Buy Any Bond Necessary
Buy Any Bond Necessary
This month marks the anniversary of the pandemic induced stock market crash, inducing government launched emergency credit facilities, aided by the Fed who announced it would purchase:
Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy...
A year later, the US Debt has surpassed $28 trillion. US 10-Year Treasuries topped 1.6%, mirroring pre-COVID levels. Regardless of how the pandemic is resolved, the Fed will always intervene in our lives. There will always be economic problems which need addressing. Regarding what’s needed to support “smooth market function,” the initial $700 billion of securities has tapered to $120 billion a month… for now.
This brings us to the latest problem: rising interest rates.
Despite a targeted Federal Funds Rate of 0 to 1/4 percent, yields, especially on long-dated bonds, can and do fluctuate. CNBC illustrates two commonly heard ideas:
Bond investors are getting worried about the potential for inflation.
This time the rise in yields is coming from economic growth, stimulus, and infrastructure. All of that is good for stocks.
Of course, the narrative is problematic. If yields rise due to price inflation, economic growth, and government stimulus (supposedly desirable), you’d think there shouldn’t be significant risk to the economy nor stock market when yields increase.
Luckily, the concern over rising rates can be explained: debt. Ironic, since we use a debt-based currency with the widespread belief spending leads to prosperity which government stimulates through borrowing. Somehow championed by those who claim debt doesn’t matter or deficits are a myth, we can’t deny this is where many of our problems stem.
When rates rise, interest costs increase. Imagine a world where the 10-year treasury is at, say, 4%. The interest expense on the $28 trillion would surpass $1 trillion a year. Mortgage rates would no longer be considered “cheap” and corporate bonds would be much higher. There are additional effects, such as making share buybacks not as attractive as they have been for over decade, but there are many areas of the economy that are affected.
If rising interest rates scare the market and the public now, what happens in the future when US Debt, household, and corporate debt are at greater highs and when asset valuations are even richer than today?
The US Debt will pass $30 trillion this year with no sign of slowing. The Fed would face difficulty if it wanted to raise rates then, or face backlash by not taking action when long dated bonds rise again.
Unfortunately, the Fed is stuck in limbo of sorts; letting rates rise would be economic destruction. But to keep rates low forever leads to a similar fate. The difference being, if rates are raised, the Fed will look like the villain. If they try to suppress rates and fail, they’ll be hailed as fallen heroes, whose earnest efforts to control the markets backfired due to uncontrollable forces, (e.g., blame capitalism).
Last March, Neel Kashkari, President of the Minneapolis Fed, gave a hint on 60 Minutes:
And there's an infinite amount of cash at the Federal Reserve.
His quote was an answer to the question of whether or not our bank deposits are safe. Yet, he captures the ethos at the Fed. Whether they revisit ideas of yield curve control or use alternative approaches, the only way rates stay low for perpetuity is via perpetual money creation.
The Fed has long since committed to buying any bond necessary in times of crisis. But the crisis will never end. Society’s debt level will never shrink and its growth will accelerate year after year. The only way to ensure rates don’t stay too high for too long is to utilize its infinite cash position, seeking to solve the problem with the same method used to create it in the first place.
How Does a Bank Collapse in 48 Hours?
“How does a bank collapse in 48 hours?” Asks the CNN headline. Especially a bank that reported a profit of $3.4 billion just last year. Murray Rothbard answered the question years ago in What Has Government Done To Our Money?, “No other business can be plunged into bankruptcy overnight simply because its customers decide to repossess their own property. No other business creates fictitious new money, which will evaporate when truly gauged.”
If you watched the Fed Chair Jerome Powell testify before the Senate and the House this month you heard over and over that banks are well capitalized. The non-sequitur inspiring the Shakespearean quote “Methinks you protest too much.”
The very next day after the hearings, shares of SVB Financial Group, parent of Silicon Valley Bank, fell 60 percent (the bleeding continued in after hours trading) after a Wall Street Journal article revealed, the bank “had sold large portions of its securities portfolio and would raise fresh capital, highlighting a broader problem for U.S. lenders who have seen rising interest rates hammer the values of their bond holdings.”
A day later Silicon Valley Bank depositors ran for the exits attempting to pull $42 billion out on Thursday, leaving the firm with a negative cash balance of almost $1 billion, regulators said. joining shareholders the same day the WSJ article appeared. The FDIC promptly closed the bank Friday morning saying: "Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank."
