. According to the World Bank, the effective Italian corporate tax burden is around 65%. The European average tax on corporations is around 41%, with only France (64% and Spain (58%) in a comparable range. Switzerland and Croatia, both located close to Italy, have tax rates of 29% and 20%, respectively, which diverts investment from Italy. Even with high taxes, the quality of public services remains poor. Enforcement of a contract in Italy takes around three years, versus an OECD average of 18 months. Civil lawsuits take more than eight years to complete, compared to under three years in Germany.

Italy A European Debt Bomb Waiting To Explode

The truth is that in all reality Italy went bankrupt in summer 2011. Back then we saw interest rates on the national debt spike going out of control and Italy lost access to the financial markets. At that time the ECB and political authorities in Europe agreed to create around the country’s finances an artificial market to give the impression of stability and the appearance that Italy could work its way through its problems.

Italy, it appears is now forced to stay on this artificial support until the economic conditions improve and confidence is restored to where the country will have again access to real and normal credit markets. This most likely will never happen because not only is the country mired in debt but it is also a mess politically. The truth is not only the size of debt but the quality of the debt meaning the ability to repay it is an important issue. Because of the sheer dimensions of Italy as an economy and as a debtor, it dwarfs the problems posed by other countries that make up what has been referred to as the Euro-zone PIGS that have received so much attention in the past. All countries are not equal in size and the reason for their woes vary, however, propping up an economy is not a long term fix and the ECB loaning money to banks to have them purchase government-issued bonds is a scheme and instrument that allows international investors to over the years exit Italy in an orderly fashion.

All in all, it might be fair to say Italy is a European debt bomb waiting to explode. This is not sustainable and the country is held together only because of the direct intervention of the ECB which made over 102 billion euros of Italian bond purchases in 2011-2012 alone. This has continued since then and the sum has gotten much larger. Only through the LTRO have the finances of the Italian state been kept afloat. Way back in 2011 Nouriel Roubini warned that Italy needed to pursue an orderly restructuring of its debt to avert a default in coming years. Almost everyone agrees that Italy’s public debt is unsustainable and needs an orderly restructuring to avert a default, but as usual in the Euro-zone no action is happening. In many ways for Euro-skeptics Italy remains the Achilles heel of Europe, these skeptics are quick to point out that, once foreign investors withdraw, Italy will crumble under the weight of its debt.



Footnote; Thanks for reading, your comments are encouraged. This post dovetails with several other recent writings. Related articles may be found in my blog archive.

Is The Press Free And Are They Working For Us?

Over the years who controls the news and how we receive it has changed. The internet has made a huge difference in how news is distributed allowing people more choice in how to get the news, however, much of the content remains controlled by some rather strong players that often are driven by an agenda of self-interest. This has shown itself to be very apparent during the current presidential contest where many in the media have moved their strong bias towards candidates front and center, some of the coverage has left many of us wondering what to believe. Many times over the last few months supporters of non-establishment candidates Donald Trump and Bernie Sanders have been miffed and less than overwhelmed to see how poorly their man was treated by the press.

Weeks ago during an interview by Chuck Todd on "Meet The Press" viewers witnessed a good example of just how badly you can treat a guest invited to answer questions. Todd's over the top effort to put words in Trump's mouth and take statements out of context then spin them in the most harmful way reached new heights.  In one segment of the show as Todd talked viewers saw the names of anti-Trump Republicans scrolled along the right-side of the screen, the fact that many viewers did not even recognize the names of what might be considered lower level party members mattered not. At that point, I would not have been surprised if Todd looped the list around so it would begin again in a way to reinforce his point that the number of party members against Trump was growing too large to count.

An interview with Hillary Clinton, on another network, stood in drastic contrast to how Trump was treated and interviewed. In her interview Sunday morning on "Face The Nation" it was as though Hillary had written the softball questions asked of her. It was as if she had seen the questions in advance or controlled the interview. Having seen her speak "off the cuff" in the past leaves me dubious of what I saw and heard. I assure you it was not the same Clinton, she banged away at every talking point as if she had a teleprompter in front of her. Hillary's message was clear and well defined. Donald Trump is a loose cannon and dangerous, and if you are a serious voter you cannot even consider putting a "loose cannon" in control of this country. This was backed up by a series of scripted statements that all loop back around to support the subliminal message, Trump bad, Hillary good. 

