Paul Volcker Explains Why The Fed Can’t Raise Rates

In an op-ed posted by Paul Volcker and Peter Peterson in the NYT, the two financial titans start off by pointing out just how “strange” the current presidential campaign is in its historical context…

Together, the two of us have 179 years of life experience and 13 grandchildren. We have served presidents of both parties. We have seen more campaign seasons than we care to count — but none as strange as this one. Insults, invective and pandering have been poor substitutes for serious debate about the direction in which this country is going — or should be going. And a sound and sustainable fiscal structure is a key ingredient of any viable economic policy.

… but the main issue that troubles the two financial titans, is the lack of any practical discussion of the soaring US debt during the entire bizarre campaign – the one issue both agree is the biggest challenge facing the US economy today:

Yes, this country can handle the nearly $600 billion federal deficit estimated for 2016. But the deficit has grown sharply this year, and will keep the national debt at about 75 percent of the gross domestic product, a ratio not seen since 1950, after the budget ballooned during World War II. Long-term, that continued growth, driven by our tax and spending policies, will create the most significant fiscal challenge facing our country. The widely respected Congressional Budget Office has estimated that by midcentury our debt will rise to 140 percent of G.D.P., far above that in any previous era, even in times of war.

That staggering number has been ignored by most, and certainly the Obama administration, which has been glad to take credit for a sputtering “recovery” while ignore what caused it.

Unfortunately for Obama, just last week it was revealed that none other than the chair of the Democratic Party, Donna Brazile, was “peddling fiction” when the head of the DNC admitted to John Podesta that the “people are more in despair about how things are – yes new jobs but they are low wage jobs… HOUSING is a huge issue. Most people pay half of what they make to rent.

While the reality of the recovery was set to emerge sooner or later, the US debt continues to grow, and as of Friday hit an all-time high of 19,785,585,189,878.12, just $214 billion away from a nice, round $20 trillion, nearly doubling under President Obama, and worse: starting to accelerate again, despite the lack of any apparent economic crisis that demand a surge in debt issuance.


Back to the Volcker-Peterson lament, in which the two points out that “unfortunately, despite a brief discussion during the final presidential debate, neither candidate has put forward a convincing plan to restrain the growth of the national debt in the decades to come.

Throughout the campaign, Donald J. Trump has called for a combination of deep tax cuts that appear to far exceed proposed spending reductions, at the clear risk of substantially increasing the ratio of debt to G.D.P. Hillary Clinton has set out more balanced and detailed proposals, but they would still fail to stabilize and reduce our debt burden. Whoever wins, the new president will eventually face fiscal realities that force him or her to develop strategies for decreasing the national debt as a share of the economy over the long term.

Still, one can’t really blame the government for continuing its debt-funded spending spree – despite protests to the contrary – after all rates are so low, it would be irrational not to take advantage and add on more debt. However, it is here that the punchline from the Volcker op-ed kicks in, and explains why the Fed is stuck and will find it next to impossible to hike rates:

Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending. There would be no room for the infrastructure programs and the defense rebuilding that today have wide support.

And there you have it: with debt continuing to soar, growing by the third-highest amount on record in fiscal 2016…


…all that would take for US interest expense to spiral out of control is a spike in debt servicing costs, i.e., interest. But that’s not all: US government debt is just a tiny fraction of total US liabilities and future obligations. How tiny? As the following chart from Bridgewater shows, it is less than 10% of the massive stack of US obligations that amount to well over 1,100% of GDP!

So, yes: a practical person may be forgiven for wondering just what will happen to the roughly $200 trillion in total US obligations as rates start creeping higher, especially since that “creep” is not due to actual economic growth (see the Brazile quote above and more or less every article we have written since 2009), but due to the Fed desire toonce again telegraph that it believes the US recovery has arrived (as it did in December 2015 only to admit it was dead wrong half a year later).

So what happens next? Well, in a world of rising rates and soaring debt… nothing good. Back to the Op-Ed:

It’s not just federal spending that would be squeezed. The projected rise in federal deficits would compete for funds in our capital markets and far outrun the private sector’s capacity to save, to finance industry and home purchases, and to invest abroad. Instead, we’d be dependent on foreign investors’ acquiring most of our debt — making the government dependent on the “kindness of strangers” who may not be so kind as the I.O.U.s mount up.


We can’t let that happen — not if we want an America that is able to provide growth and stability at home while maintaining global leadership. We would risk returning with a vengeance to stagflation — the ugly combination of inflation and economic stagnation that we tasted in the 1970s.

Are the any solutions? Well, according to the authors, “the solutions are clear enough” – they are just unpleasant.

A realistic approach toward the major entitlement programs is required, given that they are projected to account for all of the growth of future noninterest spending. We should make gradual adjustments to the Social Security system that still maintain present benefit levels for those at or near retirement, with particular attention to those most in need. Our health care systems can be made more efficient, with better approaches toward cost control. Since health care represents 70 percent of the growth of our major entitlement programs over the next 30 years, bending the cost curve is essential to the long-term well-being of our economy.