Almost Daily Grant’s wrote “Total deposits stood at $175.4 billion, with $151.6 billion of those uninsured. Those with deposits in excess of the FDIC’s $250,000 insurance threshold will receive a receivership certificate for their funds, with payments to follow as the regulator sells down remaining assets.” (emphasis added)
Roku, Roblox, and Blockfi are among the companies that had millions on deposit at SVB, uninsured. “The company’s deposits with SVB are largely uninsured,” Roku said. “At this time, the company does not know to what extent the company will be able to recover its cash on deposit at SVB.”
Overseas this weekend, leaders of roughly 180 tech companies sent a letter calling on UK Chancellor Jeremy Hunt to intervene. “The loss of deposits has the potential to cripple the sector and set the ecosystem back 20 years,” they said in the letter seen by Bloomberg. “Many businesses will be sent into involuntary liquidation overnight.”
While SVB was a lender to the venture capital industry and tech sector, the investments that did the bank in were bonds backed by the full faith and credit of the U.S. government. However, the value of those bonds has plunged as interest rates have increased dramatically.
Banks are able to use a little accounting trickery pokery as it concerns bonds designated “available-for-sale,” as opposed to “held-to-maturity.” The available-for-sale label allows banks to “exclude the paper losses on those holdings from its earnings and regulatory capital, although the losses [do] count in equity.” Held-to-maturity allows banks “under the accounting rules to exclude paper losses on those holdings from both its earnings and equity.”
This problem is not particular to the bank serving techland.
The Federal Deposit Insurance Corp. reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $690 billion as of Sept. 30, up 47% from a quarter earlier, reported the WSJ.
Bank analyst Christopher Whalen wondered in a tweet, “Is it possible that nobody has asked Chair Powell about the deteriorating solvency of US banks due to QE? Where do you think that -$600 billion number will be at the end of Q1 '23” (emphasis added)
MarketMaven’s Stephanie Pomboy weighed in on the same subject with this tweet, “I'm puzzling to understand how THIS isn't the only thing people are talking about today????????? Someone tell me about the rabbits. and fast!”
But again on Capitol Hill and at the Eccles Building no one was uttering a discouraging word. However, FDIC Chairman Martin Gruenberg said in a December 1, 2022 speech, “The combination of a high level of longer-term asset maturities and a moderate decline in deposits underscores the risk that these unrealized losses could become actual losses should banks need to sell investments to meet liquidity needs.”
Now Gruenberg’s prophecy is coming to fruition. Silicon Valley said it decided to bite the bullet and sell holdings and raise fresh capital “because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.” The fresh capital could not be had at any price.
Rothbard reminds us, “The bank creates new money out of thin air, and does not, like everyone else, have to acquire money by producing and selling its services. In short, the bank is already and at all times bankrupt; but it's bankruptcy is only revealed when customers get suspicious and precipitate ‘bank runs.’”
So the banks are well capitalized Mr. Powell? Bank depositors and ex-depositors will decide that. Silicon Valley Bank is the first this cycle to fail, but likely not the last.
How Reporters Manipulate You
An article in the New York Times last night by reporters Jonathan Swan and Maggie Haberman is an excellent example of one of the common ways “hard news” reporters can put their thumbs on the scale and push a preferred agenda.
On Monday Florida governor, and likely presidential candidate, Ron DeSantis said on Fox News that “becoming further entangled in a territorial dispute between Ukraine and Russia” is not a vital interest of the United States.
The people who work at and manage the New York Times clearly disagree with this opinion. That’s clear to anyone who has consumed their war coverage and seen the way they frame the conflict.
However, the paper wants its reporting to continue to appear nonpolitical as can be seen in this disclaimer halfway down the article.
So how do they dissuade readers of DeSantis’s point without appearing to rebuke it? They launder their opinions through experts and notable people with the same view.
In this article, they focus on some of DeSantis’s fellow Republicans who happen to agree with the New York Times on this particular issue.
The article presents reactions from seven Republicans who strongly denounce the DeSantis statement. They rake the Florida governor’s name through the mud with their comments. They call him weak and say that he’s so wrong it’s a risk to national security.
The article also quotes a Wall Street Journal columnist who criticizes GOP noninterventionists for wanting to “surrender” to Putin.
The article has one single quote from someone who agrees with DeSantis, but only because he wants the U.S. to focus more on combating China. Pure noninterventionism is given no voice, only a dissenting interventionist.
In paragraph 23, Haberman and Swan do admit one important detail that the readers who made it that far would be forgiven for getting completely backward. The opinions of those highlighted in this piece are unpopular with the GOP base compared to the skepticism of U.S. intervention in Eastern Europe voiced by Donald Trump and Ron DeSantis.
