Decoding The Yen's Strenght And The Move By The BOJ

An announcement made by the Bank of Japan to modify its so-called Yield Curve Control framework came at one of the most illiquid times of the day. It also occurred during one of the most illiquid weeks of the year. This "tweak" immediately created havoc in the currency markets. Where this becomes insanity plus is that this is a bogus market, a glorified illusion. When all is said and done, the BOJ will be the buyer of this debt. 

New data shows that the share of Japanese government bonds held by the Bank of Japan has grown to where it now tops 50% on a market value basis. Into this mix, we should factor in the notion that with a wider/higher band for the 10Y yield, in theory, the BOJ will have to buy fewer bonds to keep the spread within their limit. Many of us are struggling to interpret the logic behind the latest move that allows long rates to rise from 25bps (the prior YCC limit) to 50bps. The point is, it doesn't matter all that much.  

You could argue the BOJ is both tightening and loosening at the same time. One explanation is that while causing speculation and chaos in the markets it is, or will prove to be, a big nothing burger. It is difficult to embrace the idea this will help the struggling Japanese economy which has already been hit because of its ties to China, where growth has slowed, and the high cost of energy.

Despite saying the BOJ would increase bond purchases to Y9 Trillion from Y7.3 Trillion per month (which indicates an easing of monetary constraints) the Japanese yen strengthened against the dollar. We must remember that this is a double-edged sword. An upward move in interest rates by the BOJ increases the cost of servicing Japan's enormous national debt. 

Japan's debt has become so large it can never be repaid by a yen that has real value. The only way it can be repaid is by massively demonetizing the yen which would take it down the road traveled by many fiat currencies. In short, it would become worthless. Adding to the problems faced by Japan is the fact any rise in the yen will put pressure on exports, yes, Japan is in a pickle.

The BOJ Is In A Pickle

Here the reference to being "in a pickle"  has to do with the difficult situation the BOJ currently finds itself in. A problem with no easy answer or an obvious way out. The 'in trouble' meaning of 'in a pickle' is an allusion to being disoriented and mixed up in a bunch of stewed vegetables used to make pickles. This is almost a literal reference to fanciful stories from old stories related to hapless people who found themselves on the menu, but that is enough about pickles.

•  be in a difficult situation
• to have a problem where there is no immediate answer or solution
• to be in an unpleasant situation with no obvious way out

Source: theidioms.com

in a pickle

Meaning

• to be in a difficult situation
• to have a problem where there is no immediate answer or solution
• to be in an unpleasant situation with no obvious way out

Source: theidioms.com

in a pickle

Meaning

• to be in a difficult situation
• to have a problem where there is no immediate answer or solution
• to be in an unpleasant situation with no obvious way out

Source: theidioms.com

in a pickle

Meaning

• to be in a difficult situation
• to have a problem where there is no immediate answer or solution
• to be in an unpleasant situation with no obvious way out

Source: theidioms.com

As mentioned earlier in this article, this announcement from the BOJ came with no warning and caught currency markets off guard during a time of very light trading. It also came at a time when the rest of the world's central banks are still moving in the opposite direction. 

The BOJ has acknowledged, “the functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and future markets... If these market conditions persists, this could have a negative impact on financial conditions.” 

This could reflect the BOJ has lowered its view on the economy and is getting worried. The bank even stressed it expects short-term and long-term policy rates to remain at their present or lower levels. In short, traders should not see this so much as a pivot in policy as much as an effort to put a net under the sliding yen. After the yen rose in value stopping out those with short positions and forcing out many traders due to margin calls it has now edged slightly lower. Many of us see the yen as being in a precarious situation and would not be surprised to see it resume its slide downward in the new year.

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Ukrainian Narrative Continues To Morph Ugly

Death And Destruction In Ukraine

If the "Ukrainian narrative" was not ugly enough, it continues to work its way farther to the dark-side. It is debatable how long the American people will buy the line that funding the war in Ukraine will result in a good outcome. Someday, what is happening in Ukraine may be looked back upon as a horrible blunder, lie, and misstep largely orchestrated by America and the "Obama/Biden political machine."