It’s no secret that our federal tax system is broken — unfair, inefficient and prone to political manipulation. It’s filled with exclusions, deductions, exemptions and preferential rates — so-called tax expenditures — that are ripe for reform. Those policies cost about $1.5 trillion each year and disproportionately benefit the well off. Tax reform could provide better incentives for economic growth, while raising more revenue, even as the code is simplified.


But we face an immutable fact. Fair and responsible reforms will take years to implement. And businesses and individuals will need time to adjust. Delaying action now will make the needed changes only more painful and difficult later on, while also increasing the risk of financial crisis before the reforms are even made. That is why the real debate should begin immediately.


Yet at the final presidential debate, both candidates missed the opportunity to clearly lay out their visions for a fiscally responsible, long-term future for our country. There’s still time to solve this problem. But our next president needs to show leadership in the first months.

Well yes, nothing serious was touched upon in the debate, but then again the American people no longer care about serious things. Instead, they are far more fascinated by whether Trump is a Putin spy, or if Hillary will revert to the TPP as soon as she becomes president and the next check from Malaysia clears.

As for Volcker and Peterson, they personally have nothing to worry about: “At our age, neither of us will personally suffer from a failure to act. It is those with long lives ahead — grandchildren and great-grandchildren — who deserve the benefit of prospering in a nation with sound finances. Take some advice from two observers who have been around for a while: The long term gets here before you know it.”

Sadly, nobody ever won a US election by focusing on what is truly important, and thus painful: case in point – Ron Paul. As for the broader American population, it is about to get the president it truly deserves, be it Trump or Hillary: those who routinely ignore the important, and focus on the trivial.

Leaked Soros Memo Exposes Obama’s Secret TPP Negotiations; Hillary “Flip-Flopping”

In addition to providing a glimpse into the internal, and often confrontational, dialogue that took place within the Clinton campaign on topics ranging from Hillary’s email server, to coordination and collusion with the media, to the planning how to attack Bernie Sanders, to the fascinating strife and conflicts of interest within the Clinton Foundation and the Clinton Global Initiative, the Podesta leaks have also been instrumental in providing the public with insight into Hillary’s flip-flopping views on the TPP. Indeed, as the WSJ put it recently, a running question through the presidential race has been whether Hillary Clinton is sincere in saying she opposes the 12-nation Asian trade deal that is one of the Obama administration’s top overseas priorities.

As secretary of state, Mrs. Clinton praised the proposed Trans-Pacific Partnership, calling it the “gold standard” of trade deals. But that was before she jumped into the presidential race. Organized labor, liberal activists and others want to scuttle TPP, so if Mrs. Clinton remained supportive, she risked a political backlash.

This is what the Podesta files have revealed so far: on Oct. 8, 2015, Hillary Clinton said she opposed the trade pact, a position that proved helpful in keeping her coalition intact and beating back a primary challenge from Vermont’s liberal senator, Bernie Sanders. That wasn’t an easy call. A new batch of hacked emails illustrates divisions within her staff about how to handle one of the most delicate issues of the race.

Five days before Mrs. Clinton’s announcement, her top advisers were divided about what she should do, with some fearing that opposition to the trade pact would look like a blatant “flip-flop.”

On October3, 2015, Clinton advisor Ron Klain wrote Jake Sullivan with the following advice:

She has to be for TPP*. She called it the “gold standard” of trade agreements. I think opposing that would be a huge flip flop. She can say that as President she would work to change it. She can say that it can be better. But I think she should support it.

That produced the following reply from Jake Sullivan, the Clinton campaign’s top foreign policy advisor: ”I agree with you on TPP but others (including on this email!) feel strongly to the contrary.” The exchange ends with campaign manager Robby Mook noting that labor wouldn’t stand for her endorsing the trade deal.

TPP would be lethal with labor. We’d loose [sic] Afscme and likely SEIU as well.” As the WSJ points out, that calculation apparently carried the day.

To be sure, the TPP came up during the last debate in Las Vegas, where Hillary Clinton said the following about the trade deal: “Well, first, let me say, number one, when I saw the final agreement for TPP, I said I was against it. She added that “it didn’t meet my test. I’ve had the same test. Does it create jobs, raise incomes and further our national security? I’m against it now. I’ll be against it after the election. I’ll be against it when I’m president.”

What she really meant is that she had realized that backing her previous stance, and supporting the TPP, would likely cost her millions of union votes. The irony, however, is that if Hillary is elected president, she will almost certainly revert back to some TPP formulation, especially since it is in the best interest of big business.

* * *

Fast forward to today, when thanks to the latest set of Wikileaks released today, we find intimate details involving Obama’s negotiations of the TPP, and learn that none other than George Soros and his Open Society Foundation was keen on being a key influencing factor in the outcome of TPP negotiations regarding at least one country, allegedly the most important one – Malaysia.

Recall that all the TPP fundamentally is, is a treaty that is meant to keep China in check by providing preferential treatment to legacy Chinese trade partners with the US to prevent them from pulling a “Duterte”, and realigning with Beijing.  Of these, Malaysia was the most important “link” in the TPP.