Then the news swings to coverage of how the President spent the day and if he had any harsh statements about Trump. It should be noted that when Obama strolls to the podium to criticize, condemn, decry, and denounce Trump he often merely enrages supporters of the Donald. Believe it or not many of them do not hold the current president in high esteem. The truth is his arrogant denouncements are the equivalent of throwing blood in the shark-filled water. The irony of all this is that Obama who ran for office under the banner of  "Hope And Change" is viewed by many Americans as one of the most divisive Presidents in our history and now we see him continuing to polarize politics and the nation as his term nears an end.

The media coverage of this election cycle is akin to a slow motion train wreck. Pathetic is a good way to describe how the media has pulled out all stops to get a "Breaking News" banner across the news screens whether it is justified or not. Often it is rolled out as we watch the same news clips and footage we have already seen several times, this is accompanied by rampant speculation geared to tantalize the viewer. Yesterday as I viewed several Sunday morning talk shows that claim to focus on the nation and the news that affects all of us rather than important issues, I was blasted with more Trump bashing. This leaves many people wondering if the so-called "free press" is working for us or under the directive of greater forces seeking to control the election. We must assume that greater force would be those currently in power and yearning to extend their run. Another name for this group is the establishment.

Then there is the issue of what is touted as "free publicity" or media coverage that many in the anti-Trump group point to as a "gift" that is sighted as a key reason for Trump rising to his current position. These people fail to mention that most of this coverage has been bad and the time the media has spent talking about Trump is heavily skewed to disparaging him. In an un-relentless barrage of attacks, all the tricks are being used from taking comments out of context, straight-out misstating his position then putting it in an unpleasant light. The failure of his enemies to dislodge Trump from becoming the Republican nominee has created a state of panic and is now driving a new wave of media speculation that another candidate must be found to carry the banner of the "really good" true conservatives. The search for someone rooted in a pure ideology and untainted by reality continues on.

It is interesting to note that many of the major media websites do not offer a comment area, or if they do they are restrictive in the comments they accept. This could be considered a form of censorship because it appears they would rather not show the views of those seething in disagreement. It is becoming more obvious each day that the mainstream media has taken upon themselves the job of choosing America's next President and public opinion be damned! With each passing day the myth that America is a land where democracy rules and the voters call the shots is being stripped away. Recently, when the insiders of our two parties tried to regain control of voters in revolt, Americans were reminded that the country is a republic and not really a democracy. Adding to this if you listen closely the sound of the cursed and long ago obsolete electoral college that skews the importance of states in the general election quietly rumbles in the shadows. 

With the continued unchecked and relentless attacks on Trump, the media risk a growing backlash and losing the little credibility they have. Is it no wonder that Americans question the honesty of the media whose ranks appear to have become filled with opportunist and bums dressed as journalist.  The bottom-line is that we out here beyond the beltway in the backwaters and wilds of America should remember the media has a casual relationship with the truth. Just because the media or a politician says something does not make it true.



Footnote;  A while back I wrote a piece that looked at the definition of propaganda. It is a form of communication that is aimed towards influencing the attitude of a community toward some cause or position by presenting only one side of an argument. Propaganda is usually repeated and dispersed over a wide variety of media in order to create the chosen result in audience attitudes. It explored how the White House creates a message by spinning, scrubbing, molding, and shaping it, they then send it out to the public. This becomes a real problem when one person or a small group controls the message and uses an army of tax paid employees to shape, spin, and sends it forth. More on this subject in the article below.
http://brucewilds.blogspot.com/2013/04/white-house-propaganda-machine.html

The Yen And Its Failure To "Fail"

To consider the Japanese yen a "safe haven" currency flies in the face of reason. For years many economists have looked at Japans economic path and predicted an economic crisis brought on by the growing debt of its government. The myth promoted by the central banks that a major currency cannot fail is accepted as fact by many people however, the rapid demise of either the yen or the euro is all that will be needed to reveal the truth and remind people everywhere that our system of fiat money is held together only by faith in the system and a prayer. Clearly, an accurate timetable for such an event is very difficult to predict. Several factors playing into such a scenario and how fast such an event might take to unfold after its onset remains difficult to answer. In recent years as Japan has undertaken a policy to weaken its currency and to strengthen its exports America has until recently remained mute in sympathy of the problems Japan is facing. Nothing good is really occurring within the Japanese economy. Prime Minister Abe has even said he will delay a sales tax hike because it threatens to derail the country's fragile recovery. The reality is that much like the situation that developed in Greece it is clear that Japan is facing a wall of debt that it will never be able to repay. The difference is that Japan controls the press that prints its money.