Readers will come away from this article thinking that DeSantis said something on TV that most people, including leaders and prominent members of his own party, think was stupid.
That is the exact kind of point you’d expect from the paper’s Editorial Board. But here it’s presented by reporters writing in the “hard news” section of the supposed paper of record.
Larry Summers Apologizes for his Rothbardian Insight and George Selgin Exhales
Larry Summers affirms the Rothbardian critique of fractional-reserve banking on Twitter . . .
SVB committed one of the most elementary errors in banking: borrowing money in the short term and investing in the long term.When interest rates went up, the assets lost their value and put the institution in a problematic situation.
. . . but then takes it back . . .
Responding to some of the comments here: Of course banks borrow short and lend long, but properly managed and supervised banks limit duration mismatch between liabilities and assets so their capital position is not gravely compromised by rising long-term interest rates.
. . . and free banker George Selgin breathes a sigh of relief at "Prof. Summers" retraction.
I'm glad to see, upon reading on, that Prof. Summers explains himself in the comments. Still, I was taken aback upon first seeing this tweet by him attributing SVB's troubles to its having done what all banks always do!
The Banking System is Built on Deception
There's nothing like a bank failure to get people thinking about the banking system. And though it appears the Fed has bought the nation's banks some time, the pair of bank runs on Friday and Sunday again exposed the fragility of the nation's banks.
But fragility isn't the only problem. As Rothbard hammered home decades ago, our banking system relies on a deceptive scheme, authorized and supported by the government, called fractional reserve banking.
To quickly review how fractional reserve banking works, say you deposit some of your dollars into your bank account. If the bank's reserve ratio is 5%, it then loans 95% of those dollars to other people who spend them on goods and services. The sellers of those goods and services then deposit the dollars in their own bank accounts.
Again, 95% of the dollars get loaned out and deposited in yet more bank accounts. However, all of these dollars still appear in every one of these accounts. Eventually, we'll arrive at a situation where most of the dollars you see in your bank account also show up in the accounts of many other people, appearing to them as their own dollars.
This gives the illusion that there is more money in the economy. But all that's really happened is that the bank has created new claims on the same amount of dollars. Specifically, a property claim on money stored has been transformed into a sort of callable loan that simultaneously appears available to a number of other bank customers.
Advocates of free banking argue that, on the free market, some bank customers would choose to invest in these types of collectivized callable loans. I agree. But these would certainly trade at a discount compared to cash because of the underlying risk of default.
But in today's banking system, these collectivized callable loans trade at par with cash. That indicates that enough bank customers are ignorant about the nature of their bank accounts. And banks benefit tremendously from this ignorance. They get to loan money into existence without account holders behaving any differently.
The banking deception relies mainly on concealment with a touch of duplicity. Watch banking commercials or read webpages about opening a checking account. You'll find common selling points like ease of access, security, connection to the digital financial system, a large ATM network, and the ability to send money to friends and family. All of these are also features of 100% reserve warehouse-style banking. The fractional reserve process is largely concealed from the customer, while the language used can mislead about the nature of bank accounts.
For instance, when a bank says, "your money is secure," they mean that there are measures in place to ensure only you can access your account and alert you when there is a suspicious login. What they do not mean, but what a lot of people surely understand them to mean, is that your money will not suddenly disappear from your account as it has at these banks that failed.
But that is exactly what can happen with these collectivized callable loans. It's why the funds in bank accounts are not the perfect money substitute that most people are misled into thinking they are.
Fractional reserve banking presents multiple people with what they believe to be a property claim over the same dollar. Beyond being risky and unstable, modern banks systemically rely on ignorance, deception, and government privilege. Until that changes, we remain teetering on the edge of the next crisis.
How a Libertarian Church in the Nation of Georgia Helped Undermine Military Conscription There
Georgia is a country at the intersection of Eastern Europe and Western Asia. It was occupied by the Soviet Union in 1921 and remained part of it until 1991. Military service was mandatory in the USSR because the Soviet leadership didn't respect individuals’ lives and used them as mere pawns.
This practice remained intact in contemporary Georgia until a libertarian party called Girchi established a "Christian, Evangelical, Protestant Church of Georgia—Biblical Freedom" in 2017 to free people from being government slaves, as priests were legally allowed to avoid conscription.