Sadly, US senator Bernie Sanders on Tuesday agreed, due to fairly intense pressure from the White House, to withdraw the so-called ‘Yemen War Powers’ resolution from a vote in the Senate. The crucial bill would have restricted US military involvement in war-torn Yemen and reasserted Congress’ war-making authority. As a footnote, the word was put out that President Joe Biden would most likely veto the bill passed if it passed. White House officials said the bill “could complicate the effort to back Ukraine in its war against Russia.” 

Recently, in a phone call, Ukrainian President Volodymyr Zelensky "thanked" President Joe Biden for the "unprecedented defense and financial assistance that the U.S. provides to Ukraine." that of course did not stop him from asking for billions more. So far the total that has been either proposed, pledged, or enacted exceeds a mind-boggling $100 billion. With every billion dollars representing roughly three dollars for every man woman and child in America, this means it has already cost each of us around 300 dollars. When you consider how many people, such as children and those barely getting by don't share in this burden, the amount placed upon each taxpayer soars. Much of this money has been doled out with little oversight.

It is important to remember that under Biden's tutelage this "conflict" has become not so much about defending Ukraine but ending Putin and Russia. It is not about the people of Ukraine but much more. The Ukrainian people and much of Europe have become mere pawns in a game. Unfortunately for the Biden camp, for all the money being poured into this "theater" it would be naive to think Putin will not achieve his goals or come out of this conflict the victor. 

Even as this is being written, Ukraine is bracing for yet more Russian attacks on its energy infrastructure. Ukraine has accused Moscow of intentionally unleashing additional suffering on the population headed into Christmas. Its Prime Minister Denys Shmyhal said, "Russian terrorists will do everything to leave Ukrainians without electricity for the New Year." Currently, around 80% of the Kiev area appears to be without electricity for the second day in a row.

The only thing growing as fast as the cost of Biden's proxy war is the ego of Ukraine's President Zelensky. This has become more apparent by the day as the attention-seeking comedian media star turned politician pushes his way onto the center of the world stage. Zelensky is constantly appearing at major public events to make appeals for aid. These include the Grammys and Cannes Film Festival. This is when he's not busy addressing the G7, the European Parliament, or an UN-sponsored event.  

Pro-war advocates even arranged for Zelensky to give a 30-minute long speech before Congress, foreign leaders seldom get this opportunity. During the speech, he was frequently interrupted by spontaneous standing rounds of applause from US lawmakers as he vowed: "absolute victory" over Russia. With events like this taking place, it is little wonder Time magazine recently named Zelensky and The Spirit Of Ukraine as person of the year. There are, however, signs global audiences are tired of hearing Ukraine's President Zelensky ask for more money. His message is steeped in propaganda. This could be the chief reason the formal request for Zelensky to talk about "world peace" before the kickoff to the World Cup final, was recently denied. 

The Biden administration along with Ukrainian officials have been shocking the world with claims of how well things are going on the battlefield." This has gone to the point where NBC News reports that the White House now calculates that the Ukrainian armed forces are capable of retaking the Crimean Peninsula. Administration officials are using this as a reason Congress still needs to fund Ukraine. Those promoting and encouraging such an offensive move ignore the danger it may cross Moscow’s "red lines" and increase the possibility of nuclear weapons being used.

Chart Source: Center for Strategic and International Studies

Still, with many Americans distracted by the holidays, few are paying attention to just how much money we are spending supporting Ukraine. The visual aid above helps clarify the distinction between what has been proposed and enacted. The additional "proposed" billions that are shown in the above chart have at this point been approved with the recent passage of the National Defense Authorization Act for Fiscal Year 2023. Approving the current request would bring the total amount approved to $104 billion in less than a year. 

To the chagrin of many Americans, the war in Ukraine continues to grind on. The ramifications of the Biden proxy war extend far past spending. It includes using presidential draw-down authority to pull hundreds of millions in weapons and anti-air missile systems from American stockpiles. Biden's newly announced pledge to send Patriot missiles to Ukraine means we may be short weapons if a problem comes up somewhere else.

This is why NATO Secretary-General Jens Stoltenberg commenting on the state of Russia-West relations said "Even if the fighting ends, we will not return to some kind of normal, friendly, relationship with Russia. Trust has been destroyed." He claimed that NATO sought to build positive relations with Russia immediately after the Cold War - despite the fact it expanded to Russia's doorstep soon after the collapse of the Soviet Union.