In March of 2016, when John Podesta was set to meet with the billionaire philanthropist and hedge fund manager,Soros’ right hand, and his political liaison who sits on the board of the Democracy Alliance, Michael Vachon,
told Podesta that Soros would like to talk about the TPP in the context of Malaysia “corruption crisis” among other things, as laid out in a memo drafted by John Pang, a senior fellow at the S. Rajaratnam School of International Studies, Singapore, where he works on regional strategic and security issues.

As a reminder, ever since July of 2015, Malaysia has found itself in an intricate web of corruption involving its sovereign wealth fund, 1MDB, which stretches from Goldman Sachs as key enabler of years of fraud and embezzlement (in exchange for hefty fees) reaching all the way to the very top – Malaysia’s Prime Minister, Najib Razak, seen here in December 2014 golfing with president Obama:

Per the memo:

In July 2015, after an exposé by the Wall Street Journal, Mr. Najib foiled an attempt by the Task Force investigating the sovereign wealth fund 1MDB to charge and detain him for having received almost $700 million diverted from this fund that he controls into his personal bank account. Swiss investigators working on this case estimate that more than $4 Billion has been misappropriated through “systematic course of action carried out by means of complex financial structures.”… The new Attorney-General has unilaterally cleared Mr. Najib of wrongdoing and proposes life-imprisonment for whistle-blowers under the Official Secrets Act and punishment for journalists who refuse to reveal their sources.

The attacks on Obama’s administration begin from the very top of the leaked memo:

“the Obama administration appears to have made the Trans-Pacific Partnership the overriding priority of its engagement with Malaysia. In doing so, the administration has made visible compromises on principle that have set back Malaysia’s difficult transition to democracy. In a region that his home to 240 million Muslims, it has sacrificed the moderate, democratic Muslim agenda to collaborate with a regime riddled with corruption and abuse of power. It has set back the fight against human trafficking by compromising the credibility of its own chief instrument in that struggle.”

They continued:

A reckoning of the cost of those compromises puts to rest any notion that the TPP is anything like a ‘gold standard’, 21st century trade agreement. Instead, it will be a negative chapter in the history of US-Malaysia relationship, not just because of its content but because of the circumstances in which it has been secured in Malaysia. The TPP, if it is finally ratified, will set back reforms much needed by the Malaysian economy and the political system.

As a result, “the administration’s engagement with Prime Minister Najib Razak has damaged US credibility in the region.”

Disturbingly, we find that while the WSJ has been trying to get to the bottom of the pervasive corruption in Malaysia’s government, said corruption may have been enabled by none other than Obama’s administration:

Malaysia received more TPP carve-outs than any other TPP member country. These carve outs over government procurement, SOE’s and bumiputera preferences constitute an exemption for key domains of the bumiputera policy, an extensive set of racial preferences justified on racial supremacist grounds, through which UMNO exerts control of Malaysia’s huge state sector. It translates this control into political power through kickbacks, patronage, vote buying or direct misappropriation of funds as seen in 1MDB.

In an odd twist of events, liberal billionaire George Soros accuses Obama of supporting racism, corruption, kickbacks, patronage and “vote buying”, just so Obama could assure the passage of his landmark trade deal. Curiously, while in the past Soros has been steadfastly supportive of Obama, in this case the Open Society Foundation openly lashes out at the US president, and goes so far as accusing Obama of being a puppet of Najib, who has significant influence over Obama as “Mr. Najib is the only hope that the TPP will be signed

History, and tomorrow’s newspapers, may look poorly on the administrations dealings with Najib


The most damaging effect of the Obama administration’s apparent mono-focus on the TPP in its policy towards Malaysia has been the unnecessary leverage this has given Najib with the US administration.The TPP has few friends in Malaysia. It is opposed by the majority of the Malaysian population, by the ruling party and the Opposition. To the US, Mr. Najib is the only hope that the TPP will be signed. This gives him leverage at a time when his leadership has crossed the line into open criminality at home and he is under investigation abroad. For Malaysians, the TPP and Mr. Obama have come to be identified with  Mr. Najib’s administration.

As a result, Soros had the following recommendations for Obama (and Podesta, thus Hillary’s administration as Obama was largely a figurehead in march 2016) :

Make the TIP Report independent of political designs


The administration’s adoption of the TPP as the cornerstone of its engagement with Malaysia may have led it to miss the opportunity to exercise leadership on democracy and the rule of law. These values have never been more relevant, whether with China’s growing influence or Islamic radicalism in view.


US leadership in Southeast Asia is based on its promotion and underwriting of a rule-based international order. Such leadership, to be credible, needs to also be consistent on matters of fundamental principle.


The United States’ credibility on human trafficking will be but the first casualty of this approach if the TIP Report is not freed from ‘political interference.’ If the standards or rules it offers on  fundamental human rights (and economic freedom, in the case of the TPP) are so transparently self-serving, the US will be seen to have less to offer the region than China, with its ‘win-win’, investment driven formula of engagement.

