Power & Market
Last month, Weld County, a Republican-dominated county in the northern part of the state, announced it would no longer be enforcing state edicts requiring the closure of businesses for purposes of government-mandated social distancing.
Specifically, the county commissioners released a statement saying that it was up to businesses to determine for themselves whether or not they could safely open:
Weld County Government is not opening any businesses, just as Weld County Government did not close any businesses. That said, each commissioner has received comments from constituents struggling to make ends meet, pay their bills, and take care of their families who have said they are going to open their businesses.
So, Weld County Government took the proactive response of preparing best practices and guidance that could be used as business owners look to reopen—whenever they feel comfortable to do so. An informed public is a strong public.
The same preventative measures need to be heeded—we’ve said that. Expectations need to be managed—we’re doing that. What we aren’t going to do is pick winners and losers as to who gets to restart their livelihoods.
And at the end of the day, everyone has freedoms: freedom to stay home, freedom to go out, and freedom to support whatever business they want to support.
Of course, the real concern is whether or not county or state bureaucrats will show up with armed police officers and shut the business down, as has happened in some cases.
On the county level, at least, it appears the commissioners have instructed county bureaucrats to not intervene. At least according to one business owner. The owner of El Charro restaurant reported earlier this month that
her husband called the Weld County Health Department and was told they would not shut them down or penalize them for re-opening.
“They didn’t say we could open," said the general manager and Kelley's son, Harrison Chagolla. "They just said we’re not going to shut you down, we won’t stop you, which as far as we’re concerned, that’s permission enough."
The restaurant has been open at limited capacity since Wednesday. Because they are seating people at every other table to continue social distancing, the Chagollas said they have had to turn customers away.
Naturally, the governor of Colorado, Jared Polis, condemned the move and threatened to withhold emergency funds from the county. In other words, in order to enforce executive orders that he claims keep people safe, Polis plan to withhold funds designed to help people cope with COVID-19. It's a rather vindictive and capricious position to take, but it may have been the only tool the governor was willing to use.
In response, the county reported that it already has the funds Polis threatened to withhold, and says it doesn't plan to seek any additional funds.
The state maintains that it still has the ability to go in and revoke state-issued business licenses, although it is unclear that this has happened in the month since the controversy first erupted. It may be that the county has called the governor's bluff.
[RELATED: "The Shutdown May Soon Collapse in Pennsylvania Thanks to Local Resistance" by Zachary Yost]
Perhaps emboldened by the Weld County refusal, Elbert County, just east of the Denver metro area, has also announced it will no longer be adhering to the state's social distancing mandates. As reported by Elbert County News:
The Elbert County Board of County Commissioners has voted unanimously to allow graduation ceremonies for Simla, Kiowa and Elizabeth high schools, and to allow houses of worship to resume in-person services without capping attendance.
The move on May 20 came despite county officials not yet having received approval of a partial waiver request the county had submitted to the Colorado Department of Public Health and Environment for exemptions from the state's COVID-19 guidelines.
The commissioners' vote came after repeated attempts to seek a "variance" from the governor's office allowing for greater flexibility from state mandates. The governor's office has encouraged applications of this sort, but the commissioners reported that the governor's office was apparently incapable of processing the request.
So, the county was forced to go out on its own.
In other words, the state government couldn't get its act together, so the county government had to make a judgment call. The governor's office has not threatened any action in response to Elbert County's "disobedience." And none may be coming. After all, sending state troopers to close down church services and small businesses is not necessarily a winning proposition for a governor where statewide offices are still competitive for both parties at election time.
Meanwhile, in El Paso County, home of Colorado Springs with half a million people, the district attorney and county commissioners are decidedly unenthusiastic about bringing charges against those violating state orders.
These local acts of noncooperation serve an important function in applying pressure to the governor's office, and this illustrates the difficulty in maintaining lockdown orders as time goes on. After all, the initial closures benefited from widespread public fear over the COVID-19 virus and the common perception that it could prove to be deadly on a scale similar to the 1918 flu epidemic. Thus compliance was generally voluntary and easy to maintain. It has now become clear that a chaotic and highly deadly pandemic will not play out the way many alarmist media outlets and government experts insisted it would. For example, the CDC has downgraded the disease's fatality rate, and the public has noticed that hospitals never were anywhere near exhausting capacity.
Soon, however, the county government's opposition to lockdown orders will become academic. Today, restaurants opened to dine-in service in Colorado for the first time since March. The state can either continue to soften its stance on lockdowns or risk losing credibility with the growing segment of the population which is prepared to face the risk of COVID-19 infection by participating in the regular activities of daily life.