For now, the idea this conflict will rapidly end has been placed on the back burner. This could be because many people are benefiting from the spending. To the warmongers, this is because we have not done enough. Those of us advocating the antiwar position view this as an unnecessary proxy war and that we have no business there. This extends to the position we should do everything we can to bring hostilities to an end.

Some of us take the position that this was all set in motion by the U.S. choreographed coup in Kiev eight years ago under the Obama Administration. It would be hard to overstate the significance those events played in creating the situation currently before us. Former US Secretary of State Henry Kissinger is one of those calling for urgently finding a path of negotiated settlement to the war in Ukraine. He warns the entire world is in danger as nuclear-armed superpowers inch closer to a disastrous confrontation.

A huge factor in keeping truthful information about what is happening is held hostage by propaganda. The situation on the ground in Ukraine may be far different than we in America are being led to believe. Recently the Russians have altered their strategy in reaction to reality but not because they are in dire straits. An argument can be made that Russia's pullback from some Ukrainian territory was strategic and that by pulling back they have sucked the Ukrainian troops into a meat grinder where they have suffered massive casualties.

Michael Vlahos and Douglas Magcregor got together recently in the library of the Army-Navy Club, Washington, D.C., to reflect on the war in Ukraine; https://www.youtube.com/watch?v=GhA1yofpkMg It appears Putin has been to the front to confirm that Russian troops are prepared for a winter offensive. This is the type of warfare in which Russia excels. When it comes to fighting on the ground in cold weather, it has been said that Russia invented winter. It certainly does not look like a pleasant winter for the people of Ukraine, and for that, they can thank Biden. 

 

Minor Footnote; Added 12/30/22,  I highly recommend the following video that was recently released. While I consider it slightly biased, it gives a picture of a rather unexciting end to this conflict. https://www.youtube.com/watch?v=FU8N-CxkIRM

 

 (Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

The Huge Cost Of Opulence

An Example Of Opulence

The cost of opulence is often far greater than we might expect. The people seeking to accumulate wealth are often driven by a variety of reasons and it is not always to show off their riches. The kind of riches and grandeur and riches that most individuals can only dream to enjoy are expensive and out of reach for the average person. What many people don't understand is that such trappings are frequently overrated.

Over-the-top displays of wealth are something I find rather silly. Much of the desire to live this way is to attract positive attention and to make those living in such grandeur an object of envy. The idea you can fall into or backdoor your way into wealth is pushed forward by fairy-tale-like media stories about it happening to someone else. Usually a person of average means.

The subject of an opulent lifestyle became the issue of this post due to my seeing a movie where the main character started bouncing off the walls when transferred into the world of the "rich and famous." They rapidly learned that life tends to be a trade-off and try as you might you can't have everything. In some ways adopting a lifestyle of opulence appears exhausting. 

Living large does not come cheap. In addition to expending a great deal of effort to make this appear effortless, you will be taxed in more ways than you can imagine. This includes people you have no interest in wasting your time. Another problem is people will focus on getting their hands in your pocket at every opportunity. In short, people will see you as a target and so will every charity under the sun. 

If you collect cars or just have one that you only drive now and then it does not take long to get the message that a car must be started or its battery will go dead. It must be recognized that even if you do keep them properly charged, batteries only last so long. Time takes its toll on many things and ownership complicates life. This is why so many people prefer to rent rather than buy. It is also why so much wealth is held in intangible assets and paper promises. 

This avoidance of direct ownership is something people may end up regretting if the financial system comes upon rough times and defaults soar. Still, regardless if you own or rent, when it comes to real estate, lawns need to be mowed, trees need to be trimmed, and roofs replaced. All this comes at a cost. Not only can maintenance be expensive but it can also be a time-consuming bother. On top of what is considered normal maintenance, you can also have that occasional storm or freak occurrence that sooner or later happens to most of us. 

We Can Reject Opulence

There is a lot that can be gained by rejecting the high cost of opulence and simply embracing the freedom it lets us enjoy. This does not mean you need to reject wealth, just that you don't have to get so caught up in being rich that you forget the value of a balanced life. From the cheap seats, we can often enjoy the same show and maybe even enjoy it more. Sometimes you do get more for less. When I was told this by my rich uncle decades ago I was offended and wondered why it was OK for him to have nice things but I should "settle" for less. Over the years I have come to appreciate his opinion when it comes to this issue.