Small Shifts From Bigger Players Move The Yen

In the future, Japan's debt can only be addressed by printing more money and debasing the yen. In truth, this means they would be paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 250% of its GDP is the highest in the industrialized world. It seems that because of its minute size people tend to forget that the island nation of Japan is an economic powerhouse. When looking at the GDP of Japan we find the country ranks third behind only the United States and China. Japan is an export driven economy meaning it sucks in raw materials from all over the world, adds value to them, and then spews out finished goods. This leaves the country and its economy dependent on and vulnerable to the countries buying its products. A weak yen makes these goods more competitive on the world market and propels the economy forward.

The yen is part of a somewhat self-defending system that includes the four big boys or major currencies. These players known as reserve currencies are considered the most liquid and sound in the global economy. The value between them constantly fluctuates and as one currency temporary falls out of favor investors shift into the other three seeking the least bad choice. As long as savers, investors, and institutions keep their wealth stored within these four currencies and continue the delicate balancing act of avoiding the worse and exiting the most overvalued the system remains relatively stable and will continually readjust partly because it is so self contained. Each of these currencies has its particular strengths and weaknesses, however, the most vulnerable of the two are probably the Japanese yen and the Euro which is the official currency of the Eurozone, which consists of 19 of the 28 member states of the European Union. A key weakness of the euro is the questionable accountability of its controlling institution.  

Japan's Huge Debt - Click For Larger Chart

Over recent decades because of its size in the global economy the current Bank of Japan policy has quietly and systematically distorted financial markets across the planet. With super low interest rates it has become a key player in the carry trade. In recent years investors and the mega-banks have drastically reduced their Japan Government Bond (JGB) holdings. Much of the risk of who gets hurt in the case of a falling yen or a default is shifting from the private sector to the Japanese public as the BOJ splurges on JGB's. As Japan continues down this path it is only a matter of time before the credibility of the BOJ is lost and the yen will plunge. For a long time I along with many economists have taken a dim view as to the yen and its value in coming years, however, timing when it will succumb to economic reality has been hampered because of how it is insulated and intertwined in world markets.

Demographics paint a bleak picture going forward because Japan is stuck with an aging and shrinking population that is increasingly expensive for the government to provide for. Adding to its woes the Fukushima nuclear disaster shuttered its nuclear power plants and forced the country to import more expensive energy alternatives. All in all neither monetary nor fiscal policy will adequately solve Japan's problems. Continuing to run fiscal deficits only means that government debt is pushed onward and upwards. Simply put, the fundamentals for Japan are lousy. It should be noted that Japan would be sitting in far worse shape if it were not for the wealth currently shifted from America to the small island nation each year. America spends billions each year defending Japan and puts much of this money directly into the economy. Another way America supports Japan is by purchasing many of the goods the country produces. The massive trade deficit America has with Japan feeds large amounts of money into Japan, without this money the massively indebted nation would be in even more trouble.

For years it has been noted that a key strength that Japan holds is its ability to control its own economic fate and that it cannot be held hostage to foreigners because the people and institutions of Japan hold its debt. In the past we have seen outside creditors can wield a great deal of sway over a nation that is deeply in debt. It is not uncommon for creditors to squeeze, threaten, and even blackmail a country that owes them a great deal of money. Recently, as the yen has moved higher many analysts claim Japan is unable to halt its advance. As for the current idea that Japan may not be able to drive the yen lower even if it makes an effort to do so. I contend it is bunk because a country can always drive its currency downward, however, supporting it is much more difficult. To drive a currency lower a country only needs to print and sell their currency using it to buy one or more of the other three reserve currencies. Part of recent strength seen in the yen may be contributed to the fact Japan has strong economic ties to the collapsing economy in China and thus is used as a conduit to move wealth out of China.

Unlike many other leading economies, Japan has been battling deflation or falling prices for the best part of the past two decades. At some point expect this to change as reality takes hold. To support their stock market the BOJ has even gone to buying stock. When investors in Japan's government bonds begin to believe that Abenomics will be successful in bringing back inflation it would be logical for owners of  JGB's to move out of low yielding securities and buy foreign bonds or equities. The moment the Japanese stock market fails to rise enough to offset a falling yen and inflation this will turn into a tsunami of money fleeing Japan and constitute the end of the line for those left holding both JGB's and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some other stock markets have remained so resilient in our slow global economy. When Japan crumbles it will be felt across the world.

