Clinton’s Hell

Today is the day – fifteen years ago and all that.

What does presidential candidate Hillary Clinton have to say about it?

“I remember one image so indelibly, [a firefighter] dragging his ax, and it was as close to depiction of hell that I've ever personally seen."

Spend in week in one of the hells you have created, Hillary.  Try Libya for a week – without Marines or secret service agents; if you are lucky enough to survive seven days, get to a boat to take you across the Mediterranean; if you are really lucky, you might survive even this.

Go to Syria.  Live in Aleppo for a while.  Try going to the market; go to a Christian church; mingle with the people.  See how that goes.

How about Iraq?  Afghanistan?  Yemen?  Ukraine?  Try each of them for seven days – no Marines, no private security, no secret service.  Just you, Hillary.  Live like one of the people.

In other words, Hillary – before you try to fool us with your crocodile tears about the hell you have seen, why don’t you go to hell first – go to the hells you have created on earth.  Give us a first-hand report.

The Wisdom of Science

Scientists are among the most intelligent people on the planet.  Of course, this does not always make them among the wisest.  But today I offer an example that exemplifies the highest standards of both intelligence and wisdom.

Background

In biology/ecology, parasitism is a non-mutual symbiotic relationship between species, where one species, the parasite, benefits at the expense of the other, the host.

Unlike predators, parasites typically do not kill their host, are generally much smaller than their host, and will often live in or on their host for an extended period.

Parasites reduce host biological fitness by general or specialized pathology, such as parasitic castration and impairment of secondary sex characteristics, to the modification of host behavior. Parasites increase their own fitness by exploiting hosts for resources necessary for their survival, e.g. food, water, heat, habitat, and transmission.

The Discovery

Scientists like Barack Obama so much that they named a parasite after him….World, meet Baracktrema obamai, a deadly turtle pathogen named in honor of our current president.

Scientists and Social Awareness

Believe it or not, it's supposed to be a compliment.

To a scientist, maybe.

The Black Horse of the Apocalypse

Revelation 6:5 When the Lamb opened the third seal, I heard the third living creature say, “Come!” I looked, and there before me was a black horse! Its rider was holding a pair of scales in his hand. 6 Then I heard what sounded like a voice among the four living creatures, saying, “Two pounds of wheat for a day’s wages, and six pounds of barley for a day’s wages, and do not damage the oil and the wine!”

Consider first my brief post, citing John Mauldin’s concerns (to put it mildly) regarding the potential actions currently being contemplated by central bankers around the world.

Now, consider this from Ambrose Evans-Pritchard:

An ominous paper by the US Federal Reserve has become the hottest document in high finance.

David Reifschneider's analysis - 'Gauging the Ability of the FOMC to Respond to Future Recessions' - more or less concedes that the Fed has run out of heavy ammunition.

The world should be so lucky.  For example: referring to the aforementioned Mauldin piece, there are many who are figuring out how to force the issue regarding negative interest rates – potentially significantly negative. 

Apparently, over the last nine recessions the Fed has reduced rates on average by 550 basis points to (supposedly) combat the downturn.  When rates are already microscopic (as they are today), this may not be so easy.  Equally as ominous:

Quantitative easing (QE) in its current form cannot compensate, and nor can forward guidance. (Emphasis added.)

“In its current form….”  What other forms are possible?  More on that shortly.

What is needed is a significant increase in short term rates, such that the Fed has ammunition for the next downturn:

The Reifschneider paper argues that the Fed can probably muddle through, so long as it succeeds in pushing interest rates back up to 3pc or so before the next recession hits.

Hahahaha,  hohohoho, hehehehe.  Keep in mind how the markets reacted at the beginning of 2016 when the Fed moved the target rate up by 0.25%.  The likelihood of the Fed moving to 3% – absent the markets forcing the move – is exactly 0%.  Anyone who thinks otherwise does not understand the tools to increase interest rates that the Fed has at its disposal, and how these tools (if utilized) will inherently crush the markets (see my previous work on this, parts one, two, three, and four).

And too many powerful people do not want markets crushed.

Even then it might have to launch a further $4 trillion of QE and stretch its balance sheet to a once unthinkable $8.5 trillion.

This is virtually a certainty; nothing “unthinkable” about it.

Remember those melancholy days, when Bernanke said the Fed would be able to shrink the balance sheet to a more normal level – anytime now, real, real soon.  I laughed then, and I laugh today.  I find nothing “unthinkable” about this number of $8.5 trillion.  It is merely double the current balance sheet.  Last time the Fed increased the balance sheet five-fold – and guess what?  No measurable price inflation.

What might be considered in addition to these “unthinkable” steps?

The Fed acknowledges that fiscal policy will have to come to the rescue when push comes to shove. Keynesian tax cuts and spending will be the last line of defence.

A novel idea – deficits without end, and growing to infinity!  US Debt to GDP is already a little over 100%.  AEP sees no real limit to this ratio for a country with deep bond markets and its own printing press:

Britain's public debt was over 200pc after the Napoleonic Wars. Japan is over 250pc today, and the sky has yet fall in Tokyo.

Why is he wrong?  Absent significant price inflation (and one other possibility, touched on below), I cannot think of a reason.  As long as politicians and bureaucrats can kick the can for even one more day, they will.