Of course, there is political pressure coming from other corners as well. The state now is looking at the need for a 10 percent cut to spending. And that's just for starters. Much larger cuts are likely coming in the future, since restaurants and retail outlets are producing only a small fraction of former revenues. County and city governments won't be content to continue lockdowns much longer.
Have you ever noticed how some countries always seem to be having debt crises? For some inexplicable reason they are often in an economic crisis and fail to meet their debt obligations. Sometimes a nation like Argentina resorts to issuing hundred-year bonds, taking on International Monetary Fund (IMF) loans or undertaking other restructuring measures that seem “designed to fail.” Such ideas still seem foreign to many living in the wealthy developed countries, but perhaps the recently announced Main Street Lending Program will change all of that.
Under this program up to $600 billion will be made available in loans to US businesses that meet either of the following conditions:
(1) the business has 10,000 employees or fewer; or (2) the business had 2019 revenues of $2.5 billion or less.
The loans have a four-year maturity and all principal and interest payments are deferred for the first year. Since the Federal Reserve is prohibited from providing small business loans to the public, it circumvents this by lending to a Special Purpose Vehicle (SPV) which will then buy 95 percent of the loans made by eligible lenders for the purpose of the program. The US Treasury will then spend $75 billion as an equity investment in this same SPV.
Each loan will be between $1 million and $25 million (unsecured under the Main Street New Loan Facility) or between $1 million and $150 million (secured under the Main Street Expanded Loan Facility) to eligible borrowers. There are only a few attestations required, such as refraining from paying back other loan balances and the provision below, which takes us to the heart of the matter:
The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
Why are $600 billion in loans being given to businesses that are going through exigent circumstances, and what is the expected default risk on these loans? Without cost-cutting measures such as layoffs and salary reductions or increasing sales, there may be little prospect that the principle can be returned to the SPV and the banks. How many will default remains unknown, considering that the loans were granted not based on any merit nor metric, but based on being distressed due to the pandemic. Like any nation unable to pay back the IMF, the entrepreneur will find that he must take on a new loan in order to pay back the previous loan.
The problem is that the Fed’s intervention completely distorts the profit and loss system required to have functioning markets. Normally a lender will lend money to a business if it believes that the business can expand, innovate, or implement some other method to increase profits. However, a profit motivation on behalf of the lender does not appear to be the case here. In a press release regarding the various loan programs being offered, the Fed said that the loans will support the economy.
It’s unclear how this will support the economy, but it is clear that the Fed will potentially increase the money supply by just over half a trillion dollars. In turn, the loans received will be pyramided by commercial banks, creating a further increase in the money supply. The funds may help keep some business afloat during this crisis and may help keep staff members employed, but without reducing costs or increasing revenues many businesses may find that the only way they can continue after recovery is to take on more debt.
It was often said that during the Great Recession that main street did not receive the support that it needed; this is no longer the case, because during the Great Lockdown “support” is finally on its way!
Two weeks ago, Fed chair Jay Powell declared the “fundamentals of the U.S. economy strong,” while simultaneously announcing the largest interest rate cut since 2008 in the face of global pressures stemming from the coronavirus.
Last week, the Fed escalated its repo operations in a desperate attempt to boost short-term liquidity for large financial institutions.
But this past weekend, the Federal Reserve made its most radical moves since 2008. The headlines focused on cutting the federal funds rate back to 0–0.25 percent and a major $700 billion reboot of quantitative easing. The Fed also cut reserve requirements, maintained paying interest on excess reserves (0.1 percent), and cut its discount window down to 0.25 percent from 1.75 percent.
The discount window cut may be the biggest deal.
As Bob Murphy explained in his Money Mechanics chapter on post-2008 monetary policy, the discount window is an alternative to standard open market operations that allows banks to borrow directly from the Fed by posting collateral. Since 2008, banks have largely abandoned the discount window, opting instead to sit on excess reserves, in part to avoid the appearance of being stressed.
The Fed is now actively trying to reverse this trend. The cut brings the discount window rates down to the closest they’ve been to the federal funds rate since the 2008 crisis. In case that was too subtle, Chairman Powell also explicitly emphasized the opportunity banks have to utilize the discount window.
Discount Rate vs. Effective Fed Funds Rate, 2002–February 2020
Note: Discount rate last updated December 2019.
This may end up being the most important piece of yesterday’s historic announcement, because it may serve not only as a lifeline to banks, but as a means to prop up a dangerous corporate debt bubble.
