Recently, I discussed the “Two Pins That Pop The Bubble,” specifically noting the risk of rising interest rates and inflation. However, the real threat is not just the stock market bubble’s deflation but rather blowing up the “everything bubble.”
During previous periods in financial history, the focus was primarily on the deflation of a singular market bubble. Such was a point we touched on in “Extraordinary Popular Delusions:” The two tables below show the history of bubbles and what they all had in common.
The flood of liquidity and ultra-accommodative monetary policies has simultaneously inflated multiple bubbles. Stocks, bonds, real estate, and speculative investments have all experienced historic inflations.
The byproduct of cheap debt and liquidity is the explosion of household net worth as a percentage of disposable personal income. Starting in the early 80s, as President Reagan deregulated the banking system, net worth exploded through massive leverage increases. Such was made possible by four decades of continually falling interest rates and inflation.
Another view is to look at the expansion of net worth relative to GDP growth. Of course, the massive deviation would not be possible without the massive increases in leverage over the last 40-years.
However, ironically, while it appears that Americans are far more wealthy, in reality, it is only a small fraction of the population that has benefitted. A point we made in “The Fed Made The Top 10% Richer.”
This framework is the basis for the rest of our discussion on the coming deflation of the “Everything Bubble.”
The Stock Bubble
There is little argument that financial markets are currently in a “bubble.” The monthly chart of the S&P 500 shows the deviation from long-term monthly means at levels not seen since 1990.
As discussed in “Yes, There Is A Stock Market Bubble,” valuations are just a reflection of the underlying psychology at the second-highest level in history. As noted:
“If market bubbles are about ‘psychology,’ as represented by investors’ herding behavior, then price and valuations are reflections of that psychology. In other words, bubbles can exist even at times when valuations and fundamentals might argue otherwise.”
During a “market mania,” investors must continue to rationalize overpaying for assets to keep prices moving higher. Over the last decade, the most common justification remains that low discount rates justify high valuations.
The problem comes when interest rates rise. Throughout history, an unexpected surge in interest rates has repeatedly led to poor investor outcomes.
Despite media rhetoric that “rising rates” aren’t a problem for the stock market, history suggests they are. Given the massive surge in corporate leverage promulgated by weak economic growth, higher rates will quickly impact corporate profitability and financing activities.
As history shows, such collisions have often left a trail of bodies in its wake.
The Real Estate Bubble
Currently, there is also a “bubble” once again in housing as a continual suppression of borrowing costs, loose lending policies, and a flood of stimulus has led to a historical surge in home prices. As we noted previously in “There Is No Supply Shortage,” home price appreciation has once again eclipsed long-term price trends.
The current overvaluation in homes, of course, is driven by record-low mortgage rates.
However, as noted above, that economic support will quickly reverse as interest rates rise. Given there is a surging demand for homes, just as with the stock market, when rates rise, there will be a rush to sell to a diminishing pool of buyers.
Also, as with the stock market, owned by the top 20% of income earners, most houses bought were by that same fraction of the population. (Higher incomes and nearly perfect credit.)
Given the sharp rise in prices, the resulting price decline will likely be equally as quick.
The Bond Bubble
Of course, there is nowhere more at risk from higher rates than the bond market itself. Given that “yield” is a function of price, there is a perfectly negative correlation between prices and interest rates.
I pointed out before the “pandemic-driven shut-down” the 2019 yield-curve inversion was signaling a problem with the bond market. To wit:
“The magnitude of the Fed’s response was also a function of “panic” based more on “recency bias” than facts. The Fed quickly returned to the “Financial Crisis” playbook to anticipate events that may occur in the credit markets rather than responding to outcomes.
There is a difference.
The Financial Crisis was a problem with the banking system. The COVID-19 pandemic is a health crisis.”
The Federal Reserve problem is they have now pushed “yield spreads” across the entirety of the credit spectrum to record lows. The Fed’s suppression of rates to “bail-out” the bond market in the short-term has created a long-term problem of “mispricing risk.”
That mispricing of risk, or rather the creation of “moral hazard,” in the credit markets created a record number of “zombie” companies in the process.
Eventually, when rates rise enough, these “zombie” companies will be unable to refinance debt for their continued survival. Once bankruptcies begin to spike uncontrollably, investors will demand to get paid for their investment risk. As shown, such has occurred in the past with relatively dismal outcomes.