It is said that Buddha, the South Asian renunciate who founded Buddhism saw the responsibility of owning worldly goods as a burden on the soul and not the answer to a better life. Buddha was born in what is now Nepal, to royal parents, but renounced his home life to live as a person who labors, toils, or exerts themselves for a higher or religious purpose. Buddha saw "things" as a major distraction to our ability to achieve personal growth.

Whatever is not yours, abandon it; when you have abandoned it, that will lead to your welfare and happiness for a long time.

Buddha, MN 22

But, this article is not about Buddha, it is about how as a person moves to more lavish, larger, and luxurious surroundings, the cost of living soars. Living the so-called good life can drain a person both financially and mentally. Years ago I heard a song with the lyrics, something like, "You don't know the problems I got, I'm a millionaire, and your not." Many Americans, especially baby boomers, have reached the point where they recognize they have far too much stuff. they are also finding that "downsizing" is easier said than done.

While most of us would quickly agree that we would rather be rich than poor, this does not mean we are required to take on the outward trappings of wealth. Generally, people find meaning and fulfillment through Maslow’s hierarchy of needs. Survival and food come first and as we work our way up the Maslow pyramid most individuals find there are a lot of things money can't buy. 

 

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China's Future Remains Cloudy And Uncertain (Part 2)

China's impact on the global economy is too large to ignore. Growth in China has stalled over recent years, with China exiting the covid-19 restrictions expectations of increased demand for several commodities are on the rise. Increasing steel production means China would need more iron ore. Citi Group reports this could drive iron ore prices from its previous price of $110 to as high as $150 a ton by June 2023. Now and then we see stories about how China is expanding its influence on the African continent and in other parts of the world. This is tied to China's need for natural resources and represents another potential source of conflict.

China Is Now Building Cutting-Edge Weaponry 

 

While America focuses on demonizing Russia, China's military-industrial complex sells arms to rebels and pariah states. These weapons are generally "low-end" and sold to almost anyone who pays cash with no restrictions. Chinese weapons have been used extensively in conflict zones across the world by terrorists and dictators. As the United States, Russia, and other countries battled ISIS, a study showed the biggest proportion of their weapons were made in China. Around 43 percent of arms captured from ISIS were Chinese-made, compared to 1.8 coming from America. 

China also has a currency problem. As China's debt service rises expect the yuan to weaken and create a serious balance of payment challenge. The Center for Global Development highlighted in a report entitled Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective, the problem of extending credit to poor or unstable countries. It has been pointed out that as many as 23 countries could be prone to “debt distress.” This group includes Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan, and Kyrgyzstan which were rated in the “high risk” category. Many poor African countries share this trait. 

If countries default on loans from China it is possible that OBOR could become a massive expensive bridge to nowhere. With that in mind, it is very possible that in coming years China may find the projected explosion of the African continent's population a "pesky" problem that conflicts with China's interest. Call it racism or self-preservation but it would be wise for African nations to remember that racism and tribalism are not qualities limited to western culture. Throughout history, a lack of respect for the indigenous people in areas being developed has resulted in them being displaced or worse. An example is the fate of the American Indians that were not only pushed off their land but also killed in huge numbers.

Several Factors Are Having A Major Influence Over China

• Covid lock-down / extended control over the masses
  
• The collapse of the housing market and its effect on China's middle-class
  
• Geo-political posturing has set China on an inflexible course forward

Understanding the core nature of China is important to comprehend the lack of flexibility ingrained in their system. China is still very much a communist country, and the Chinese Communist Party (CCP) controls everything. From indoctrinating children with Party slogans to requiring companies with more than 50 employees to have Party liaisons, the military and other areas of the country have similar programs. This is why we should be cautious.

China’s Great Internet FireWall is considered the largest, most extensive, and most advanced Internet censorship regime in the world. It censors content critical of the Chinese government or contrary to Communist Party policy. It is key to the suppression of the masses, part of this is about "group think." All this flows into an overt system dedicated to the social engineering of society. The idea that people think alike and how it shapes the individual and society is generally unappealing to Americans.

The Zero Covid policy China has adopted to "protect" its citizens and eliminate Covid-19" has included boarding people up in their apartments, attacking people trying to escape, all those fun things fascists like to do. For decades China has been pushing its people towards a more "homogeneous way of thinking." Without a doubt, China is far less polarized and divided than America where people seem unable to agree on much of anything. The Chinese people, however, appear far more accepting of what they are told but are also unwilling as individuals to take personal responsibility for much of anything.