During his press conference following yesterday’s announcement, Powell emphasized that the Fed is statutorily limited to purchases of US Treasurys and mortgage-backed securities for its balance sheets. These limits, however, do not apply to discount window loans.
According to the Fed’s website, assets that can be used for discount window collateral include:
- US Treasury obligations
- Obligations of US government agencies and government-sponsored enterprises
- Obligations of states or other US political subdivisions
- Collateralized mortgage obligations
- Asset-backed securities
- Corporate bonds
- Money market instruments
- Residential and commercial real estate loans
- Commercial, industrial, or agricultural loans
- Consumer loans
Perhaps most important here are corporate bonds.
One of the most significant challenges that the coronavirus has posed to global markets are major supply shocks to industries, as well as a significant decrease in oil prices as demand has dropped. Although lower oil prices can reduce costs for transportation-heavy industries, they are a major problem for American energy companies reliant upon shale oil. Although fracking has unleashed a massive oil boom in the US, it is not on an even playing field with oil operations in a country like Saudi Arabia. According to oilprice.com, only five shale drillers are profitable at $31 oil.
As a result, the drop in oil prices has caused significant dangers for banks heavily invested in energy markets—particularly regional banks.
As Vipal Monga noted in today in the Wall Street Journal:
Especially vulnerable are regional banks with big energy-lending portfolios. Larger banks also are on the hook for billions of dollars in loans to the energy industry, but they are relatively less exposed because their balance sheets are much bigger and their lending businesses more diversified. Energy accounts for 3.2% of Citigroup Inc.’s loan portfolio and 2.1% of JPMorgan Chase & Co.’s loan book, according to Goldman Sachs analysts.
But a shakeout among regional banks’ borrowers could dent their earnings this year between an average of 15% to 60%, depending on the extent of loan losses, said Keefe, Bruyette & Woods analyst Brady Gailey.
“It is a big deal for these oil-exposed banks,” he said.
Of course, the energy sector isn’t the only industry in which banks may want to offload corporate bond holdings.
A decade of global easy money policies has created a world flush with corporate debt, both due to the ease with which corporations have been able to access credit lines and to a demand for yield. This has resulted in the rise of “zombie companies,” which James Grant defines as companies “failing to generate cash flow to cover interest expense for three consecutive years.” Such firms made up almost 14 percent of S&P 1500 companies last year.
For years there have been warning signs that a recession could light the fuse on a massive corporate debt bomb, and it’s possible that the coronavirus may be the match. By explicitly pushing the use of the discount window, the Fed may be signaling acknowledgment of this problem and giving American banks the ability to borrow off their bad loans.
Although this may provide short-term relief, it’s another example of the real disease that has infected global financial markets—central banks engaging in extraordinary monetary policy without any end game in place.
After all, we have seen that central banks have been unable to unwind their 2008 interventions in financial markets. In the US, minor rate hikes and a slow balance sheet roll-off sparked dangers that forced it to reverse course within a year. It has resulted in an overleveraged global economy, full of wildly mispriced debt. This has not only created significant bubbles throughout the financial system, but also an economy that is even more reliant on these volatile markets as conservative investments have been repressed in our low-interest environment.
So, although discount window operations are meant to be short-term loans to financial institutions, we’ve seen the Fed's ability to make the temporary permanent. The coronavirus has helped accelerate a global crisis, but it is having the impact it has because the economy was already sick.
Now governments want us to believe that the ones who infected it are equipped to save it.
It has become something of a tradition in the free market corners of social media to express shock and dismay over the possibility that New York congresswoman Alexandria Ocasio-Cortez (AOC)—an avowed "democratic socialist"—has an economics degree from Boston University.
This is how it works: AOC makes a statement that is notably antimarket, prosocialist, or generally clueless about general concepts from the field of economics.
Her critics then post responses questioning whether she actually has a degree, or saying that she must have not been paying attention in class, etc.
Here are a few examples:
But why is it so hard to believe that she has a degree in economics? It seems that far too many people have rather inaccurate ideas about what is taught in economics programs nowadays.
The truth is that there is little emphasis on understanding markets in economics programs, and little emphasis on the value of markets. The emphasis is now on using economics to justify state action in the economy. And any bias that may have once existed in favor of unhampered markets in these departments is vanishing.
The idea that economics is the dispassionate study of understanding how hiring is affected by an imposed price floor (i.e., a minimum wage) or how opportunity cost affects consumer choices is rapidly becoming hopelessly outdated.
Sure, twenty years ago that sort of thing could still often be observed. But microeconomics of that sort is now about as fashionable as other relics of that time, such as the Backstreet Boys.