More importantly, the Soros foundation advised Obama to dissociate from Najib, and thus Malaysia:

Dissociate from Najib…soon


The administration should consider a plan to distance itself from Mr Najib. The open scandal around Najib has spiraled out of control and his position is unsustainable. He is determined to remain in power but can only do so by brute force. If he does ‘survive,’ it will have been by destroying all independent institutions. A focus on the TPP may have lulled the administration into missing the trajectory of this crisis. The administration should understand where the Najib bus is headed, and find a place to get off soon rather than later.

Finally, while this particular hypothetical scenario has yet to play out, should Obama and/or Hillary heed Soros’ advice, buying Malaysian CDS or shorting local stocks may be the appropriate trade here:

If Najib is forced to step down it could be a chaotic, potentially violent process. Najib is likely to use the emergency security powers he has prepared for himself. He may try to divert the challenge by sparking racial conflict as he has done before. There will be a leadership vacuum. Anwar could play a critical role negotiating a peaceful return to constitutional government and preventing civil strife. Mr. Anwar could also be instrumental in forming a new government. It is important that the liberal and plural values that he stands for be protected.

The memo raises many questions: just how far does Soros’ influence stretch in determining US foreign policy, if not so much under Obama then certainly with Hillary, with whom he has a far better relationship; another question is if Soros’ accusations are true, then how and why did Obama cross so many ethical and moral lines just to pass a “secret” global trade deal, which so many have voiced reservations against. Finally, while Hillary is against the TPP as of her latest “flip-flop”, will she revert back to her default state once elected president, and if so, just how much leverage will Razaj – and Malaysian special interests – have over US foreign and domestic policy to assure the treaty is implemented?

* * *

The full Soros memo is below (link):

New Podesta Email Exposes Dem Playbook For Rigging Polls Through “Oversamples”

Earlier this morning we wrote about the obvious sampling bias in the latest ABC / Washington Post poll that showed a 12-point national advantage for Hillary.  Like many of the recent polls from Reuters, ABC and The Washington Post, this latest poll included a 9-point sampling bias toward registered democrats.

“METHODOLOGY – This ABC News poll was conducted by landline and cellular telephone Oct. 20-22, 2016, in English and Spanish, among a random national sample of 874 likely voters. Results have a margin of sampling error of 3.5 points, including the design effect. Partisan divisions are 36-27-31 percent, Democrats – Republicans – Independents.”

Of course, while democrats may enjoy a slight registration advantage of a couple of points, it is no where near the 9 points reflected in this latest poll.

Meanwhile, we also pointed out that with huge variances in preference across demographics one can easily “rig” a poll by over-indexing to one group vs. another.  As a quick example, the ABC / WaPo poll found that Hillary enjoys a 79-point advantage over Trump with black voters.  Therefore, even a small “oversample” of black voters of 5% could swing the overall poll by 3 full points.  Moreover, the pollsters don’t provide data on the demographic mix of their polls which makes it impossible to “fact check” the bias…convenient.

ABC Poll


Now, for all of you out there who still aren’t convinced that the polls are rigged, we present to you the following recommendations on “oversamples for polling” in order to “maximize what we get out of our media polling.”

I also want to get your Atlas folks to recommend oversamples for our polling before we start in February. By market, regions, etc. I want to get this all compiled into one set of recommendations so we can maximize what we get out of our media polling.

The email even includes a handy, 37-page guide with the following poll-rigging recommendations.  In Arizona, over sampling of Hispanics and Native Americans is highly recommended:

Research, microtargeting & polling projects
–  Over-sample Hispanics
–  Use Spanish language interviewing. (Monolingual Spanish-speaking voters are among the lowest turnout Democratic targets)
–  Over-sample the Native American population

For Florida, the report recommends “consistently monitoring” samples to makes sure they’re “not too old” and “has enough African American and Hispanic voters.”  Meanwhile, “independent” voters in Tampa and Orlando are apparently more dem friendly so the report suggests filling up independent quotas in those cities first.

–  Consistently monitor the sample to ensure it is not too old, and that it has enough African American and Hispanic voters to reflect the state.
–  On Independents: Tampa and Orlando are better persuasion targets than north or south Florida(check your polls before concluding this). If there are budget questions or oversamples, make sure that Tampa and Orlando are included first.

Meanwhile, it’s suggested that national polls over sample “key districts / regions” and “ethnic” groups “as needed.”

–  General election benchmark, 800 sample, with potential over samples in key districts/regions
–  Benchmark polling in targeted races, with ethnic over samples as needed
–  Targeting tracking polls in key races, with ethnic over samples as needed



And that’s how you manufacture a 12-point lead for your chosen candidate and effectively chill the vote of your opposition.


Here is the full report of “Polling & Media Recommendations” from “The Atlas Project.”