This Is Why Americans Are Worried

Until recently, China’s growth has been explosive, many take this as an indication China has the capability to reshape the international order. This is why Washington now regards China as its biggest and most formidable strategic adversary and Americans are now putting things in their proper geopolitical context. China has no intention of being locked into producing low-end manufacturing of basic goods but is determined to move into high-tech products.

China is our rival and China's state-run economy is based on a business model that is geared to expand by crushing the competition. China's plan centers around both state-owned and private firms investing in and acquiring foreign companies to steal their technological innovations. Subsidizing those companies working within its system in a multitude of ways helps China achieve this goal. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and America and the rest of the world are their prey. 

Circling back to the dilemmas facing China, it could be argued that much of the pain China has been experiencing is self-inflicted. The country suffers from a mix of corruption, malinvestment, and the hidden economic cost that result from governments intervening too deeply in the free market system. China's options are more limited than most people think. If China embarks on issuing a wave of new credit that lowers the value of the yuan it could result in a crisis in Asia. In 1994 china devaluated its currency by 50%, doing so today would send a signal to the world of just how weak China is. 

The massive devaluation of the CNY in January 1994 from 5.8210 to 8.7219 created a favorable exchange rate environment for exporting goods from China. How much this helped as a whole is less clear. Today a weaker yuan and recession in China would most likely result in a wave of defaults. This also means that China could see many of its government entities go bankrupt and let equity holders take a hit. This does not paint an inspiring picture of a powerful empire on the rise but rather of a weak self-centered giant staggering along without broad support.

No account of China's direction and strategy to get there would be complete without a comment on how China's path forward might lead to war. If a war does occur, we can only speculate as to whether China would be victorious or collapse in defeat. With modern warfare comes risk most of us have a difficult time understanding. Hopefully, that is not where all this is heading. The world has enough problems without bringing upon us more death, destruction, and carnage.

                                                                                 This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free  to E-mail it to a friend

Footnote; Part 1 of this article can be viewed using the following link. https://brucewilds.blogspot.com/2022/12/chinas-future-remains-cloudy-and.html

China's Future Remains Cloudy And Uncertain (Part 1)

OROB Could Result In Creating Massive Conflicts

The article below is a summery of China today. China has been moving away from its dependence on America but its path forward may be more difficult than people imagine. China has huge problems that make this planned decoupling a risky gambit. Still, this move has already started and that is unlikely to change. Over the years China has invested heavily in its One Belt One Road (OBOR) initiative. The brainchild of Chinese President Xi Jinping, OBOR is an all-encompassing and confusing "work in progress" that, as it unfolds will reshape world trade and the relationships China has with many countries.  

Now that the Chinese Communist Party has finished holding its 20th National Party Congress, things can move along as planned. OROB consists of two major parts or projects that are known collectively as One Belt, One Road, Belt and Road, or the New Silk Road. According to Chinese state media, some $1 trillion has already been committed to OBOR, with several trillion slatted to be spent over the next decade. The plan aims to pump this huge sum of money into railways, roads, ports, and other projects across Asia, Africa, and Europe.

OBOR is so overpowering it has morphed into a "philosophy" or "party line," rather than anything concrete. This massive endeavor includes more than 68 countries and impacts 4.4 billion people, or around 60% of the world's population. This means it touches just over a third of the world economy. Its boosters tout its massive economic promise and claim it could benefit the entire world by lifting millions out of poverty. Still, for all its rhetoric about trade and development, OBOR is primarily a political project.

China's state media claims OBOR will benefit: the Middle East peace process, start-ups in Dubai, currency trading, global poverty reduction, Xinjiang's medical industry, Australian hotels, nuclear power, Polish orchards, and, darn near the entire world. This clarifies and extends a trend that has been going on for years. It should be noted, in the past, several Chinese overseas investments have also earned China a bad reputation when it comes to delivering on its promises. This includes some local economies claiming allegations of exploitation.  

Emboldened by an influx of wealth over the last few decades, China has played fast and loose with creating and loaning out new funds. As debt service rises, this can create a serious balance of payment challenges. OBOR to move forward has to provide the financing for infrastructure that many countries desperately want and need but will they be able to repay the loans in coming years? 