Basic principles that were once a given—i.e., the notion that making labor more expensive means that employers buy less of it—are now out the window.
But this trend didn't start yesterday. For decades now, economics has been moving further and further away from teaching microeconomics and how firms and households work. Instead, by the late 1990s economics was well down the road of constructing elaborate and purely hypothetical mathematical models that had little bearing on everyday life. These model builders claimed they could predict the future, but of course, they completely missed the huge financial crisis of 2008.
Another trend in recent decades has been toward conducting an enormous number of studies that produce statistical correlations. But as the correlations can be interpreted any number of ways, they often end up being used to support whatever policy the researchers prefer. Out of this has come the drive to make economics into a discipline that depends on tinkering and trial and error. Some now insist we can't really guess what the results of a policy might be until we "test" it using methods from the physical sciences.
This is now what's fashionable, and a December article at Quartz tells us, "the new era of big data…has led economists to revisit the wisdom of some long held assumptions."
Those old "assumptions" are what many people wrongly think is a focus of economics instruction. Last year, for example, Vox happily reported that in a new introductory economics course at Harvard "[t]here’s little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts." Moreover, it's getting easier to get through an economics program without any knowledge of economics because economists are increasingly less interested in economics proper.
As I noted here at mises.org last year, economists nowadays seem to spend a lot of time ripping off the insights of historians, sociologists, psychologists, and political scientists. They then slap some new labels on the research and give it names like "behavioral economics."
In the sorts of "economics" classes that focus on such topics, one learns that government planning is what gets a poor country out of poverty. They learn that people can't be trusted to make decisions for themselves. They learn that bailing out billionaires in the financial sector again and again has no real downside, morally or otherwise.
There's no reason to believe that a student with an economics degree is going to graduate with a deep understanding of how government intervention distorts markets or impoverishes consumers. The theoretical foundations behind such things are mentioned, of course, but at many institutions they are most certainly not emphasized.
Far more likely, one learns in these programs that central banks can be relied upon to fix almost any economic problem faced in the course of a business cycle. And if a certain problem becomes especially difficult, the answer surely lies in giving the central bank even more power.
Moreover, economics students believe all sorts of fantasies that most normal people would easily identify as obvious nonsense were they not told otherwise by "wise" economists. Only economics students, for example, are naive enough to think that central banks are "independent" and nonpolitical institutions. This is why the most revealing research on the Fed as a political institution is conducted primarily by political scientists. (For example, see John T. Woolley's "The U.S. Federal Reserve and the Politics of Monetary and Financial Regulatory Policy.")
So, it's entirely plausible that AOC took any number of economics courses and came out with good grades after learning virtually nothing accurate about entrepreneurship, wages, money, or consumer choice. What she did learn on these topics was likely built on the premise that the state ought to be intervening in and tinkering with all these things.
AOC appears to have the same beliefs that many economics grads do.
Meanwhile, AOC's critics make fun of her for being a bartender. But they're getting things backward. Being a bartender is possibly the best thing on her CV. These snide remarks about "the bartender AOC" seem to assume that bartending is some sort of disreputable line of work that only idiots pursue. It's not. "Serving" in Congress is much less impressive. Besides, tending bar is likely one of the more instructive things AOC has done as far as understanding markets goes. There's certainly no reason to assume that the economics faculty at BU was any help in this regard.
Thank to Thorvaldur Gylfason for pointing out his 2009 article examining the economic implications of Iceland's small population of only about three hundred thousand people.
Gylfason noted how Icelandic politicians have claimed that the country's small population was "our most serious social evil," and that the critical mass for a well-functioning society must be much larger than was currently available.
But Gylfason notes:
Yet, medieval Florence and Venice flourished with 70,000 and 115,000 inhabitants. They were better situated in Europe and better served by sea lanes than Iceland was and could, therefore, easily make up for their small size through trade. Economic integration is vital to small countries. The population of ancient Athens was 200,000. Too small? Hardly.
Or take modern Barbados (pop. 300,000), independent since 1966, a prosperous and stable democracy where virtually every child completes primary and secondary school and life expectancy matches that of the US. Is Barbados too small? No. Barbados has not even felt it necessary to pool its currency with its eight neighbours comprising the East Caribbean Currency Union (ECCU, pop. 600,000). Since 1975, the exchange rate of the Barbados dollar has been kept fixed vis-à-vis the US dollar at a rate of 2 to 1 (and the ECCU, meanwhile, pegged the East Caribbean dollar to the US dollar at a rate of 3 to 1).
Is there a lower bound on population below which countries cannot stand on their own feet? Yes, but it seems to lie far below 300,000.