His prescription?  Lather, rinse, repeat:

The winners - or survivors - will be those most willing to seize on the cheapest borrowing costs in history to fight back, preferably combining fiscal and monetary in a radical fashion. Call it helicopter money if you want, or 'overt monetary financing' of deficits.

Print, borrow, and spend; print, borrow, and spend; print, borrow, and spend.  Where have we heard that tune before?  Probably from some defunct economist.

There is another way out, according to David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution:

"If we had a huge exogenous shock like Lehman Brothers or 9/11, they would act. But what if it were not quite that bad? We would have prolonged argument," he said.

I say you can count on such an “exogenous shock” if that’s what it will take; no “what if” about it.  The state is well-skilled at creating demand for its “services.”

Conclusion

I hold firmly to the view: as long as consumer price inflation remains politically acceptable, there is no reason for the Fed to increase rates to any meaningful extent; there is no reason to stop increasing the balance sheet, let alone decrease it.  Absent such unacceptable consumer price inflation (which will cause havoc to markets), I suggest that the Fed cannot do it without causing complete havoc in financial markets.

It may end via such price inflation, but we may not see this for many, many more years given the numerous (price) deflationary forces in play today. 

There is another possibility: it may also end when the ratio of unproductive to productive overwhelms the productive’s ability to enjoy a decent standard of living.* I don’t have my brain wrapped around how this might play out: ballot box, civil unrest, death panels (not just for the elderly).  I don’t know.

There may be other reasons that might bring this to an end, but I don’t see any.

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*Productive = those who earn a living by providing goods and services primarily demanded by market forces at prices primarily determined by market forces.

Unproductive = everyone else (government employees, most on Wall Street, defense and other government contractors, all living primarily on government benefits, retirees (even those who have legitimately saved are dependent today on the production of others).)

Intellectual Slaves of Defunct Economists

“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

-        John Maynard Keynes

John Mauldin has written what I consider to be one of his most refreshing columns to date (well, at least of the ones that I have read (PDF).  I will only offer the subject and certain of his reactions, followed by a concluding thought.  Hopefully I tease you enough to read the whole thing.

The subject is the recent meeting of central bankers in Jackson Hole, Wyoming.  He finds no new thinking coming out of this recent event:

 A very small sampling of his reaction:

…the unthinkable policy that I have been warning about since last May – yes, we’re talking negative rates – was not only discussed at Jackson Hole, it was discussed in a positive, even slavishly approving, manner. 

I trust that by the end of this letter you will better understand just how bankrupt – and disastrous – what passes for sound economic thinking among the world’s central bankers actually is.

Let’s read that sentence again: “… the idea is, the lower the interest rate the better it is for investors.” They are sacrificing mom-and-pop middle America, the hard workers who have played by the rules and retired and saved and now want to live out their lives enjoying their grandkids and a little well-deserved relaxation, and they find they can’t do that because the Federal Reserve thinks that protecting Wall Street and wealthy investors and bankers is more important. (Emphasis in original.  Yes, his blood really is boiling.)

That’s enough.  There is much more where that came from.

Concluding Thoughts

Sadly, however, having reviewed the speeches and the interviews that came out of the gathering, I found few if any fresh ideas, or at least none that would truly be helpful.

Mauldin has no idea what would be “truly…helpful.”  No individual does or can; no group of central planners does or can.

Regarding attendees at the conference, Mauldin notes:

What you won’t see on the list is anyone who looks like a “private market participant.”

This will not improve the situation.  Neither Mauldin nor any “private market participants” holed-up at a conference can offer “solutions.”

When the dust settled, I was left with a profound sense of sadness over our global economic leadership’s obvious lack of understanding of the real world.

No need to be sad about this; it is inherently true in such a circumstance.  There is no “understanding of the real world” to be found at a conference.  The “real world” of price and quantity of money and credit can only be found in the “real world” called the market.

Interest rates are prices; prices can only be properly determined in this thing we refer to as “the market,” not at a conference – not matter who you invite.

The quantity of money and credit is a good, economically indistinguishable from any other good provided by this thing we refer to as “the market.”  The quantity, quality and manner of production and delivery of any good can only be properly determined in the market, not at a conference – no matter who you invite.

Mauldin is saying everything one needs to say about the disaster of the current situation without verbalizing the only solution to the problem at hand; it is as if he is purposely avoiding the politically incorrect. 

Go ahead and say it, John: End the Fed.

The Internet Reformation

A term I first heard at the Daily Bell, many years ago.  The Daily Bell offers a review of this “reformation,” examining the plusses and minuses.  It is worth reading.

I offered the following comment at the site:

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Very well stated, DB.

There is little doubt that the Dark Ages were not so dark.  There is also little doubt that along with positive change, the reformation brought negative.  Every technological, intellectual, and cultural advance brings the possibility of both more freedom and more control.

However, there is no doubt that the individual has a better possibility of feeling empowered when he has access to more information.  I find this a “good” in and of itself. 

In the meantime, there is significant value in finding others of what might be termed “the remnant.”

It is also empowering to find that there are many more of us than might fit in a phone booth.

If nothing else comes, this is enough.