Lesser Of Two Evils, Wall Street Bankers Or Government?

Wicked Bankers - Who Controls Who?

The worse of two evils? Wall Street bankers or government? While I was pondering this question the other day it did not take long to come up with an answer. Government wins hand down. We elect politicians to lead and guide us, we do not elect or appoint bankers. Government's job and those claiming to be public servants are to protect and defend us, bankers claim no such role in society. Bankers are the snake, the creatures that we know to be poisonous. In theory with an army of dedicated public servants standing at guard, we should be safe from these creatures. Unfortunately,  lawyers and politicians historically garner rather low marks in the eyes of many Americans when it comes to ethics. Ironically we find many politicians flow from prior careers and backgrounds in the legal profession. With this in mind, it is little wonder the 2,300 plus pages called the Dodd-Frank Act partially written by the very banks it is to control is to be our shield from abuse.

The goal driving this post is to highlight which of these institutions is the lesser of two evils may have become a moot point because over the years the worse fears of many freedom loving people have begun to play out as these two forces of evil have joined together. Years ago President Eisenhower warned the American people about the Industrial Military complex, but nobody warned us an even more evil alliance that of the "Financial-Political Complex." This unholy alliance of the Federal Reserve, the government, and the too big to fail has left the rest of us in a precarious position. Following the 2008 global crisis, the authorities acting primarily to prop up governments and the economy took actions to save the financial system by bringing big banks deeper into the fold.

Politicians And Dignitaries Davos, Switzerland   

Before I  turn my attention towards the crux of our problem a quick volley at the institution filled with so-called "public servants." Over the years my observations have led me to believe that worse things could happen to you then taking a job with the government, after viewing the lifestyles associated with many career paths, politics and the route of working for the government seems to offer both job security and much potential. A career in politics can grant you a lifestyle where you, and often times your family will get to rub elbows with the ultra-wealthy and the country's most powerful titans of business and industry. It is not uncommon to see our public servants, some as low as a mayor or agency head climbing out of a limousine, being wined and dined, or on an exotic visit or fact-finding mission at the expense of the taxpayer. 

A career choice within government also has the benefit of sheltering you and extending legal protection that covers you from the responsibilities of your actions. Politicians are often rewarded with generous pensions and superior healthcare benefits far outside the reach of the average citizen. Imagine being flown to retreats at lavish resorts, elegant dinners, and when the gig ends it can be followed by lucrative connections that will serve you after you later move into consulting or the private sector. Our public servants often stay at the best hotels with their beverage of choice waiting in their suite and experience tours of important sites while security closes them to the masses. During your time in government you will carry an aura of power setting you above the common man, like a rock star, you arrive in style, chauffeured about in limousines at the taxpayer's expense. Do not forget the expense accounts, and as you look around you will find more than one building or structure named to salute these grand sacrificing soles who often position themselves to serve and benefit while doing so. 

Just A Thought - So Many Crooks To Watch

It is important to remember politicians and bureaucrats seek increased power and influence, and it now appears these authorities hit the jackpot when following the 2008 financial meltdown they joined with the banks. In doing so they created the "Financial-Political Complex" a group that promotes the current fiscal policy and supports our "too big too fail" banks. Many people say that the way out of the housing crisis is to let everyone fix their mortgage debt at super low fixed rates, then inflate, inflate, inflate? Well, perhaps the government's way out of its own debt is to secure low fixed rates for itself then inflate away when it becomes necessary. It should not bring comfort to the average man that these two unholy forces have joined together in such an incestuous union.

Who is the principal borrower at today's rates? The banks don't seem to be using the cheap money for their traditional business of lending to small businesses and supporting communities.  It seems it is the government that is doing the borrowing and getting away with amazingly low rates for long-term debt. Banks have been big buyers of government bonds in the past couple of years because of the “carry trade,” this allows them to borrow money from the central banks at low rates and lend it back to the government at a higher yield. In effect, this is a subsidy to the banking sector. Banks may buy even more government bonds in future because international regulations assign a low capital charge to government debt and because banks will be required to hold a store of liquid assets, of which bonds will be a big part. So the government stands behind the banking system, and in turn, the banks are big buyers of government debt.