The answer lies in free trade. Gylfason writes:
Fuelled by free trade, small nations have increased in number. Without external trade, many small nations would be inefficient on account of their small size and would seem, on economic grounds, to need to merge with larger nations. Foreign trade relieves small nations of this need by enabling them to reap the benefits of scale and scope through trade.
This is how trade has helped increase the number of sovereign states over the years. Without vivacious trade, the costs of small size to many countries would almost surely outweigh the gains. The inability of a small country to benefit from specialisation by exploiting its comparative advantages would by itself be disastrous.
Not that everything is fine when a society is small:
Even if small countries can succeed by being open and peaceful, their small size presents challenges. Strong checks and balances are imperative in small, heavily politicised, clan-based societies to prevent relations between politics, banking, and business from becoming too cosy, not to say incestuous. Here Iceland failed. High-quality recruitment into political service and careful selection of key public officials, from abroad if needed, are also important in a small country with a small pool of appropriate local talent. Here, too, Iceland missed the boat.
But the benefits do outweigh the costs, Gylfason concludes:
Some observers at the time thought Belgium and Portugal were too small to be viable as independent countries. The tables were turned in the twentieth century when centrifugal forces prevailed, facilitated by the worldwide liberalisation of trade after World War II. Iceland attained home rule in 1904 and transformed itself from economic parity with today‘s Ghana in 1900 to parity with Scandinavia in 1980 (Gylfason 2008a). Gradual liberalisation of trade from 1960 onward played an important role in Iceland’s transformation.
One consequence of the social accord that tends to go along with small size may be a shared interest in education, as children in cohesive societies are less likely to be deprived of schooling. Countries with 300,000 or fewer inhabitants keep their young people in school a year longer on average than larger countries, in the sense that the small countries have an average school life expectancy—i.e., the expected number of years of schooling that will be completed as measured by UNESCO—of 13 years compared with 12 years elsewhere.
Another consequence of small country size, especially in a strategic location, may be that neighbours may be willing to share the costs of national defence. France spends 2.4% of its GDP on national defence compared with 1.1% in Belgium and 0.8% in Luxembourg. This tendency may offset some of the higher per capita cost of public services in small countries. Moreover, and this may surprise you, small countries tend to have less corruption than large countries as measured by Transparency International. In 2008, the Corruption Perceptions Index—which ranges from 1.4 in Somalia to 9.4 in Denmark—was 4.6 on average in countries with 300,000 or fewer inhabitants compared with 4.0 in larger countries.
As I noted in this article, both the empirical and theoretical evidence suggests that smallness is no impediment to growth and economic success. Smallness means more openness to trade, less aggressiveness militarily, and studies have shown that small countries have better growth rates in many cases.
In his book Human Scale, Kirkpatrick Sale covers this topic of the "ideal" size for a political entity. Sale suggests that an independent city or city-state probably reaches its ideal size for self-rule around fifty thousand people. He also notes that medieval cities that were larger than this tended to break themselves up into smaller, adjacent independent pieces, with the idea being that large scale breeds alienation, crime, and political dysfunction.
The public still doesn't know who won the Iowa caucuses. Maybe the leaders of the Democratic Party don't know either.
But there's an important lesson here: if one's political process is founded on votes counted through a phone app, or a "direct recording electronic" (DRE) voting machine, centralized technical control of the system raises the risk of system-wide failure and corruption.
In Iowa the downside of an electronic system was made worse by a sheer lack of competence on the part of organizers. The Iowa system was something of a hybrid between physically tallied votes that were then reported through an electronic system. Some parts of the process were directly observable and verifiable. But the electronic component of the system appeared to increase human error rather than mitigate it.
Moreover, even when results finally are announced, many will have good reason to hold the results suspect. Some will likely claim party leaders purposely held up results to make "adjustments." Others will question—quite reasonably—if the people who can't competently use the vote counting system can be trusted to properly count the votes at all.
The good news in all of this is that this is just a primary. This vote is essentially a private vote count for a private organization known as the Democratic Party. Even if the vote in Iowa is totally botched, all that legally matters is the candidate chosen at the convention this summer.
Things are different in a national elections, however. In those cases, the stakes are higher, and the motivation to influence them greater. When using electronic voting, votes can be more easily and conveniently lost or changed through error or malicious schemes. This can also be done more easily on a larger scale. Yes, paper vote counts can be corrupted, but it is more difficult to do so on a large scale.
Yet, many policymakers in many states have suggested "streamlining" the voting process by moving ever further toward DREs to count votes. Many of these same people wax philosophical about the alleged sanctity of the democratic process, or they make hysterical claims about how "Russian hackers" are trying to corrupt American politics.