As they found out back in March, the Fed can only buy a small fraction of corporate bonds without disrupting the market.
The risk is a surge in rates and defaults, greater or faster than the Federal Reserve can absorb.
What should be clear is that if the rise in interest rates approaches 2% or higher, there are many problems embedded in an economy laden with nearly $85 trillion in debt.
The debt problem exposes the Fed’s most significant risk. Given economic growth remained elusive over the last decade, it is unlikely doubling the Fed’s balance sheet will improve future outcomes. The failure to recognize the impact of ongoing monetary policies, given a decade of experience of surging debt and deficits inhibiting organic growth, is problematic.
The US economy is literally on perpetual life support. Recent events show too clearly that unless fiscal and monetary stimulus continues, the economy will fail and, by extension, the stock market.
However, the Fed currently has no choice.
Such is the consequence, and problem, of getting caught in a “liquidity trap.”
What the average person fails to understand is that the next “financial crisis” will not just be a stock market crash, a housing bust, or a collapse in bond prices.
It could be the simultaneous implosion of all three.
Whatever causes that change in sentiment is unknown to me or anyone else.
I am not saying with certainty it will happen, as I hope sanity prevails and actions are taken to mitigate the consequences.
Unfortunately, history suggests such is unlikely to be the case.
The post Technically Speaking: Blowing Up The “Everything Bubble” appeared first on RIA.bankruptcies pandemic covid-19 stimulus economic growth bonds corporate bonds credit markets sp 500 stocks fed federal reserve mortgage rates real estate suppression gdp interest rates stimulus
WHO Explains Why It Skipped ‘Xi’ When Naming New COVID-19 Variant Omicron
WHO Explains Why It Skipped ‘Xi’ When Naming New COVID-19 Variant Omicron
Authored by Mimi Nguyen Ly via The Epoch Times,
The World Health Organization (WHO) has explained why it skipped the Greek letters “nu” and “xi” in naming…
“Two letters were skipped—Nu and Xi—because Nu is too easily confounded with ‘new’ and Xi was not used because it is a common surname and [the] WHO best practices for naming new diseases … suggest avoiding ‘causing offence to any cultural, social, national, regional, professional, or ethnic groups,'” the United Nations agency said in a statement to The Epoch Times on Saturday.
The WHO best practices for naming new diseases was developed in conjunction with the Food and Agriculture Organization (FAO) of the U.N. and the World Organisation for Animal Health (OIE) in 2015.
Prof. Jonathan Turley, a criminal attorney and professor at George Washington University, speculated that the WHO “is again avoiding any discomfort for the Chinese government” in skipping the “Xi” letter and naming it Omicron.
“The new variant was expected to be Nu but any additional variant would then be Xi, which happens to be the name of the Chinese leader,” he wrote on Twitter.
“It is not clear if there is another reason for the decision to skip over Nu and Xi, but W.H.O.’s history with the investigation into the origins of the pandemic has fueled speculation as to a political motive,” he suggested. “It is a demonstration of the continuing credibility problems for the organization after its original inquiry. Even the new panel has been criticized for its imbalance and the background of its members.”
On Twitter, Sen. Ted Cruz (R-Texas) accused the WHO of being “scared of the Chinese Communist Party.” Meanwhile, Sen. Tom Cotton (R-Ark.) accused the WHO of being “more concerned about the feelings of the Chinese Communist Party than they are about public health.”
Besides Omicron, the WHO has designated five other “variants of concern” as well as two “variants of interest.”
The WHO earlier this year adopted letters of the Greek Alphabet to have “easy-to-pronounce and non-stigmatising labels” for variants of the CCP (Chinese Communist Party) virus that causes the disease COVID-19.
The Omicron strain, identified as B.1.1.529, was first detected in Botswana and South Africa within the past week. South African scientists say it has an unusual combination of mutations on the spike protein that may make the virus capable of evading immunity from prior infections or vaccination.
Early evidence, WHO said in a statement, suggests Omicron has a higher risk of reinfection compared to other variants such as Delta or the Alpha strain.
Meanwhile, a top South African doctor has told The Telegraph the new variant causes unusual but mild symptoms.