Clinton Campaign Admits Hillary Used Same Tax Avoidance “Scheme” As Trump

Well this is a little awkward. With the leaked 1995 Trump tax returns ‘scandal’ focused on the billionaire’s yuuge “net operating loss” and how it might have ‘legally’ enabled him to pay no taxes for years, we now discover none other than Hillary Rodham Clinton utilized a $700,000 “loss” to avoid paying some taxes in 2015.

The Clinton Campaign was quick to jump on the leaked Trump tax filing with Robby Mook tweeting…

And Hillary following up, adding Trump “apparently got to avoid paying taxes for nearly two decades—while tens of millions of working families paid theirs.”

However, a look back at Hillary Clinton‘s tax returns from 2015 (here), proudly displayed by the campaign proving she has nothing to hide – shows something awkward on page 17…


While not on the scale of Trump’s business “operating loss”, Hillary Clinton – like many ‘wealthy’ individuals is taking advantage of a legal scheme to use historical losses to avoid paying current taxes.

As Bloomberg notes, this federal tax break is among the wealthy’s most used avoidance schemes…

Those 1.1 million folks in the 1 percent, as measured by the TPC, have annual income that averages a little less than $700,000. The top one-tenth of that group, some 110,000 households, average about $3.6 million, according to Howard Gleckman, a senior fellow at the TPC.2


The middle of the pack, some 33 million people, have pretax income ranging from $45,000 to $80,000. The lowest one-fifth of taxpayers, a universe of about 47 million Americans, have income up to about $24,000.


Among the biggest of these givebacks, courtesy of the Internal Revenue Service (well, really Congress), are capital gains and dividends—these are the biggest way the wealthiest benefit.

In the words of Hillary Clinton‘s campaign manager, “this bombshell report reveals [Hillary Clinton‘s] past business failures… and may show just how long [Hillary Clinton] may have avoided paying taxes.”

*  *  *

Finally, as we noted previously, the NYT itself is also perfectly happy to take advantage of the US tax to minimize the amount of money it pays to the government: in 2014 the company got a tax refund of $3.6 million despite having a $29.9 million pretax profit, an effective negative tax rate for 2014, which it explained was favorably affected by approximately $21.1 million for the reversal of reserves for uncertain tax positions due to the lapse of applicable statutes of limitations.

A History Of Manufactured Regime Change And Civil Unrest: Is America Next?

 Truthstream Media outlines the history of elitist run regime change and cultural overthrow in the past century.As Alt-Market’s Brandon Smith notes, Truthstream thankfully acknowledges what some in the Liberty Movement refuse to see; namely that the strategy of engineered collapse of nations perpetrated by the CIA and globalist NGOs is now being perpetrated against the U.S. Yes, that’s right, America is just as expendable to the elites as any other nation in their quest to create “order out of chaos”, or a New World Order…

These revolutions are portrayed in the western media as popular democratic revolutions, in which the people of these respective nations demand democratic accountability and governance from their despotic leaders and archaic political systems. However, the reality is far from what this utopian imagery suggests. Western NGOs and media heavily finance and organize opposition groups and protest movements, and in the midst of an election, create a public perception of vote fraud in order to mobilize the mass protest movements to demand ‘their’ candidate be put into power. It just so happens that “their” candidate is always the Western US-favoured candidate, whose campaign is often heavily financed by Washington; and who proposes US-friendly policies and neoliberal economic conditions. In the end, it is the people who lose out, as their genuine hope for change and accountability is denied by the influence the US wields over their political leaders.


-Via Global Research, “Color-Coded Revolutions and the Origins of World War III”

Via TruthStream…

Hidden Agenda Perpetrated By Congress & The Fed Exposed In One Simple Chart

I like to say policy objectives are invisible ink and policy results are the coloured glasses that expose them. You see, policy makers always tell us how they design and implement policies targeted at middle class America.  However, time after time after time, the only segment of society that fails to realize any benefit from any policy is middle class America.  Yet for some mind boggling reason we continue to allow these policy makers to carry on with this skullduggery.  The following chart really tells you everything you need to know about economic policy objectives for the past three decades.

The above chart depicts Wall Street real profits (black line), non-financial corporate real profits (red line) and real median weekly wages and salaries (blue line) all indexed back to 1982 (this is an important period where antitrust policies broke down under the Reagan admin).

What we find is that while median wages and salaries have increased by a paltry 9% over the past 35 years, corporate income is up 250% and Wall Street income is up almost 800%.   And so over the decades this story line about policies targeting the middle class is absolutely, in every way, a total and complete fabrication.  This chart doesn’t happen by accident nor could it be the result of honest mistakes.

The above results expose the hidden agenda perpetrated by Congress and the Fed.

The American middle class is a patsy in a system designed to do exactly what it has done.  

International trade agreements and excessive money printing do help Wall Street and Corporate America but do not help the middle class.  This is made absolutely clear in the above chart.  And if you are one of those typically shallow regurgitators of the theories you’ve been told, well tell it to the facts above.