This isn't to say there aren't people out there trying to tamper with vote counts. "The Russians" are not the only people with an interest in doing so. As has become abundantly clear since the election of Donald Trump, US intelligence bureaucrats at agencies like the FBI and CIA are happy to employ an endless barrage of schemes to undermine an elected president. James Comey, for instance, employed FBI investigations to enhance his own power and influence the 2016 election to suit his personal ends. We also know that the CIA and other intelligence agencies engage in cyber warfare of their own design. The idea that these skills and resources would never be employed for domestic political ends is a cute one.
The most reasonable response to all of this is to make the logistics of corrupting and "hacking" elections as daunting as possible. The first step is in insisting on old-fashioned paper ballots in all elections.
Unfortunately, fewer than half of US states require the use of physical ballots only. More than half employ electronic voting, at least in part. Some states even employ electronic voting without any sort of paper trail at all.
A big reason to employ electronic counting schemes is to make life easier for government officials. In other words, laziness and incompetence on the part of the vote-counting officials (mostly state governments' "secretaries of state") means they're looking for a way to manage vote counts with minimal logistical effort.
These officials claim it's just too difficult to count all the votes in a public, traceable, and accurate way.
And yet, the United Kingdom just held an all-paper-ballot election in a country of over 65 million people. It's not that hard. As explained here, each UK voter casts a paper ballot. The ballots are rushed to the place where they are counted. People then count the votes out in the open. Candidates can ask for multiple recounts. The candidate with the most votes is announced in each constituency. The end. As one British observer noted:
On the 24th June 2016, by approximately 6am, we had managed to count 33,577,342 votes in the UK Brexit Referendum. These votes were counted by hand and we all voted by putting a simple cross in a box, using a trusty pencil.
Now, the voting in the Iowa Caucus has been closed for over 16 hours and, as of now, there has been no result. In fact only 1.9% of the votes have been tallied and are being reported.
Now, I'm not saying the British have a perfect system, and few would accuse me of being any sort of an Anglophile. Counting votes in a Prime Minister system is a bit different. But the fact is that this isn't rocket science. Yet we now live in an America where governments can't manage their most basic functions. Yes, state and local governments are sure to pay their employees big salaries with exorbitant retirement benefits. Yet we're also being told—by these well-paid officials themselves—that in spite of perennially growing budgets, roads are falling apart and bridges are falling down. We're told school kids can't read because teaching people to read is just so, so difficult. And counting paper ballots? For these people, that's a nut that's just too hard to crack.
When the New York Federal Reserve began pumping billions of dollars a day into the repurchasing (repo) markets (the market banks use to make short-term loans to each other) in September, they said this would only be necessary for a few weeks. Yet, last Wednesday, almost two months after the Fed’s initial intervention, the New York Federal Reserve pumped 62.5 billion dollars into the repo market.
The New York Fed continues these emergency interventions to ensure “cash shortages” among banks don’t ever again cause interest rates for overnight loans to rise to over 10 percent, well above the Fed’s target rate.
The Federal Reserve’s bailout operations have increased its balance sheet by over 200 billion dollars since September. Investment advisor Michael Pento describes the Fed’s recent actions as Quantitative Easing (QE) “on steroids.”
One cause of the repo market’s sudden cash shortage was the large amount of debt instruments issued by the Treasury Department in late summer and early fall. Banks used resources they would normally devote to private sector lending and overnight loans to purchase these Treasury securities. This scenario will likely keep recurring as the Treasury Department will have to continue issuing new debt instruments to finance continuing increases in in government spending.
Even though the federal deficit is already over one trillion dollars (and growing), President Trump and Congress have no interest in cutting spending, especially in an election year. Should he win reelection, President Trump is unlikely to reverse course and champion fiscal restraint. Instead, he will likely take his victory as a sign that the people support big federal budgets and huge deficits. None of the leading Democratic candidates are even pretending to care about the deficit. Instead they are proposing increasing spending by trillions on new government programs.
Joseph Zidle, a strategist with the Blackstone investment firm, has called the government — or “sovereign” — debt bubble the “mother of all bubbles.” When the sovereign debt bubble inevitably busts, it will cause a meltdown bigger than the 2008 crash.
US consumer debt — which includes credit cards, student loans, auto loans, and mortgages — now totals over 14 trillion dollars. This massive government and private debts put tremendous pressure on the Federal Reserve to keep interest rates low or even to “experiment” with negative rates. But, the Fed can only keep interest rates, which are the price of money, artificially low for so long without serious economic consequences.