Since its creation the church managed to free individuals in nearly 50,000 cases from this form of modern slavery, but recently the government introduced a new law making it illegal to avoid conscription this way. Therefore, Girchi is now battling against the government to completely cancel the military draft and make the service fully voluntary by offering willing soldiers a decent salary, contrary to how it is nowadays when the government pays them less than $25 per month.
For all these years, the immoral practice of forcibly taking 18 to 27-year-old boys and exploiting their labor has been justified with patriotic slogans and the unwillingness of the government to stop treating people like a free resource for the duration of 12 months. However, patriotism is not just a word; it's an act of showing your respect in material form to the people who voluntarily want to defend your country, because patriotism or any other virtue can only be moral if it's done voluntarily and not under the threat of force.
There's been research done on the topic of whether the size of an army is an important factor when it comes to winning the battle, but it turns out it's not the size of the army but other factors such as motivation, weaponry, and tactics that play the main role.
Therefore, concentrating only on soldier quantity without guaranteeing that the army is staffed with people who voluntarily chose this profession and are equipped with decent weaponry, only points out that the government places no value on individual lives, as unmotivated and inadequately armed soldiers are doomed to an undeserved death.
There have been cases when conscription was justified with false argumentation that it's a duty of every patriot to serve in the army. But this reasoning overlooks a simple fact that defense is a public service that's financed from the state budget, therefore it is in fact taxpayers who keep army well-fed and armed.
This, it is no more of a patriotic act to serve in the army than to be employed or run a business so then the government can take taxes in order to actually keep the army financed and functioning. Especially nowadays when modern armies are exclusively dependent of high-tech equipment and weaponry, it is foolish to hope merely on troop numbers rather than directing the funds towards a fully professional and well-armed voluntary army.
No army is as effective as the one that is staffed with people who have willingly accepted their occupation as a soldier and it is in fact counterproductive to keep unmotivated people in the army, as it’s a waste of financial resources required for the training as well as dear lives when it comes to the actual battle.
In some cases, Girchi's church was criticized from a religious perspective that it's a sinful act to help people avoid the conscription, however the Bible itself states the following in 1 Samuel 8:10:
Samuel told all the words of the lord to the people who were asking him for a king. He said: This is what the king who will reign over you will claim as his rights: He will take your sons and make them serve with his chariots and horses, and they will run in front of his chariots. Some he will assign to be commanders of thousands and commanders of fifties, and others to plow his ground and reap his harvest, and still others to make weapons of war and equipment for his chariots. He will take your daughters to be perfumers and cooks and bakers.
He will take the best of your fields and vineyards and olive groves and give them to his attendants. He will take a tenth of your grain and of your vintage and give it to his officials and attendants. Your male and female servants and the best of your cattle and donkeys he will take for his own use. He will take a tenth of your flocks, and you yourselves will become his slaves. When that day comes, you will cry out for relief from the king you have chosen, but the lord will not answer you in that day.
For anyone interested in learning more about the party feel free to follow the official Facebook page at or join a private Facebook group for discussions.
Denying Western Provocations Risks Prolonging War in Ukraine
The war in Ukraine has become a bloody grind — and there's no end in sight.
As some Western allies express doubt that Ukraine can completely expel Russian forces, Britain, France and Germany have entertained the idea of a defense pact with Ukraine. Their hope is that the prospect of closer ties to NATO will encourage Ukraine to negotiate a peace deal with Russia. While searching for a path to negotiations is a worthwhile endeavor, recent history suggests that the proposal of a post-war defense pact could push Putin even further away from potential peace talks.
Although many in the West don’t want to admit it, it was Ukraine’s growing relationship with the West — threatening to pull the country further from Russia’s sphere of influence — that kindled the conflict in the first place. In other words, Putin’s invasion of Ukraine was not completely “unprovoked” as the media often suggests.
Eastern Europe has been increasingly tumultuous ever since the Bucharest summit in 2008 when NATO declared that Ukraine and Georgia “will become members” of the alliance. Russia’s Deputy Foreign Minister Alexander Grushko asserted that this was a “huge strategic mistake,” and President Putin called it “a direct threat” to Russian security.
Months after this declaration, a war broke out between Russia and Georgia. In 2014, the U.S. aided a coup that resulted in the ousting of Ukraine’s pro-Russian president Viktor Yanukovych, arousing Russia’s invasion and annexation of Crimea.
After the U.S. and Ukraine co-hosted military exercises with over a dozen nations in 2021, the Kremlin reiterated that NATO expansion into Ukraine is a hard red line. Despite this, weeks later the U.S. and Ukraine signed the U.S.-Ukraine Charter on Strategic Partnership, which doubled down on the 2008 Bucharest Declaration and even explicitly said Crimea is a territory of Ukraine despite being under Russian control.