This financial-political complex is bolstered by the general unwillingness of governments to let banks go bust. The argument runs that it is better to intervene heavily in markets rather than do nothing and repeat the mistakes that created the Great Depression. The cumulative effect of steps taken by the authorities over recent years designed to prop up the economy and save the financial system has resulted in the creeping nationalization of markets. Central banks are the biggest players in many rich-world government-bond markets. Equity markets seem to perk up only when central banks are expanding the money supply and companies use the bounty to buy back stock shares at ever-increasing prices. Banks were created to channel funds from savers to borrowers, traditionally from the household sector to companies. Banks main function was to distribute money, and for this minor service they are paid exorbitantly well, allowing and extending their role in the financial sector is fraught with risk.

History suggests that once governments get involved in a sector, they find it hard to withdraw. Given the weak outlook, it is hard to imagine the circumstances in which liquidity support for the banks will be withdrawn or the policy of low-interest rates abandoned. This is a new financial and economic era. QE, ZIRP, and even NIRP haven't forced people to invest better but has had the effect of causing people to scramble for cover. More of the same is not a resolution to deep-rooted problems but does represent the evil character of finance for the moment. We should be very afraid of the "Financial-Political Complex" and the current policies because both have a lot in common with what is known as a Ponzi scheme. This is a reason for caution! Again, history speaks volumes because if it looks like a Ponzi scheme, sounds like a Ponzi scheme, and feels like a Ponzi scheme, then it is probably a Ponzi scheme.


Footnote; The idea the wicked bankers have been brought further into the fold to mask the failings of the government and central banks ties into many of my prior articles. This capital cronyism is a driving force behind growing inequality and has surfaced in recent elections. As always your comments are welcome.

Economic Expectations Inflated By Four Key Factors

G7 Meeting In Japan Ignored Warnings of Global Crisis

Several factors have been inflating economic expectations. Four key issues in play are the tailwinds from China's massive liquidity injection during the first part of the year, rising oil prices, technical factors indicating a breakout on the charts, and Janet Yellen's recent rollback of when interest rates would increase. In truth all these issues are double edged swords that could cut either way rather than a solid guarantee of stronger markets. An argument exist that each of these factors is a warning that risk is on the rise and together they scream "caveat emptor" or in plain English, let the buyer beware.

It is now known that in the first quarter of 2016 China opened the floodgates of liquidity in what some economist view as an almost panic reaction to its deteriorating internal economic conditions. This explains a great deal as to why housing prices are again on the rise in China and office space is being built even though vacancy rates remain high. This recent boost in money supply occurred at the same time money has continued to leak out of China, fueling prices in several global markets and increasing speculation. This boost in markets has reassured those touting a bullish scenario and lends credence to the false illusion that all is well.

Due to the fact China shares strong economic ties with Japan it is possible this wave of money also had a role in the announcement overnight that Japan’s economy grew slightly more than the government initially reported.  A revision in private consumption and business investment that dropped less than originally thought during the first quarter was given as the reason. According to revised data gross domestic product expanded by an annualized 1.9 percent in the three months ending March 31, a slight bit more than the initial reading of 1.7 percent. It should be noted this is not a great performance on the part of Japan but it does keep the country out of a recession.

Money leaking out of China and working its way into commodities also helps to explain a jump in oil and even copper while it is clear more than ample stocks of both exist to fill somewhat weak demand. While many people had predicted oil to come back a bit off its bottom the speed of its rise has surprised even some bulls and caused bears to cover their positions in panic and horror. If this China boost has indeed been the big driver of recent markets and its force is about to weaken we might see prices soon reverse and again head lower. If this happens predictions of a breakout to the upside by the chart loving nerds may prove just another market disappointment. These have been experienced on more than one occasion.

As for Janet Yellen and her flipflop and dovish comments on an interest rate hike followed a heartbreaking jobs report. Shocking many the report showed that only 38,000 jobs were created in May and revisions lowered the number of jobs thought to have been created in prior months. Yellen's move was seen as an effort to prop up and halt a market fall. The idea "bad news is good news" is based on skewed logic and can be countered with the argument the good effects garnered from lower interest rates are largely behind us. This has proven true across the world as the central banks have raced to the bottom only to find little relief from the slow economic growth that has haunted their economies for years.