According to Michael Pento, the Fed is panicking in an effort to prevent economic trouble much worse than occurred in 2008. “It’s not just QE,” says Pento, “it’s QE on steroids because everybody knows that this QE is permanent just like any banana republic would do, or has done in the past.”
Congress will not cut spending until either a critical mass of Americans demand they do so, or there is a major economic crisis. In the event of a crisis, Congress will try to avoid directly cutting spending, instead letting the Federal Reserve do its dirty work via currency depreciation. This will deepen the crisis and increase support for authoritarian demagogues. The only way to avoid this is for those of us who know the truth to spread the message of, and grow the movement for, peace, free markets, limited government, and sound money.
You don’t need to be a supporter of President Trump to be concerned about the efforts to remove him from office. Last week House Speaker Nancy Pelosi announced impeachment proceedings against the President over a phone call made to the President of Ukraine. According to the White House record of the call, the President asked his Ukrainian counterpart to look into whether there is any evidence of Ukrainian meddling in the 2016 election and then mentioned that a lot of people were talking about how former US Vice President Joe Biden stopped the prosecution of his son who was under investigation for corruption in Ukraine.
Democrats, who spent more than two years convinced that “Russiagate” would enable them to remove Trump from office only to have their hopes dashed by the Mueller Report, now believe they have their smoking gun in this phone call.
It this about politics? Yes. But there may be more to it than that.
It may appear that the Democratic Party, furious over Hillary Clinton’s 2016 loss, is the driving force behind this ongoing attempt to remove Donald Trump from office, but at every turn we see the fingerprints of the CIA and its allies in the US deep state.
In August 2016, a former acting director of the CIA, Mike Morell, wrote an extraordinary article in the New York Times accusing Donald Trump of being an “agent of the Russian Federation.” Morell was clearly using his intelligence career as a way of bolstering his claim that Trump was a Russian spy – after all, the CIA should know such a thing! But the claim was a lie.
Former CIA director John Brennan accused President Trump of “treason” and of “being in the pocket of Putin” for meeting with the Russian president in Helsinki and accepting his word that Russia did not meddle in the US election. To this day there has yet to be any evidence presented that the Russian government did interfere. Brennan openly called on “patriotic” Republicans to act against this “traitor.”
Brennan and his deep state counterparts James Comey at the FBI and former Director of National Intelligence James Clapper launched an operation, using what we now know is the fake Steele dossier, to spy on the Trump presidential campaign and even attempt to entrap Trump campaign employees.
Notice a pattern here?
Now we hear that the latest trigger for impeachment is a CIA officer assigned to the White House who filed a “whistleblower” complaint against the president over something he heard from someone else that the president said in the Ukraine phone call.
Shockingly, according to multiple press reports the rules for CIA whistleblowing were recently changed, dropping the requirement that the whistleblower have direct, first-hand knowledge of the wrongdoing. Just before this complaint was filed, the rule-change allowed hearsay or second-hand information to be accepted. That seems strange.
As it turns out, the CIA “whistleblower” lurking around the White House got the important things wrong, as there was no quid pro quo discussed and there was no actual request to investigate Biden or his son.
The Democrats have suddenly come out in praise of whistleblowers – well not exactly. Pelosi still wants to prosecute actual whistleblower Ed Snowden. But she’s singing the praises of this fake CIA “whistleblower.”
Senate Minority Leader Chuck Schumer once warned Trump that if “you take on the intelligence community, they have six ways from Sunday at getting back at you.” It’s hard not to ask whether this is a genuine impeachment effort…or a CIA coup!
The current head of the International Monetary Fund, Christina Lagarde, is the likely replacement for Mario Draghi at the European Central Bank. Draghi's eight-year term ends on October 31.
In practice, this has meant negative interest rates and huge growth in the ECB's balance sheet. Via these mechanisms, the central bank has intervened to prop up demand for government debt in Europe, and bail out a financial system in desperate need of liquidity.
Under Draghi's leadership, ECB's key target rate has been negative since June of 2014, and has been -0.4 percent since March of 2016.
There had been some speculation that the EU might nominate a compromise candidate who was inclined to moderately more hawkish policy favored by some German policymakers.
With the nomination of Lagarde, it looks like that's not going to happen.
Thus, in response to Lagarde's nomination, Alasdair MacLeod averred on Twitter: "Lagarde replaces Draghi. Bundesbank will be most unhappy: goodbye euro, hello mark?"