In January of 2022, an agitated Russia, having amassed troops on Ukraine’s border, demanded a number of written guarantees from the U.S., including that Ukraine would never become a member of NATO. The U.S. refused. Russia invaded Ukraine less than a month later.
The West’s refusal to heed any warnings that courting Ukraine could create serious conflict played a major role in triggering this war. To be clear, this doesn't excuse Putin’s illegal invasion and the devastation that has ensued. But the media’s portrayal of the West’s supposed innocence perpetuates a false narrative.
Foreign policy expert John Mearsheimer, a professor at the University of Chicago, has written about the events leading to the war at length and argues that the West is “principally responsible for the crisis” in Ukraine. Even back in 1998, George Kennan, best known for formulating the U.S. “containment” policy during the Cold War, warned that NATO expansion was the “beginning of a new cold war” and “a tragic mistake” that would provoke adversarial reactions from Russia.
William J. Burns, the current CIA director and once U.S. ambassador to Russia, wrote to Secretary of State Condoleezza Rice in 2008 that "Ukrainian entry into NATO is the brightest of all red lines for the Russian elite (not just Russian President Vladimir Putin). In more than two-and-a-half years of conversations with key Russian players… I have yet to find anyone who views Ukraine in NATO as anything other than a direct challenge to Russian interests."
Admitting the West’s role in the lead-up to this war is necessary as Western governments seek to foster negotiations. Any approach to negotiations that fails to understand the causes of the war is likely to encourage extended Russian aggression.
This war was not solely instigated by a fanatic. Rather Russia viewed Ukraine’s gradual incorporation into the West and the prospect of further NATO expansion as a direct threat to its security.
So, while an agreement for a post-war defense pact between NATO allies and Ukraine might encourage Ukraine to negotiate, it would likely discourage Russia from engaging in conversation. Without an honest analysis of the causes of this war, the West risks pushing Putin further from negotiations and prolonging this brutal conflict.
I’d Buy That for a Dollar!
What a weekend! On Sunday morning Treasury Secretary Janet Yellen told CBS there would be no bailouts. Later that day the Fed declared Quantitative Easing to infinity and beyond.
What’s going on?
Quite simply: the Fed is willing to overpay for debt (again). They call it the Bank Term Funding Program (BTFP), and as far as one can tell, its dollar value is limitless. The term sheet reads:
Program: To provide liquidity to U.S. depository institutions, each Federal Reserve Bank would make advances to eligible borrowers, taking as collateral certain types of securities.
And who is eligible?
Any U.S. federally insured depository institution (including a bank, savings association, or credit union) or U.S. branch or agency of a foreign bank…
Basically everyone (i.e., not you or main street, just financial institutions) can take part in this legal counterfeiting operation.
So what’s being traded for newly created Federal Reserve notes?
Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations … provided that such collateral was owned by the borrower as of March 12, 2023.
Meaning: Practically any bank can exchange US Treasuries (or even Mortgage-backed securities should they have held any on their books) with the Federal Reserve.
This program will be offered for one year at no charge to banks, and of course with no recourse!
Recourse: Advances made under the Program are made with recourse beyond the pledged collateral to the eligible borrower.
Now here’s the rub:
Collateral Valuation: The collateral valuation will be par value. Margin will be 100% of par value.
Therefore, if Wells Fargo or Bank of America own US debt that is trading at 50 cents on the dollar, they can trade it with the Fed who will pay $1. In theory, it’s only an unrealized and temporary loss because once the US debt comes due, it will be paid in full. So the Fed won’t suffer a loss, nor will the bank.
The Fed will purposely pay an amount above market value on debt held by banks. The banks would receive this newly created money and get rid of their unrealized losses. Afterwards, the banks will have to “do something” with this new money, such as buy more debt. We can only guess but whatever the banks do with the money, it will most certainly be highly lucrative for them, push asset prices up, and further erode whatever is left of the middle class. It will also offer a new way for banks to make even riskier bets that will land them in more trouble in the future.
It is theft, moral hazard, anti-capitalistic and even antagonistic to those forced to pay taxes and work for a living. But still more questions remain, specifically: How large is this program; are we talking a few billions or trillions of dollars?
On one extreme, this program serves as a confidence booster more than anything; it’s public messaging. Very few banks will accept the generous offer. It will provide public assurance that the Fed will insure deposits, it will keep banks from panic selling bonds at a loss, and quell any ideas of bank run.