Maria Van Kerkhove, head of the WHO’s emerging diseases and zoonosis unit, said the WHO has named the new strain a variant of concern because it has “some concerning properties,” namely a large number of mutations, some of which “have some worrying characteristics.”
“Once a variant is classified as a variant of concern, it’s really important that we have good SARS-CoV-2 surveillance around the world, including better genomic sequencing, because we want to be able to detect this variant where it is circulating,” Van Kerkhove said.
“It’s also really important that studies are undertaken in the field to look at any clusters and also the studies that are needed in the lab, to look to see if there’s any changes in severity, any changes in our impact on diagnostics, therapeutics, or vaccines.”
The new CCP virus variant has sparked travel bans by several countries—including United States, Canada, Brazil, the UK, the European Union, Saudi Arabia, Japan, Russia, and Australia—a move South Africa’s health minister called “unjustified.”
The United States is restricting travel from South Africa, Botswana, Zimbabwe, Namibia, Lesotho, Eswatini, Mozambique, and Malawi, in efforts to curb the spread of Omicron.
Anthony Fauci, the longtime director of the U.S. National Institute of Allergy and Infectious Diseases, said on Saturday that the travel ban is intended to buy more time to assess the new variant and is “not any reason to panic.”
No cases of the new Omicron virus variant have been identified in the United States as of Friday, according to the Centers for Disease Control and Prevention (CDC).
A President Betrayed by Bureaucrats: Scott Atlas Exposes The Real COVID Disaster
A President Betrayed by Bureaucrats: Scott Atlas Exposes The Real COVID Disaster
Authored by Jeffrey Tucker via The Brownstone Institute,
I’m a voracious reader of Covid books but nothing could have prepared me for Scott Atlas’s A Plague…
I’m a voracious reader of Covid books but nothing could have prepared me for Scott Atlas’s A Plague Upon Our House, a full and mind-blowing account of the famed scientist’s personal experience with the Covid era and a luridly detailed account of his time at the White House. The book is hot fire, from page one to the last, and will permanently affect your view of not only this pandemic and the policy response but also the workings of public health in general.
Atlas’s book has exposed a scandal for the ages.
It is enormously valuable because it fully blows up what seems to be an emerging fake story involving a supposedly Covid-denying president who did nothing vs. heroic scientists in the White House who urged compulsory mitigating measures consistent with prevailing scientific opinion. Not one word of that is true. Atlas’s book, I hope, makes it impossible to tell such tall tales without embarrassment.
Anyone who tells you this fictional story (including Deborah Birx) deserves to have this highly credible treatise tossed in his direction. The book is about the war between real science (and genuine public health), with Atlas as the voice for reason both before and during his time in the White House, vs. the enactment of brutal policies that never stood any chance of controlling the virus while causing tremendous damage to the people, to human liberty, to children in particular, but also to billions of people around the world.
For the reader, the author is our proxy, a reasonable and blunt man trapped in a world of lies, duplicity, backstabbing, opportunism, and fake science. He did his best but could not prevail against a powerful machine that cares nothing for facts, much less outcomes.
If you have heretofore believed that science drives pandemic public policy, this book will shock you. Atlas’s recounting of the unbearably poor thinking on the part of government-based “infectious disease experts” will make your jaw drop (thinking, for example, of Birx’s off-the-cuff theorizing about the relationship between masking and controlling case spreads).
Throughout the book, Atlas points to the enormous cost of the machinery of lockdowns, the preferred method of Anthony Fauci and Deborah Birx: missed cancer screenings, missed surgeries, nearly two years of educational losses, bankrupted small business, depression and drug overdoses, overall citizen demoralization, violations of religious freedom, all while public health massively neglected the actual at-risk population in long-term care facilities. Essentially, they were willing to dismantle everything we called civilization in the name of bludgeoning one pathogen without regard to the consequences.
The fake science of population-wide “models” drove policy instead of following the known information about risk profiles.
“The one unusual feature of this virus was the fact that children had an extraordinarily low risk,” writes Atlas.
“Yet this positive and reassuring news was never emphasized. Instead, with total disregard of the evidence of selective risk consistent with other respiratory viruses, public health officials recommended draconian isolation of everyone.”