Macleod is likely engaging in hyperbole, as in the short term it seems unlikely the Bundesbank will be looking to make an exit. However, when the next recession hits, it becomes increasingly likely Europe will continue to splinter into two camps: the productive, savings-minded, and relatively financially-sound northern bloc versus the more profligate and less financially stable southern bloc.
German savers will be left all the more yield-starved by the ECB so as to keep interest rates for government debt down and liquidity high. It will essentially be a wealth transfer from northern Europe to southern Europe.
With Legarde at the helm of the ECB, this looks to be likely, and is no departure from the current road that Europe and the ECB are already headed down.
After all, as the AP reports today, Lagarde's easy-money leaning have long been quite apparent:
Under Lagarde’s leadership, the IMF has called for the ECB to continue its monetary stimulus efforts aimed at raising inflation and supporting a recovery that appears to be losing steam. The IMF’s review of the eurozone last year warned against premature interest rate increases and urged clear forward guidance, that is, promises to keep rates low well into the future. The report echoed much of what Draghi had been saying, including his urging for governments to do more to support their economies with well-targeted spending, and to engage in pro-business reforms.
Moreover, Lagarde sang the praises of negative interest rates back in 2016:
“We see the recent introduction of negative interest rates by the ECB and Bank of Japan—though not without side effects that warrant vigilance—as net positives in current circumstances,” Ms. Lagarde said.
For the established political powers, of course, Lagarde is a sound choice. She is by training not an economist at all, but a lawyer and politician. She knows how to manipulate Europe's regimes to buy support for the EU and to keep the status quo going by any means necessary.
If that requires a near-total takeover of financial markets— as recently described here by Thorstein Polleit, then Lagarde can be counted on to offer no resistance.
In November a year will have passed since the renegotiation of NAFTA. Although this version has new guidelines, for the most part its main principle prevails: free trade is beneficial for both parties. This is true with or without free trade agreements or the existence of "fair" trade. However, as a Parametria survey published in 2016 shows, most Mexicans still don't understand the multiple benefits that these opening policies entail.
Those benefits include:
- A greater diversification of brands and categories of consumer goods (According to IMCO)
- An increase of 21.154 billion dollars on foreign direct investment and of 339.244 billion dollars on Mexico's annual exports of goods and services since 1994 (According to the World Bank)
- Indirectly strengthening libertarian principles such as globalization (the free movement of ideas, people, capital and consumer goods) and property rights. As the liberal economist Frédéic Bastiat explained in his essay titled "Communism and Protection":
Every citizen who has produced or acquired a product should have the option of applying it immediately to his own use or of transferring it to whoever on the face of the earth agrees to give him in exchange the object of his desires. To deprive him of this option when he has committed no act contrary to public order and good morals, and solely to satisfy the convenience of another citizen, is to legitimize an act of plunder and to violate the law of justice .
- A possible contribution to the reduction of extreme poverty (measured as an income interval and not as inequality — less than half of the average national income — or access to specific consumer goods and services)
In "The Role of Trade in Ending Poverty," the World Bank estimates that between 1990 and 2010 the global percentage of people living under extreme poverty fell by half. In this report they use as a reference Kraay and Dollar's article titled "Growth is good for the poor" (in which they concluded that growth benefits the poor as much as it does the typical household) in order to explain the correlation, and possible causal relationship, of multiple economic variables. Their interpretation of the data establishes that GDP growth increases both the demand for labor and real wages for low skilled jobs:
It is the strong growth of the global economy over the past 10 years that has enabled the majority of the world’s working-age population to find employment. Real wages for low-skilled jobs have increased with GDP growth worldwide
In "The macroeconomy after tariffs," after studying the economic behavior of 151 countries from 1963 to 1914, its authors concluded that each increase of 3.6% on effective tariff rate produces a productivity reduction of 0.9% in 5 years. In some cases, this increase in average productivity is not only the result of the exit of less efficient companies from the market. As Nina Pavcinik shows in "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," companies that survive this trade opening also experience an increase in productivity.
A little known fact is that the percentage of people in Mexico who lived below the international line of extreme poverty in 2016 (income less than $1.90 dollars per day) is lower than in 1994: 4.1% less. In absolute numbers a similar scenario also occurs: 2.9 million people less. If the poverty line is used as a measure below $3.2 per day, we observe a reduction of 4.6 million people and of 9.3 in percentage points.
Due to the particular circumstances of the Mexican case (e.g., the 1994 financial crisis, social programs such as Oportunidades, among others), it is not possible to accurately determine if this commercial treaty contributed to the reduction of extreme poverty by only using global aggregates. Nevertheless, because of or despite trade liberalization, Mexico's extreme poverty has decreased since NAFTA.