The Center for Global Development, a Washington-based think tank, has highlighted in a report entitled Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective, the underlined the problems of extending credit to poor or unstable countries. It has been pointed out that as many as 23 countries could be prone to “debt distress.” This group includes Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan, and Kyrgyzstan which were rated in the “high risk” category. This brings us to the question of whether OBOR will become a massive expensive bridge to nowhere.

More Debt Has Failed To Speed Up Growth

Many China skeptics argue that China continues to prop up the unpropable, and yes, while no such word exists, when it comes to China's economy it should. Unpropable  describes China's financial collapse that can only be postponed but not stopped. A major problem for China is that it has become addicted to debt and any slowing of the economy places tremendous pressure on those already having difficulty servicing debt. The fact is most Chinese companies fund through bank credit so the stock market in China is not as large a factor in their economy as we might expect. 

Another issue is all this debt plays a role in lowering the value of China's currency. A lower yuan is a double-edged sword. While it helps exports, it makes importing raw materials more expensive and tends to raise the ire of trading partners. Still, more important may be whether a falling yuan causes more wealth to exit China in search of a safe more stable environment. The lack of good investment opportunities in China has caused more and more money to leak across the border inflating asset bubbles in other countries.

 China Is A Small Player (click to enlarge)

It could be argued that much of what is occurring in global currency markets is getting scrubbed away by our complex financial system. While many Americans tout that China has us by the throat it is not true. Considering how rapidly debt and credit have increased over the years, it could be argued that the trillion dollars of debt America owes China is not nearly as relevant as it was a decade ago.

China Only Holds A Small Percentage Of US Debt

The main reason China bought up so many U.S. Treasuries over the years is that it wanted its currency pegged to the dollar. Dollar-pegging has in the past added stability to the yuan since the dollar is viewed as one of the safest currencies in the world. It must be pointed out that even though China owns these U.S. Treasuries, China is running a massive U.S. dollar shortage both on a corporate and a national level.

Much of China's problem stems from its companies having roughly $3 trillion or more which it owes to international investors. Loans of this type are not uncommon, especially in developing nations. This "global debt" being denominated in U.S. dollars means the companies owing it needs to pay both the principal and the interest payments to their lenders in U.S. dollars. This demand for dollars creates a constant flow of dollars out of the country. 

Remember, like all politicians, even those in China, tend to go to extreme efforts to avoid taking responsibility for the problems they create. History shows that one way a country can kick its gross domestic product higher is to build a false economy based on infrastructure or war. The OBOR initiative and China's growing space program may be an extension of this idea.

Up until now, China's big misallocation of resources has been in housing. One of the biggest challenges china has going forward is that, in some ways, the Chinese residential real estate market could be called a Ponzi scheme of massive proportions. It is the most overvalued asset class in the world. Much of China's so-called wealth is tied up in poorly constructed overpriced homes. Chinese leaders knew this was a problem and tried to slow and halt growing valuations over the years but failed to follow through.

China's real estate bubble is apparent in its bizarre housing market and "ghost cities." This is where 75% of its peoples' wealth is stored. The excesses in China's real estate market have not yet been resolved. After becoming an estimated 30 percent of China's economy, housing is now an albatross around the neck of economic growth. With housing prices falling the wealth effect it created is varnishing, when all is said and done, it is very likely the process will be deflationary.

While many people think China has become the most important player in world trade, they are discounting America's role as a major consumer of its goods and capital investment. China is an export-driven economy and the numbers it puts out are suspect. The money from trade flowing into China from the west is the biggest factor keeping China afloat. Played fast and loose by creating and loaning out new funds will only mask China's dilemma for so long.

 

Footnote: Part two has now been published. It looks at several other problems currently playing out in China. Following is the link to that post.  https://brucewilds.blogspot.com/2022/12/chinas-future-remains-cloudy-and_18.html

 
                                                                                 This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free  to E-mail it to a friend.

                                         

Speculation On The Fed Must Include Sovereign Debt

Speculation on what the Fed will do may be overdone considering things are more complicated than what to do about interest rates. While Fed policy is important, it is not everything. The reason I claim this is because other factors and world events tend to feed into the mix we know as our financial future. The general thinking appears to be that as long as the Fed keeps on moving rates higher and inflation keeps falling, it will eventually cause a larger Fed pivot. This has put pressure on long-term yields.