“Restrictions on liberty were also destructive by inflaming class distinctions with their differential impact,” he writes, “exposing essential workers, sacrificing low-income families and kids, destroying single-parent homes, and eviscerating small businesses, while at the same time large companies were bailed out, elites worked from home with barely an interruption, and the ultra-rich got richer, leveraging their bully pulpit to demonize and cancel those who challenged their preferred policy options.”
In the midst of continued chaos, in August 2020, Atlas was called by Trump to help, not as a political appointee, not as a PR man for Trump, not as a DC fixer but as the only person who in nearly a year of unfolding catastrophe had a health-policy focus. He made it clear from the outset that he would only say what he believed to be true; Trump agreed that this was precisely what he wanted and needed. Trump got an earful and gradually came around to a more rational view than that which caused him to wreck the American economy and society with his own hands and against his own instincts.
In Task Force meetings, Atlas was the only person who showed up with studies and on-the-ground information as opposed to mere charts of infections easily downloadable from popular websites.
“A bigger surprise was that Fauci did not present scientific research on the pandemic to the group that I witnessed. Likewise, I never heard him speak about his own critical analysis of any published research studies. This was stunning to me. Aside from intermittent status updates about clinical trial enrollments, Fauci served the Task Force by offering an occasional comment or update on vaccine trial participant totals, mostly when the VP would turn to him and ask.”
When Atlas spoke up, it was almost always to contradict Fauci/Birx but he received no backing during meetings, only to have many people in attendance later congratulate him for speaking out. Still, he did, by virtue of private meetings, have a convert in Trump himself, but by then it was too late: not even Trump could prevail against the wicked machine he had permissioned into operation.
It’s a Mr. Smith Goes to Washington story but applied to matters of public health.
From the outset of this disease panic, policy came to be dictated by two government bureaucrats (Fauci and Birx) who, for some reason, were confident in their control over media, bureaucracies, and White House messaging, despite every attempt by the president, Atlas, and a few others to get them to pay attention to the actual science about which Fauci/Birx knew and care little.
When Atlas would raise doubts about Birx, Jared Kushner would repeatedly assure him that “she is 100% MAGA.”
Yet we know for certain that this is not true. We know from a different book on the subject that she only took the position with the anticipation that Trump would lose the presidency in the November election.
That’s hardly a surprise; it’s the bias expected from a career bureaucrat working for a deep-state institution.
Fortunately, we now have this book to set the record straight. It gives every reader an inside look at the workings of a system that wrecked our lives. If the book finally declines to offer an explanation for the hell that was visited upon us – every day we still ask the question why? – it does provide an accounting of the who, when, where, and what. Tragically, too many scientists, media figures, and intellectuals in general went along. Atlas’s account shows exactly what they signed up to defend, and it’s not pretty.
The cliche that kept coming to mind as I read is “breath of fresh air.” That metaphor describes the book perfectly: blessed relief from relentless propaganda. Imagine yourself trapped in an elevator with stultifying air in a building that is on fire and the smoke gradually seeps in from above. Someone is in there with you and he keeps assuring you that everything is fine, when it is obviously not.
That’s a pretty good description of how I felt from March 12, 2020 and onward. That was the day that President Trump spoke to the nation and announced that there would be no more travel from Europe. The tone in his voice was spooky. It was obvious that more was coming. He had clearly fallen sway to extremely bad advice, perhaps he was willing to push lockdowns as a plan to deal with a respiratory virus that was already widespread in the US from perhaps 5 to 6 months earlier.
It was the day that the darkness descended. A day later (March 13), the HHS distributed its lockdown plans for the nation. That weekend, Trump met for many hours with Anthony Fauci, Deborah Birx, son-in-law Jared Kushner, and only a few others. He came around to the idea of shutting down the American economy for two weeks. He presided over the calamitous March 16, 2020, press conference, at which Trump promised to beat the virus through general lockdowns.
Of course he had no power to do that directly but he could urge it to happen, all under the completely delusional promise that doing so would solve the virus problem. Two weeks later, the same gang persuaded him to extend the lockdowns.
Trump went along with the advice because it was the only advice he was fed at the time. They made it appear that the only choice that Trump had – if he wanted to beat the virus – was to wage war on his own policies that were pushing for a stronger, healthier economy. After surviving two impeachment attempts, and beating back years of hate from a nearly united media afflicted by severe derangement syndrome, Trump was finally hornswoggled.