If so, then the Fed has bought a little more time until the next panic sets in.
On the other extreme, come Monday, every bank in America will be lining up to receive free money from America’s central bank. The Fed would eventually expand its balance sheet by trillions of dollars more, and they’ll tell us that it would have been worse if it wasn’t for the Fed.
…as for the Fed’s commitment to reducing the balance sheet… we’ll know the answer to this soon enough! Few things are certain at the moment, but it sure is a good day to be a banker.
Washington Miffed as China makes Peace
For those who have followed the background noise of US activities in the Middle East over the past year, since it was last seriously in the news following the disastrous execution by the Biden administration of the long overdue withdrawal from Afghanistan, they will recall a vague haze of reported drone strikes, arms sales, and Israeli assassinations; more recently, they will recall resistance to attempts to end the U.S. military roles in Syria and Yemen, the death of the Iran nuclear deal, and the blocking of earthquake relief.
China, by contrast, with no military presence in the Middle East at all, just quietly concluded talks between the Iranian and Saudi leadership that resulted in the normalizing of their diplomatic relations.
Quite the contrast.
And despite complaints by the hawks and Israel-firsters in the Democratic and Republican parties, this deal is good for multiple reasons. First, it will help end the wars in Yemen and Syria where Iran and Saudi Arabia have been among the chief backers of opposite sides of the two proxy conflicts. Together, they’ve gone on over twenty years and killed well over a million people.
Two: it signals that China, who buys most of the oil from the Gulf monarchies these days, is going to start more actively investing political capital in the region. The only party that can be trusted by all sides concerned, as Beijing is ideally situated to mediate invariably arising disputes. There are real costs involved, and it would be good to see someone other than the American taxpayer start footing these bills.
Naturally, Washington acts like anything that happens anywhere without its imprimatur constitutes a threat to national security – much like Ted Cruz recently embarrassed himself by claiming the same about the mere temporary docking of two small Iranian warships in Brazil.
Worth noting as an aside, their permission to dock came despite months of reported pressure by Washington to deny them port and after Lula had already been to Washington to meet with Biden.
Apart from knowing that somewhere at the State Department someone is being paid a six-figure salary to harass Brazilian officials for literal months about a pair of small Iranian vessels taking port in their ostensibly independent and sovereign country, everywhere everyone seems to be taking every opportunity to try to send Washington the message that they have no interest in yet another round of so-called “great power” competition.
A minor, potential downside to the deal being done between Riyadh and Tehran is that it may complicate efforts to normalize Saudi-Israeli relations. But here it should be noted that any potential deal to get that done already looks terrible from the point of view of the average American: Riyadh’s demands include formal American security guarantees, more weapons, and a nuclear program.
Realistically, given the power of the Israel lobby, Washington’s failed policy of wasting American lives and treasure in pursuit of Israeli policy priorities in the Middle East hardly looks likely to be seriously disturbed by China’s mediation of Riyadh and Tehran’s most recent spat.
If it is going to be disturbed by anything, it will be by the new Israeli government. But that is another story.
In short, China facilitating these talks between Iran and Saudi Arabia was a good thing to see. It will help bring peace and save lives.
Or, as State Department shill Jonathan Panikoff, writing for the Atlantic Council put it:
“It should be a warning to U.S. policymakers: Leave the Middle East and abandon ties with frustrating, even barbarous, but long-standing allies, and you’ll simply be leaving a vacuum for China to fill.”
Fill with what? Peace? To replace four decades of Washington’s war?
Jamaica's Uncertain Political and Economic Future
Lisa Hanna has indicated her desire to exit the political landscape, but this could turn out to be a major tragedy for Jamaicans. Although her tenure as Culture Minister in the previous PNP (People’s National Party) administration was controversial, Hanna has redeemed herself with a slew of captivating proposals published in Jamaican dailies.
Unlike her peers who pander to tribal constituents, Lisa Hanna is one of the few politicians trumpeting issues that people find relevant. In her articles, Hanna discusses complex issues in a simple manner to empower the average person. Recently, Hanna pointed out that complying with the know your customer (KYC) policy of banks can be quite taxing for clients who endure the hassle of providing proof of address, financial statements, references, and other documents. Such measures are consistent with anti-money laundering regulations, though they hurt the poor according to a 2012 World Bank report.