The Reckoning

by Jeffrey P. Snider

As I have written many, many times, the “unexpected” events of January and February were a dramatic wake-up call for central banks. Last August’s global liquidation they could at least try to ignore because it could possibly fit within the paradigm of “transitory”, a one-off aberration that was some mysterious Chinese viral contagion and thus of not any great, lingering importance. The recurrence in the first part of 2016, though, destroyed those assertions and a lot of people noticed; and you can bet the Fed noticed that a lot of people noticed.

What is happening this year is astounding. After saying year after year after year that the recovery is coming, and even doing so to the point of condescension, the admissions of wrongfulness are starting to roll in, if only softly at first. How ludicrous does “transitory” look now? Though that word remains attached to official policy statements, official policymakers themselves have begun to act otherwise.

There was the brief flirtation with NIRP even in the United States, though fortunately disabused by clear Japanese example of the utter harm such monetary “stimulus” actually offers. Of late, economists having floating the idea for raising the inflation target, but they have yet to offer an explanation as to why that might be needed (even before they try to argue why it might work in a way the current one doesn’t). To get to the future of new policy regimes that are hopefully (to them) more successful, central bankers have to deal with the policies of the past that so clearly weren’t.

Even Jon Hilsenrath of the Wall Street Journal has been captured by the mood, certainly affected by the discussions to be taking place among central bankers gathered at Jackson Hole. The Kansas City Fed symposium might be better titled this year as “How do we get ourselves out of this mess we created?”

In the 1990s, a period known in economics as the “Great Moderation,” it seemed the Fed could do no wrong. Policy makers and voters saw it as a machine, with buttons officials could push to heat or cool the economy as needed. Now, after more than a decade of economic disappointment, the central bank confronts hardened public skepticism and growing self-doubt about its own understanding of how the U.S. economy works.
For anyone seeking to explain one of the most unpredictable political seasons in modern history, with the rise of Donald Trumpand Bernie Sanders, a prime suspect is public dismay in institutions guiding the economy and government. The Fed in particular is a case study in how the conventional wisdom of the late 1990s on a wide range of economic issues, including trade, technology and central banking, has since slowly unraveled.

This is a theme that I have consistently presented as evidence for monetary evolution as both an explanation for Fed failure and what I believe will increasingly be appreciated as a depression. As I wrote just a few weeks ago:

Twice a year every year, the Chairman of the Federal Reserve drives up to Capitol Hill and formally reports to Congress. Given our current circumstances, these ceremonial affairs are lent a great deal of mainstream scrutiny as the public tries to parse the smallest scraps of unanticipated deviations from the carefully laid script. In many ways, this is a rerun of the late 1990’s dot-com bubble, but in reverse. When Alan Greenspan would testify, even his briefcase would be subjected not to so much scrutiny but reverence for what the Fed would not have to do, as the St. Louis Fed embarrassingly confirms. When Janet Yellen testifies, the world waits with baited breath for her to endorse instead the smallest little something that the Fed might have got right.

During the dot-com era, it wasn’t so much what Greenspan got right but what little the Fed had to actually do. The explosion of monetary evolution took care of the “moderation” of that time for him. It was all blasted apart on August 9, 2007, and hasn’t been fixed since (Humpty Dumpty references with regard to monetary policy are actually appropriate here, especially the horses) no matter how many trillions of worthless, inert bank reserves were created. Indeed, that is the crux of the matter; the true global currency standard was destroyed in further capacity for growth, economic as well as financial, and the agency charged with the care and nurture of the dollar responded with arrogant irrelevance.

Before the eurodollar break, the Fed was a bunch of geniuses, the best and the brightest the nation could possibly offer and a shining example to the rest of the world. They were the pinnacle of technocratic competence, admired for their power that everyone just assumed because, again, how little they actually did. After the break, they are an incompetent, increasingly petulant mess where the media looks to Janet Yellen in the desperate hope that there is the tiniest little scrap of good news all despite massive effort redeployed time and again.

ABOOK August 2016 Fear Economy

But we should be vigilant about what is really going on here. I very much doubt there is a true mea culpa gathering to be offered from economists who up until recently vehemently abused any notion that they could be wrong. A preview of my RealClearMarkets column tomorrow:

There is at the very least a growing realization even among economists that their policies aren’t working; it only took nine years. It is the byproduct of the threat to survival; after having remained consistently optimistic to the point of shouting down anyone who challenged the recovery narrative, increasing popular unrest is creating political unrest that will, if unchecked, threaten even the longstanding cherished place of orthodox economists who have remained on such pedestals since the 1930’s. Thus, there can be no depression because if we all admit what is increasingly obvious that would leave no doubt as to just who has been at fault.

Economists are almost certainly repositioning themselves for when (not if, I believe wholeheartedly) that occurs. Once the depression sinks in, there is no room left for orthodox economists who blamed only the gold standard for the possibility.

ABOOK August 2016 Payrolls Final Sales LF Part

So we should be very clear also in response; they should be denied any seat at the table of reform. While starting to at least admit the possibility might seem to be something, it is far too little and much, much too late. Economists and central bankers have disqualified themselves for participation in the project. It’s not like the monetary system’s change and evolution was something that just happened overnight; it was right there for them to see all along, not the least of which was everything that has happened since August 2007. They have even talked about in at least vague and general terms for decades, only to dismiss it every time as of no great importance.