A glaring example of this occurred when the gilt market in the UK hit the wall in September. The spike it caused in yields has cast a spotlight on the problem of sovereign debt. When it becomes apparent that the current unsustainable sovereign debt situation is crumbling beneath our feet the world will face a tsunami of defaults and currency devaluations.

This means the Fed is now forced to differentiate the distinct way policy for economic cycle reasons affects economic stability. The issue of liquidity in the economic stability area is being moved to the forefront, this will translate into it being far more difficult for the Fed to reduce its balance sheet.

Sometimes you can't win and when it comes to crashing the sovereign debt market or bringing down inflation, restructuring sovereign debt will take precedence. This distraction to fighting inflation is what we know as a "biggy." Working around destabilizing the global economy while reducing central bank balance sheets while fighting inflation is no easy task. The point is, governments have spent like drunken sailors and the piper will sooner or later demand to be paid in some form or another. 

Adding to the difficulty we face is that populations in most developed nations are aging and as this group gains political size it will vote upon itself more freebies. Currently many people accept the idea fiscal austerity is the kiss of death rather than the cure for an ailing economy. Both these factors make it difficult for most countries to reduce spending. 

In the next five to ten years demographics are expected to blow government spending through the roof. In truth, this has already begun. The argument older people don't spend money is greatly offset by the fact governments have to spend tax dollars on their behalf. This is something many economists can't get through their thick heads.

Today There Is 350 Trillion Outstanding

The Federal Reserve has responded to runaway inflation by hiking interest rates during a time when many Americans are drowning in historic levels of personal debt. This debt is a dead weight on economic growth in that it tends to crowd out productive investment. The fact is we need liquidity to allow people to refinance as debt comes due, without it, everything comes to a halt. Today there is 350 trillion dollars of debt in the global economy. Roughly 70 trillion dollars of this debt needs to be rolled over on average each year. 

New credit is needed each year to service the refinance of debt or you have a refinancing crisis which of course fits under the same heading as a "liquidity crisis." If liquidity is not available the financial system locks up and falls into crisis. Financial pundits and economists can speculate and opine all they want but how events actually unfold will determine the course forward. 

With this in mind, two central banks, the Fed and PBOC are likely those really shaping policy going forward. We should not be surprised if the wild card in all this becomes a PBOC that stimulates China's economy to mask all the problems China faces. (This is the subject of my next post) Such an expansion of credit in China would temporarily spark global growth but create multiple problems in doing so.

Some of these issues are addressed or at least talked about by Michael Howell, Founder & Managing Director of CrossBorder Capital in a recent video. This video can be found at, https://www.youtube.com/watch?v=v2G0PAoRGbg Howell's views on cross-border flows and Central Bank behavior across some 80 countries merit our attention. The Fed put, negative yielding debt soaring into trillions of dollars, and massive never-ending expansion of credit underlines just how insane things have grown.

How the  majority of people in developed economies with stagnant or declining wages in real terms respond to what we are experiencing matters. Most are not keen on witnessing another obscene upward transfer of wealth to the small group of capitalists responsible for causing this mess. The looming problem is that in the midst of a crisis bailing out these thieves and clowns is often deemed the easiest solution by their friends in power. Considering these "birds of a feather flock together," we should lower our expectations for a good outcome. 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

We Are All In The Same Boat And It Has A Massive Leak

The potential of a recession is not the problem, a deep inflationary depression should be a far greater concern. Higher interest rates combined with a tightening money supply, rising energy prices, the threat of war, and de-globalization create a toxic brew. Many of us argue we are already in a strong downturn and the statistics and data simply haven't caught up to where there reflect this. 

While we may deny it, we are all in the same boat and it is leaking. The debt we have seen growing has become a bubble. This is the consequence of governments continuing to print money rather than dealing with problems. It has become clear, if nothing else, we need to make better bad choices. Under the notion, we are all in the same boat and it has a massive leak many people may soon find the answer is not only to bail out those in trouble but to "bail in" or take money from those depositing money in banks to keep them afloat, but that is a story for another time. 

The ability of a country to achieve a soft economic landing by leveraging up like crazy is no longer available to most countries. This means expanding credit and pumping money into the system. Most countries have been there and already done that, In short, they no longer have that tool in their toolbox. Not only does every dollar or yuan of stimulus create less economic growth it feeds the inflation monster by debasing the currency. In short, the chickens are coming home to roost and a major distraction is needed to take our eyes off the situation that has developed.