Near the end of May as the Group of 7 finance leaders gathered in Japan, warnings of a coming global financial crisis were voiced, but in the end concerns were ignored and brushed aside. If indeed the above factors have for the moment put a little lipstick on our tired old pig of a market do not expect her to sprout wings and fly. And it is wings she might need when you stand back and look at the fact this economy and market sits upon a pile of debt, piled upon a pile of debt. To say it may be time for caution and prudence is an understatement.

"Its The Economy Stupid" Trump Should Focus On Jobs!

Trump Should Focus On Job Creation!

A phrase "The economy, stupid" was coined by James Carville when he was a campaign strategist for Bill Clinton's successful 1992 presidential campaign against sitting president George H. W. Bush. Directly linked to this phrase is the idea of job creation. Today the fear of being replaced by a robot or seeing your job being outsourced or eliminated is on the rise. Few occupations are totally secure from the wave of labor saving technology currently in the pipeline. After facing decades of stagnate or falling wages when adjusted for inflation little wonder exist as to why the average American feels insecure or downright betrayed. As a businessman Trump holds a strong real life advantage over politician Hillary Clinton in understanding how to create jobs.

Several new technologies headed in our direction scream economic disruption, one writer I follow has pointed out on more than one occasion how self driving vehicles is a game changer. Self driving semi rigs able to safely maneuver and fill the nations interstate highways during the night when traffic is light will reduce daytime congestion but greatly reduce the ranks of a major occupation that pays relatively well. The ramifications of self driving vehicles will extend into areas such as taxi jobs and potentially change the relationship most American's have with their automobile. Currently the automobile is thought of as a mainstay of modern life in this country. Imagine not having to own a car or reducing the number of automobiles in your family because a safe and secure ride is available at the push of a button.

Amazon Boast Its Moving Towards A Robot Workforce

This returns me to the subject that Trump should hammer on, and champion, correcting the troubled job situation and declaring it his wheelhouse. Much of the angst Americans have directed at Washington is in some way or another related to how government policies have allowed jobs to flee the country and sometimes even encouraged this trend. The recent job report signaling a huge drop in hiring only highlights and makes it increasing clear that automation is not going away. Increasing wages will only accelerate and drive the trend of replacing expensive human workers with robots. Amazon the behemoth retailer known for cutting prices and exploiting brick and mortar retailers that have higher overhead because they are located in our communities often boast of its cost saving move to utilize more robots and cut human jobs.

The average American has good reason to worry not only about their job but the future opportunities available for their children. Let me make it clear, robots taking our jobs will bode poorly for the huge majority of society. The idea that those ultimately left with the decision as to how to divide the economic pie will be generous or fair is a little naive. History shows the ruling class tends to tilt the rules in their favor. Soaring economic inequality is already a major issue and the divide is most likely going to grow ever wider. When it is pointed out that entitlements are about to explode the deficit in coming years logic dictates the nation can no longer delay addressing this issue. While very important to voters creating good quality sustainable jobs is also an issue where both Clinton and President Obama who has lashed out at Trump fail to excel.

Trends Confirm Robot Workers Are Coming For Your Job

Rest assured when push comes to shove those displaced from the job market will find they are only given enough to insure they remain docile  and behave. If it ever comes to the point where filled with angst they hit the streets in angry protest it is very likely they will be beat into submission for the greater good. It should be pointed out that going forward those on the government dole or a guaranteed income may find they are at the mercy of a system where at any time benefits are canceled or cut.

Tied into Trump's solution to create new jobs is the strong message that we must demand from other nations fairer trade policies that level the playing field. We cannot compete when other nations pay their workers little, degrade the environment, and often subsidize exports in various ways. This is a stand Trump shares with Bernie Sanders and it will help him gain the votes of many Independents and some of Bernie's supporters. With the Republican primary fight behind him the pivot  to a softer sounding less abrasive stand on immigration would also garner more support and it ties in with the idea of protecting American workers. The truth is we can both build the wall and control our borders while at the same time adopting reform that seems reasonable and mutually acceptable to most Americans.

It must be recognized that anyone painting a vision that shows how America can integrate labor saving devices into a job creating bonanza would be hailed in very positive way. To be great a country must be economically strong. Key to any policy geared to creating jobs is getting the foot of government off the neck of small business. This means reducing the regulations strangling the nations most vibrant creator of jobs and where workers gain valuable work skills is a must. Tax reform and laws governing business must reduce the advantages mere size gives big business and its ability to destroy competition by mass alone. As it is big business will benefit most by adopting more automation and robot workers and this bodes poorly for most workers and society if it is not handled in a way that minimizes the damage to our culture.