Once the people’s mindset changes, what they will find in especially Federal Reserve conduct could border on criminal neglect. There was Greenspan’s warning in June 2003 that perhaps the banking world had indeed changed in a meaningful way, and that monetary capabilities might need to be more carefully examined before they had to be used as in the Japanese experience. Three years before that, Alan Greenspan admitted right in the FOMC transcripts that the Fed had no idea what modern money even was:

The problem is that we cannot extract from our statistical database what is true money conceptually, either in the transactions mode or the store-of-value mode. One of the reasons, obviously, is that the proliferation of products has been so extraordinary that the true underlying mix of money in our money and near money data is continuously changing. As a consequence, while of necessity it must be the case at the end of the day that inflation has to be a monetary phenomenon, a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.

Did the Fed expend every resource to rectify this knowledge gap? No; emphatically no. Quite the opposite as they openly proved in discontinuing M3 in March 2006, writing in the official press release that the “costs of collecting the underlying data and publishing M3 outweigh the benefits.” Any institution that made such judgment only a little over a year before the repo and eurodollar markets blew up should be prohibited from all discussions going forward.

There is a world waiting to be rebuilt and a growing realization from even the most recalcitrant orthodoxists, those stubborn elite who denied all this for decades, that such a job is going to get done. We are moving past “if” and finally toward “when.” They are not interested in litigating past liability, only ensuring that they have a voice in that outcome. That should never happen; they had their chance, squandered it, and proved themselves unfit for the huge task ahead that was left to us by nothing more than Lord Acton’s axiom about power corrupting. A republican democracy needs no such people in positions of influence. They couldn’t be trusted to do what was right, and now we are left still to tally the costs of such blatant immorality.

The only positive that will come out of this changing tone and softening stance is that it will finally crystallize all the various threads that have been aligned against true reform, including and especially the idea that monetary policy as it is would still be an option. As I write for tomorrow:

He [Former Fed Governor Warsh] is of the growing chorus of even former insiders and members of past authority who are calling for letting go of the ideological rigidity set in place during the New Deal. Warsh takes no prisoners, charging, correctly, that a “numeric change” for the inflation target is “subterfuge”, a case that I and many others have been making for years. Pretending everything is fine delays the recovery, not aids in it.

It has been my fervent, pleading hope for years now that the phrase “they really don’t know what they are doing” will become associated with central banks and central bankers in the mainstream consciousness of the public as well as the professional verdict from politicians on down. For the Wall Street Journal and none other than Jon Hilsenrath to write that article (and it is not the only one of late) is a clear sign that we are moving ever closer to that day.  Even so, we need to be mindful that, pace Churchill, it would mark only the end of the beginning. There is a vast and hopeful world yet to be created and a great many people who have proved themselves utterly unqualified to help create it.

Dear Congress: Have You Received Money From These Pharma Companies

We have been following the latest melodrama involving a “greedy” Mylan, and numerous “humanistic” US politicians, all the way up to the Democratic presidential candidate, exchange blows over the company’s dramatic price increases of its EpiPen anti-allergy medication, with a healthy dose of amusement for one simple reason: if Congress wants to crack down on someone, it should crack down on itself.

After all, the only reason Mylan has been able to pass the kinds of price increases that Congress is now blasting it for, is because of US laws and regulations; laws which incidentally, have been determined in Washington’s backroom bribe parlor, i.e. the corner offices of thousands of local lobby organizations dispensing with billions of dollars in “client” funds.

Clients such as the companies listed below.

Which brings us to this question: dear Congress, have you received millions in lobby dollars from the US pharmaceutical industry.

Or perhaps Congress denies that virtually every single pharmaceutical company operating in the US has spent millions on influence peddling pardon lobbying, in recent years? Perhaps, just like in the case of the Clinton foundation defense, that money was not used to buy favors and influence legislation, but was purely for humanitarian reasons?

So how much money has the US pharma industry spent? According to OpenSecrets, so far in 2016, the amount is $129 million, rising to $2.3 billion over the past decade.


Here is a small selection of the 369 lobbying “clients” OpenSecrets keeps track of: one can see Mylan toward the bottom.


And, as usual, we conclude with our favorite chart showing the relationship between the pharmaceutical industry  and Congress, according to which every dollar spent by big Pharma on lobbying generates a return of 77,500%!


And since virtually all representatives and senators suddenly appear so eager to accuse Mylan and its CEO of greed, we look forward to each and every member of Congress explaining to the American public, and their constituency, precisely where all their lobby dollars have come from, what laws were enacted as a result, and most importantly, what they spent the money on.

Beyond Human Capacity

Beyond Human Capacity

Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.


blue ball machine

The economy – complex and ever-changing interrelations.

Everything Changed In 1980 – Why The Fed Is Wrong

Over the weekend, Sam Fleming with the Financial Times interviewed Boston Fed President Eric Rosengren about why the Fed is likely to tighten monetary policy sooner rather than later.