“On this highly important criterion of presidential management—taking responsibility to fully take charge of policy coming from the White House—I believe the president made a massive error in judgment. Against his own gut feeling, he delegated authority to medical bureaucrats, and then he failed to correct that mistake.”
The truly tragic fact that both Republicans and Democrats do not want spoken about is that this whole calamity is that did indeed begin with Trump’s decision. On this point, Atlas writes:
Yes, the president initially had gone along with the lockdowns proposed by Fauci and Birx, the “fifteen days to slow the spread,” even though he had serious misgivings. But I still believe the reason that he kept repeating his one question—“Do you agree with the initial shutdown?”—whenever he asked questions about the pandemic was precisely because he still had misgivings about it.
Large parts of the narrative are devoted to explaining precisely how and to what extent Trump had been betrayed. “They had convinced him to do exactly the opposite of what he would naturally do in any other circumstance,” Atlas writes, that is
“to disregard his own common sense and allow grossly incorrect policy advice to prevail…. This president, widely known for his signature “You’re fired!” declaration, was misled by his closest political intimates. All for fear of what was inevitable anyway—skewering from an already hostile media. And on top of that tragic misjudgment, the election was lost anyway. So much for political strategists.”
There are so many valuable parts to the story that I cannot possibly recount them all. The language is brilliant, e.g. he calls the media “the most despicable group of unprincipled liars one could ever imagine.” He proves that assertion in page after page of shocking lies and distortions, mostly driven by political goals.
I was particularly struck by his chapter on testing, mainly because that whole racket mystified me throughout. From the outset, the CDC bungled the testing part of the pandemic story, attempting to keep the tests and process centralized in DC at the very time when the entire nation was in panic. Once that was finally fixed, months too late, mass and indiscriminate PCR testing became the desiderata of success within the White House. The problem was not just with the testing method:
“Fragments of dead virus hang around and can generate a positive test for many weeks or months, even though one is not generally contagious after two weeks. Moreover, PCR is extremely sensitive. It detects minute quantities of virus that do not transmit infection…. Even the New York Times wrote in August that 90 percent or more of positive PCR tests falsely implied that someone was contagious. Sadly, during my entire time at the White House, this crucial fact would never even be addressed by anyone other than me at the Task Force meetings, let alone because for any public recommendation, even after I distributed data proving this critical point.”
The other problem is the wide assumption that more testing (however inaccurate) of whomever, whenever was always better. This model of maximizing tests seemed like a leftover from the HIV/AIDS crisis in which tracing was mostly useless in practice but at least made some sense in theory. For a widespread and mostly wild respiratory disease transmitted the way a cold virus is transmitted, this method was hopeless from the beginning. It became nothing but make work for tracing bureaucrats and testing enterprises that in the end only provided a fake metric of “success” that served to spread public panic.
Early on, Fauci had clearly said that there was no reason to get tested if you had no symptoms. Later, that common-sense outlook was thrown out the window and replaced with an agenda to test as many people as possible regardless of risk and regardless of symptoms. The resulting data enabled Fauci/Birx to keep everyone in a constant state of alarm. More test positivity to them implied only one thing: more lockdowns. Businesses needed to close harder, we all needed to mask harder, schools needed to stay closed longer, and travel needed to be ever more restricted. That assumption became so entrenched that not even the president’s own wishes (which had changed from Spring to Summer) made any difference.
Atlas’s first job, then, was to challenge this whole indiscriminate testing agenda. To his mind, testing needed to be about more than accumulating endless amounts of data, much of it without meaning; instead, testing should be directed toward a public-health goal. The people who needed tests were the vulnerable populations, particularly those in nursing homes, with the goal of saving lives among those who were actually threatened with severe outcomes. This push to test, contact trace, and quarantine anyone and everyone regardless of known risk was a huge distraction, and also caused huge disruption in schooling and enterprise.
To fix it meant changing the CDC guidelines. Atlas’s story of attempting to do that is eye-opening. He wrestled with every manner of bureaucrat and managed to get new guidelines written, only to find that they had been mysteriously reverted to the old guidelines one week later. He caught the “error” and insisted that his version prevail. Once they were issued by the CDC, the national press was all over it, with the story that the White House was pressuring the scientists at the CDC in terrible ways. After a week-long media storm, the guidelines changed yet again. All of Atlas’s work was made null.