Inflation is far worse than the CPI indicates. Here in America, the purpose of the consumer price index (CPI) is to reflect just how much inflation is eating into both our incomes and our savings. Since many people can't handle the truth, the government understates inflation by using a formula based on the concept that evolved during the first half of the 20th century that misleads us into thinking it will remain manageable. 

The Social Security Administration recently announced that due to inflation an 8.7% cost of living adjustment (COLA) would be given next year. This translates to an additional $140 per month for the average Social Security recipient. That goes on top of a substantial 5.9% COLA for 2022. The 2023 increase is the biggest in 40 years. Back in 1981 when the COLA was 11.2%. The increase will add around $100 billion of spending per year and at the same time increase the cost of the program.

As far as, how bad inflation or the coming economic situation is it going to get, it is hard to say. We should remember things often bend before they break, and sometimes they can bend a great deal while we deny just how close we are to them breaking. When you have idiots in charge making bad decisions and ignoring reality problems can rapidly accelerate. People that have studied this issue for years, even decades, such as Alasdair Macleod, head of Research for GoldMoney generally hold little in the way of answers for the common man. 

This is because the common man has little interest in overall economics other than getting by. Macleod attempts to educate the average person and advocates for sound money. He does this by attempting to demystify finance and economics. Macleod's accumulated experiences have convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. This drives his mission to warn and educate the public in layman's terms about what governments do with money and how to protect themselves from the consequences. 

Many of us hold a view of financial devastation that may prove far more civilized than what may eventually unfold on the ground. In a recent video,  https://www.youtube.com/watch?v=PqJtUOT_IGw&t=699s he uses his background as a stockbroker, banker, and economist to give us some insight as to how bad decisions lead to horrible outcomes. Still, it is questionable how much his advice can help us when the financial system implodes. 

Then there is the idea held by the more ridged folk that gold is and will remain the only true money. This extends to the idea the "banksters" manipulate the price of gold to keep their fiat in play. This group claims that when all is said and done and the fiat system collapses, gold will return to its rightful role as money in the minds of the populace. It's just that most people think paper currency is money since they have never been taught the difference between currency and money. This is why "gold bugs" tout owning gold as the answer to economic survival.

It could be argued the ridged idea that gold is the only money is as outdated as the buggy-whip. Some of us prefer paid-for real estate or some other real asset over trying to hide gold that does not generate an income from the government and others that wish to steal from us. Often the one thing those of us suspicious of fiat currency do agree on is that staying away from paper promises and the stock market is very important. Part of our reasoning is that mega-cap companies are far from their 2020 lows and most likely stock markets have a long way to fall.

Such a fall would take its toll on the wealth effect furthering its shift into reverse. Consumer sentiment indicates the margins of consumer discretionary companies will be compressed going forward. Without a doubt, bank credit remains the backbone of lending across the world. Adding to our problems is that we live in a consumer-driven economy and once a consumer falls behind on payments it is a "bitch" getting back on track. Many people today do not have the money management skills or tenacity to dig their way out of a financial hole. Today, credit spreads have not yet moved to reflect the true risk of default.

Expect Financial Assets To Suffer Most From Defaults

Containing the swings between deflation and inflation is the test before us, this means walking the fence and not falling off either side. When the system is highly leveraged, as liquidity contracts, the potential of a debt crisis becomes overwhelming. Blame it on Putin, blame it on covid, blame it on climate change, blame it on Trump, blame it on Powell or Biden. Whatever and whoever those in power and the media choose to blame, one thing for certain and that is they will never blame themselves. The system is theirs to exploit not something to take responsibility for. 

At the same time, he highlights the risk we all face in the case of a debt crisis, Macleod explores what might happen if fiat currencies collapse. What is now being referred to as "Bretton Wood 2.0" would constitute a total reshaping of currencies and the financial system. This would be hashed out, decided upon, and forced upon us by those making the decisions, most likely behind closed doors. This would dictate how we move forward. Needless to say, this would or will carry with it a huge impact on society. Over the years as the financial sector in America and across the globe grew faster than manufacturing the world became overly credit dependent. This means that as credit and liquidity dry up, the rest of the economy will shrivel. 

 

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