The reason they should believe this time is different is that the economic conditions are changing over this period. If you go back to February there was a lot of financial market turbulence. The first quarter ended up being quite weak. Real GDP for the first quarter, at least from the preliminary report, was only half a per cent. You don’t need to tighten if the economy is weak and you are concerned about global market conditions potentially making it weaker.


If instead you are in an environment where you think labor markets are tightening, that GDP is improving and inflation is moving to 2 per cent that is an environment where more normalized interest rates would make sense.


Given that real GDP was only a half a per cent in the first quarter that is a relatively low threshold. If you look at how the data has actually been coming in I was a little surprised that there was not more of a market reaction to the very strong retail sales for April. If you look at the economic forecasters in the private sector most of them have raised their consumption forecasts for the second quarter to be in the range of 3 per cent to 3.5 per cent. When consumption is roughly two-thirds of GDP, a number that high for that major a component means that it is likely we will see growth around 2 per cent.

Here is the problem, the hope of higher personal consumption and stronger GDP has been the ever evolving“wish” of the Federal Reserve since the “financial crisis.” Of course, with each passinever-evolving “hopes”have turned to dust as consumers have struggled to make ends meet as wages have failed to grow, employment has been in primarily lower wage paying jobs,


The rise of the consumer society is a crucial point that continues to be missed in the ongoing arguments that try to explain the inability of the economy to achieve lift off.  Let me explain.

In any economy, there is a crucial link between production and consumption. In order for consumption to occur, production must come first.  Simply, an individual has to go to work and produce something, which can be consumed by others, in order to receive wages that allows for personal consumption.  In turn, economic activity can be directly traced by personal consumption expenditures as shown in the chart below.


This is not surprising in an economy that is nearly 70% (69.02% to be exact) driven by personal consumption expenditures.


What is important to notice is that while real PCE as a percentage of GDP has risen sharply since 1980, it has been a function of increasing debt levels and weaker economic growth rates as shown in the first chart above.  However, let’s look at this a bit differently.

From 1980 through 2000 total inflation adjusted household debt grew from $3.8 Trillion to $8.95 Trillion.  At the same time, PCE as a percentage of real GDP grew from 62% to 65.17%.  In other words, it took $5.054 Trillion in debt to generate 3.17% increase in the PCE/GDP ratio.

However, from 2000 through 2007, the PCE/GDP ratio expanded from 65.17% to 67.84%.  This 2.67% increase required an expansion of $6.46 Trillion in debt. Not surprisingly, when households are already laden with debt, there becomes a diminishing rate of return on debt growth.

Given the lack of income growth and rising costs of living, it is unlikely that Americans can continue to consume at ever higher levels. This is particularly the case given the inability for consumers to “save” as shown by repeated studies.

Yes, I know, the savings rate is going up, but I highly suspect the savings rate calculation is flawed.

“I know suggesting such a thing is ridiculous. However, the BEA calculates the saving rate as the difference between incomes and outlays as measured by their own assumptions for interest rates on debt, inflationary pressures on a presumed basket of goods and services and taxes. What it does not measure is what individuals are actually putting into a bank saving or investment account. In other words, the savings rate is an estimate of what is “likely” to be saved each month.”

However, as has repeatedly been the case, consumers have continued to fall short of expectations as the difference between disposable incomes and costs of living has been reflected by increases in consumer credit.


As shown above, consumer credit as a percentage of GDP has risen a low of 16.75% following the financial crisis to almost 20% currently. This increase in debt did not result in a surge in economic growth as much of that spending was not the consumption of “more” stuff, but rather the same amount required to sustain the current standard of living. The longer wage growth continues to stagnate, the dependency on credit to support the current standard of living will continue to rise.

The problem of surging debt, as it relates to economic prosperity is clearly shown below.


What was the difference between pre-1980 and post-1980?

From 1950-1980, the economy grew at an annualized rate of 7.70%. This was accomplished with a total credit market debt to GDP ratio of less 150%.

The CRITICAL factor to note is economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There were a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy. Secondly, the economy was focused primarily on production and manufacturing which has a high multiplier effect on the economy.  This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.

The obvious problem is the ongoing decline in economic growth over the past 35 years has kept the average American struggling to maintain their standard of living. As wage growth stagnates or declines, consumers are forced to turn to credit to fill the gap in maintaining their current standard of living. However, as more leverage is taken on, the more dollars are diverted from consumption to debt service thereby weighing on stronger rates of economic growth.

Unfortunately, for Mr. Rosengren, since the average American was never allowed to actually deleverage following the financial crisis, and still living well beyond their means, economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service.  The issue, of course, is not just a central theme to the U.S. but to the global economy as well.  After seven years of excessive monetary interventions, global debt levels have yet to be resolved.

If the Fed does proceed in hiking rates in the current environment, it will likely be a “policy error” which will be regretted in the not too distant future as debt service costs rise thereby further reducing consumers ability to“consume.”