Talk about discouraging! It was also Atlas’s first full experience in dealing with deep-state machinations. It was this way throughout the lockdown period, a machinery in place to implement, encourage, and enforce endless restrictions but no one person in particular was there to take responsibility for the policies or the outcomes, even as the ostensible head of state (Trump) was on record both publicly and privately opposing the policies that no one could seem to stop.
As an example of this, Atlas tells the story of bringing some massively important scientists to the White House to speak with Trump: Martin Kulldorff, Jay Bhattacharya, Joseph Ladapo, and Cody Meissner. People around the president thought the idea was great. But somehow the meeting kept being delayed. Again and again. When it finally went ahead, the schedulers only allowed for 5 minutes. But once they met with Trump himself, the president had other ideas and prolonged the meeting for an hour and a half, asking the scientists all kinds of questions about viruses, policy, the initial lockdowns, the risks to individuals, and so on.
The president was so impressed with their views and knowledge – what a dramatic change that must have been for him – that he invited filming to be done plus pictures to be taken. He wanted to make it a big public splash. It never happened. Literally. White House press somehow got the message that this meeting never happened. The first anyone will have known about it other than White House employees is from Atlas’s book.
Two months later, Atlas was instrumental in bringing in not only two of those scientists but also the famed Sunetra Gupta of Oxford. They met with the HHS secretary but this meeting too was buried in the press. No dissent was allowed. The bureaucrats were in charge, regardless of the wishes of the president.
Another case in point was during Trump’s own bout with Covid in early October. Atlas was nearly sure that he would be fine but he was forbidden from talking to the press. The entire White House communications office was frozen for four days, with no one speaking to the press. This was against Trump’s own wishes. This left the media to speculate that he was on his deathbed, so when he came back to the White House and announced that Covid is not to be feared, it was a shock to the nation. From my own point of view, this was truly Trump’s finest moment. To learn of the internal machinations happening behind the scenes is pretty shocking.
I can’t possibly cover the wealth of material in this book, and I expect this brief review to be one of several that I write. I do have a few disagreements. First, I think the author is too uncritical toward Operation Warp Speed and doesn’t really address how the vaccines were wildly oversold, to say nothing of growing concerns about safety, which were not addressed in the trials. Second, he seems to approve of Trump’s March 12th travel restrictions, which struck me as brutal and pointless, and the real beginning of the unfolding disaster. Third, Atlas inadvertently seems to perpetuate the distortion that Trump recommended ingesting bleach during a press conference. I know that this was all over the papers. But I’ve read the transcript of that press conference several times and find nothing like this. Trump actually makes clear that he was speaking about cleaning surfaces. This might be yet another case of outright media lies.
All that aside, this book reveals everything about the insanity of 2020 and 2021, years in which good sense, good science, historical precedent, human rights, and concerns for human liberty were all thrown into the trash, not just in the US but all over the world.
Atlas summarizes the big picture:
“in considering all the surprising events that unfolded in this past year, two in particular stand out. I have been shocked at the enormous power of government officials to unilaterally decree a sudden and severe shutdown of society—to simply close businesses and schools by edict, restrict personal movements, mandate behavior, regulate interactions with our family members, and eliminate our most basic freedoms, without any defined end and with little accountability.”
Atlas is correct that “the management of this pandemic has left a stain on many of America’s once noble institutions, including our elite universities, research institutes and journals, and public health agencies. Earning it back will not be easy.”
Internationally, we have Sweden as an example of a country that (mostly) kept its sanity.
Domestically, we have South Dakota as an example of a place that stayed open, preserving freedom throughout. And thanks in large part to Atlas’s behind-the-scenes work, we have the example of Florida, whose governor did care about the actual science and ended up preserving freedom in the state even as the elderly population there experienced the greatest possible protection from the virus.
We all owe Atlas an enormous debt of gratitude, for it was he who persuaded the Florida governor to choose the path of focussed protection as advocated by the Great Barrington Declaration, which Atlas cites as the “single document that will go down as one of the most important publications in the pandemic, as it lent undeniable credibility to focused protection and provided courage to thousands of additional medical scientists and public health leaders to come forward.”