Despite the popularity of AML regulations, they fail to put a significant dent in money laundering and erect barriers for working-class people to participate in the financial market. Many self-employed people desire a business account; however, they are unregistered, indeed they can choose to register, but being unregistered should not prevent them from opening an account. Hanna and average Jamaicans find it disconcerting that ordinary people must comply with onerous regulations, yet financial companies can ignore red flags without penalties. Moreover, these policies are not always enforced because a colleague opened a bank account with relative ease due to banking connections.
The truth is that AML requirements are crafted by developed countries and imposed on Caribbean countries even if they are inapplicable in a regional context. But luckily, citizens in developed countries are not enslaved to such regulations, because some American institutions don't require financial statements or character references to open accounts. So, there is no reason to think that Jamaica can't adopt flexible options. We should find it hilarious that politicians in both parties like to protest neo-colonialism, but only a few like Lisa Hanna are willing to confront real oppression. On another note, Lisa Hanna is embracing free market economics rather than battling for protectionism.
Speaking in parliament Hanna informed the public that the national import substitution policy has only enriched a few by creating monopolies. Hanna instead recommends improving productivity and human capital to boost agricultural production. Hanna's arguments are corroborated by a 2017 paper in the Review of Economic Perspectives that observes a link between trade openness and economic growth. The savings derived from imports are immeasurable so only fools will purchase inferior products and expensive products because they were manufactured in Jamaica.
Build Jamaica, Buy Jamaica is a nonsensical slogan and it's great that Hanna prefers economic reasoning to ignorant nationalism. Leader of the Opposition Mark Golding and Prime Minister Andrew Holness can continue to boast that they are committed to the poor, however, Hanna appreciates that entrepreneurs and innovators will propel the country into the future rather than poor people. Instead of loving the poor, she prefers to equip them with the tools to compete on a global scale. Undoubtedly, Lisa Hanna is the free-market champion Jamaica needs to be a powerhouse and she must reconsider retiring.
Money Inflation Is Baked In. Savers Need to Preserve Assets
This time is different. Crises aren’t just typical cycles. In Great Inflation II, savers can at least preserve savings and likely earn substantial returns by owning gold.
Government spending as a percentage of GDP has risen to a new minimum level—34 percent.
Total National, State, and Local in USA, percent of GDP
Spending was ratcheted up by congresses and presidents from both parties.
The spending is substantially paid for by creating and borrowing money. Interest is paid later, and the principal’s real value is inflated away. This money inflation is a slow-motion default on this borrowing, and is a stealth tax that’s taken from everyone who holds dollars.
Money inflation regularly produces cycles of government money error (GME, pronounced “gimme”) and occasionally produces crises.
The Great Depression was forced by 7.8 percent average annual True Money Supply increases for 8 years. Great Inflation I, by 9.9 percent increases for 18 years. The Financial Crisis, by 11.0 percent increases for 12 years. Great Inflation II, as of April 2022, had already been forced by 22.2 percent increases for 14 years.
Four Crises Summarized
Anthony, James. “Gold Is the Solution for Financial Crises, Not their Cause.”
Mises Institute Power & Market Blog, 21 Oct. 2022, licensed under CC BY-NC-ND 4.0.
Treated as illegal from 5/33 through 12/74
All government-money-error cycles bring wasteful malinvestment and then necessary corrections. Crises bring even-more malinvestment and correction and also long-lived shifts in saving and shopping.
Across the Great Depression, including the resulting World War II, private investment plummeted. During Great Inflation I, after a “deadtime” delay of several years, most savers sought out harder assets like real estate and gold.
Crisis deadtimes are made of many component deadtimes. Producers must decide to raise prices, knowing this will make customers look elsewhere. Customers must decide to buy assets, consumer products, producer consumables, labor, and producer durables (which can last decades). Savers must learn about crises, and must make decisions that are emotionally taxing.
Crises aren’t the usual fast government-money-error cycles, crises are irregular, slow, longer-lived increases in government spending, powered by crisis-level money inflation. In crisis booms and busts, the indicators that are of first importance aren’t the often-studied fast signatures of recessions, but instead are rarely-considered slower indicators of behavior changes—in government spending, and in individual saving, producing, and shopping.
Debt as a percentage of GDP has risen to a new minimum level—343 percent.
Total Public and Private in USA, percent of GDP
Employment has fallen to a new post-2000 maximum level—62.3 percent.
Excess deaths since the start of covid have reached 1.30 million—0.4 percent. Little has been done to limit these deprivations by government either during covid or in future operations.