Like many backseat political strategist I have grown weary of Trump positioning himself as a punching bag for the bias news media and their endless stream on pundits. Our horribly designed primary system has not brought the best and the brightest to the forefront as we are faced with choosing our next president. Many people have indicated in a series of polls that we have been left to choose the least evil of two bad choices. It would bode well if Trump could avoid going off on irrelevant tangents and some of the other subjects that are constantly being brought it the forefront by the headline thirsty media in their 24-7 barrage to discredit him. A focus on job creation and the economy where he is strongest has a bit of merit.

Low Interest Rates A Weakening Tailwind To Our Economy

Low Interest Rates Have Failed To Produce Solid Growth

Sometime ago I wrote about lower interest rates being a "one-off" for the economy that was largely behind us. This has proven true across the world as the central banks have raced to the bottom only to find little relief from the slow economic growth that has haunted their economies for years. The truth is a policy of creating debt and stacking layer after layer of it behind the curtain has dampened the ability of consumers to move forward. The fact that even at super low-interest rates a great share of income must be diverted away to pay obligations created in the past leaves less money available for new purchases. This has a major dampening effect going forward. An argument could be made that the power of lowering interest rates is a one-off that has largely played out and ran its course.

If indeed the "one-time" economic tailwind is rapidly weakening and lost its kick as much of the recent economic data indicates, this has put both the central banks and the economy between a rock and a hard place. The big issue is where we go from here, regardless of what you name it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. To make matters worse little has been done to address our structural problems and make America more competitive, this will massively thwart growth going forward. Adding to our woes is the Federal Reserve has failed to make any serious efforts in pushing the government to take the necessary reforms needed to move the economy forward.

Policy makers aided by the media thrive at presenting simplistic answers that solve both economic and society’s problems with little or no effort required from the masses. What former Fed Chairman Ben Bernanke started as a program to support and prop up the economy has over time morphed into the main driver of economic data. Between the low-interest rates that have propelled investors into high-risk assets in search of a positive return on their money, and money being pumped into the system, the markets have become distorted and disconnected from the economy. The idea that investors will continue to pour money into the sky high equity market is flawed.

With a policy of loose and cheap money and an inflation target of just 2% the Federal Reserve continues to please those gambling that not fighting the Fed guarantees profits. Even as many economist claim inflation is not an issue for the many Americans forced to pay higher food, rent, and health insurance premiums little comfort is forthcoming. It seems any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages, this illusion will vanish if rates move upward.

Exports To America Key Support To Many Economies 

It must be noted that America imports around five hundred billion dollars more from other countries every year than they export. This means we have a giant trade deficit. When we add this to our enormous government deficit it is easy to see that we are living far beyond our means. It also means that America cannot afford to carry the weight of the whole world upon its shoulders much longer. The Fed has been superbly entrepreneurial when it comes to Ponzi schemes or pseudo-economics hocus-pocus that has allowed the current situation to develop. Even as many people have grown comfortable with the status quo this does not change the fact the Fed is in a difficult corner.

A serious exit strategy from QE  that normalizes interest rates remains elusive. With higher interest rates the cost of mortgages will rise. The low-interest rates that have discouraged savings and encouraged people to take high risks come at a cost and does not lead to a healthy economy, but rather a story that will end in tears and regrets. When interest rates rise, as they will at some point, the value of these risky investments will decline, and these investors will be hurt. Also, as a double whammy, interest payments on the public debt will rise, increasing the budget deficit, which has remained historically high and will be at the mercy of growing entitlement programs in coming years. Still logic dictates the Fed  must at some point begin to ponder a real exit strategy and end the massive and corrosive stimulus that the economy has come to expect.

If all the money dumped into the economy would suddenly change direction and rush into hard assets, the shift would be devastating to our struggling economy. This thought also raises other questions, what can we define as a hard asset, what is really available, and in what quantities? This may be where inflation raises its ugly head. An unknown and surprising fact about inflation is how fast it can take root. With such a shift, interest rates would move higher and investors would flee government bonds. The crash of the bond market and a popping of what many have called a Bond Bubble will become a reality. It is abundantly clear Janet Yellen has shown no interest in coming up with a plausible exit strategy and even after developing such a scheme making it work will be easier said than done.