So then in the current Great Inflation II crisis, government spending is high and is staying there. Money inflation has been unprecedented for the USA in peacetime, and a juggernaut of money inflation is now baked in. Debt is high and is increasing. Employment is low and is decreasing. Lives are already lost and these losses are increasing.
When hard-to-reverse trends are for the worse and are worsening, how can savers preserve or even increase their savings?
Stocks have in the long run delivered the largest total returns of any large asset class. This has been true even across crises, eventually.
Figure: Anthony, James. rConstitution Papers. Neuwoehner Press, 2020, p. 10.21.
Data: Siegel, Jeremy J. Stocks for the Long Run. 5th ed., McGraw-Hill Education, 2014, p. 6.
Total Real Returns
USA Stocks, Government Bonds, Treasury Bills, Gold, and Dollar
Stocks are ownership shares of productive capacity. This capacity is worth less in downturns, when the capacity utilization is less. But even then, whatever value will eventually spill over into nonproducing assets like real estate and gold must first have originated as value added by productive businesses. In the long run, nonproducing assets can’t outperform stocks.
Stocks naturally protect against inflation. Stock prices reflect all future net profits. When product prices inflate, future net profits inflate too.
Savers learn that the total returns from stocks quickly fall substantially if savers don’t stay invested in stocks. The S&P 500’s 2002–2021 annual total return would have been cut from 9.52 percent to just 5.33 percent if a saver had missed out on just the 10 best trading days in these 20 years.
But while it can be rewarding to stay invested in stocks across sub-crisis government-money-error cycles, it would be punishing to stay invested in stocks during crisis drops in stock prices. In the Great Depression, Great Inflation I, and the Financial Crisis, savers were pummeled by substantial drops in the S&P 500, respectively, of 82 percent, 64 percent, and 53 percent.
Currently, earnings forecasts can’t be trusted. Current forecasts figure in both stagnation-or-recession in 2023 and a strong recovery in 2024, but both can’t happen. If a recession is strong enough to limit price inflation, then current earnings forecasts are too high. If there isn’t a strong recession, then price inflation will be high, so there won’t be a strong recovery, so here too, current earnings forecasts are too high.
Bonds inherently lack stocks’ considerable upside potential. Also, interest rates ultimately should increase, so then the nominal value of bonds will decrease. Also, money inflation and product-price inflation will continue, so the real value of bonds will decrease.
Dollars are guaranteed to lose value. Currently the Fed openly tries to force dollars to lose value at an average annual rate of 2 percent. Already, Wall Street Journal reporter Jon Sindreu suggests that the Fed should force dollars to lose value at an average annual rate of between 4 percent and 6 percent.
And yet, even these figures wouldn’t capture how quickly the Fed forces dollars to lose value. Modern price-inflation calculations are used to claim that dollars are losing value at annual rates of 6 percent to 9 percent. But in reality, more-accurate 1980 calculation methods indicate that dollars are losing value at annual rates of 14 percent to 17 percent.
Gold has a proven track record as money. Now, computerization allows gold to efficiently be kept in vaults and have its ownership transferred without moving the gold, which eliminates a past drawback of gold as money. No other store of value can match gold’s proven track record and infrastructure.
In the usual sub-crisis government-money-error cycles, gold has a relatively constant value.
In crises, gold also gains value. In the Great Depression, Great Inflation I, and the Financial Crisis, gold gained, respectively, 69 percent, 849 percent, and 156 percent.
Back when the Great Depression started, the government had claimed that dollars were worth a fixed amount of gold. But the government had inflated the quantity of dollars, so dollars were worth less.
To avoid honoring the government’s claim and as a result losing more and more gold, President Franklin Roosevelt issued an executive order that claimed that owning gold was illegal. State governments, congresses, and justices didn’t respond by using their offsetting powers to secure people’s right to own gold. This deprivation of the right to own gold continued until 1975, by which time Great Inflation I was well underway.
Now, the national government hasn’t been claiming that dollars are worth a fixed amount of gold. So the national government no longer has an incentive to deprive people of their right to own gold.
Naturally, demand for gold has already increased. Central bankers have had to increase interest rates. Higher interest rates are costing central bankers higher interest payments. Also, higher interest rates are causing central bankers’ holdings in the moneys they create to lose value. Both kinds of losses have been forcing central bankers to buy and hold a better store of value—gold.
So then in the current Great Inflation II crisis, stocks are at unsupportable prices. Bonds and dollars are sure to lose value too. But gold is proven in crises.
Unprecedented money inflation is already baked into Great Inflation II. Savers need to preserve and increase their savings by owning gold.
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