Atlas experienced the slings, arrows, and worse. The media and the bureaucrats tried to shut him up, shut him down, and body bag him professionally and personally. Cancelled, meaning removed from the roster of functional, dignified human beings. Even colleagues at Stanford University joined in the lynch mob, much to their disgrace. And yet this book is that of a man who has prevailed against them.
In that sense, this book is easily the most crucial first-person account we have so far. It is gripping, revealing, devastating for the lockdowners and their vaccine-mandating successors, and a true classic that will stand the test of time. It’s simply not possible to write the history of this disaster without a close examination of this erudite first-hand account.
The Euro’s Death Wish
The Euro’s Death Wish
Authored by Alasdair Macleod via GoldMoney.com,
Last week’s Goldmoney article explained the Fed’s increasing commitment to dollar hyperinflation. This week’s article examines the additional issues facing the…
Last week’s Goldmoney article explained the Fed’s increasing commitment to dollar hyperinflation. This week’s article examines the additional issues facing the euro and the Eurozone.
More nakedly than is evidenced by other major central banks, the ECB through its system of satellite national central banks is now almost solely committed to financing national government debts and smothering over the consequences. The result is a commercial banking system both highly leveraged and burdened with overvalued government debt secured only by an implied ECB guarantee.
The failings of this statist control system have been covered up by a pass-the-parcel any collateral goes €10 trillion plus repo market, which with the TARGET2 settlement system has concealed the progressive accumulation of private sector bad debts ever since the first Eurozone crisis hit Spain in 2012.
These distortions can only continue so long as interest rates are suppressed beneath the zero bound. But rising interest rates globally are now a certainty — only officially unrecognised by central bankers — so there can only be two major consequences. First, the inevitable Eurozone economic recession (now being given an extra push through renewed covid restrictions) will send debt-burdened government deficits which are already high soaring, requiring an accelerated pace of inflationary financing by the ECB. And second, the collapse of the bloated repo market, which is to be avoided at all costs, will almost certainly be triggered.
This article attempts to clarify these issues. It is hardly surprising that for the ECB raising interest rates is not an option. Therefore, the recent weakness of the euro on the foreign exchanges marks only the start of a threat to the euro system, the outcome of which will be decided by the markets, not the ECB.
The euro, as it is said of the camel, was designed by a committee. Unlike the ship of the desert the euro and its institutions will not survive — we can say that with increasing certainty considering current developments. Instead of evolving as demanded by its users, the euro has become even more of a state control mechanism than the other major currencies, with the exception, perhaps, of China’s renminbi. But for all its faults, the Chinese state at least pays attention to the economic demands of its citizens to guide it in its management of the currency. The commissars in Brussels along with national politicians seem to be blind to the social and economic consequences of drifting into totalitarianism, where people are forced into new lockdowns and in some cases are being forced into mandatory covid vaccinations.
The ECB in Frankfurt has also ignored the economic consequences of its actions and has just two priorities intact from its inception: to finance member governments by inflationary means and to suppress or ignore all evidence of the consequences.
The ECB’s founding was not auspicious. Before monetary union socialistic France relied on inflationary financing of government spending while Germany did not. The French state was interventionist while Germany fostered its mittelstand with sound money. The compromise was that the ECB would be in Frankfurt (the locational credibility argument won the day) while its first true president, after Wim Duisenberg oversaw its establishment and cut short his presidency, would be French: Jean-Claude Trichet. Membership qualifications for the Eurozone were set out in the Maastricht treaty, and then promptly ignored to let in Italy. They were ignored again to let in Greece, which in terms of ease of doing business ranked lower than both Jamaica and Columbia at the time. And now the Maastricht rules are ignored by everyone.
Following the establishment of the ECB the EU made no attempt to tackle the divergence between fiscally responsible Germany with similarly conservative northern states, and the spendthrift southern PIGS. Indeed, many claimed a virtue in that Germany’s savings could be deployed for the benefit of investment in less advanced member nations, a belief insufficiently addressed by the Germans at the time. The ECB presided over the rapidly expanding balance sheets of the major banks which in the early days of the euro made them fortunes arbitraging between Germany’s and the PIGs’ converging bond yields. The ECB was seemingly oblivious to the rapid balance sheet expansion with which came risks spiralling out of control. To be fair, the ECB was not the only major central bank unaware of what was happening on the banking scene ahead of the great financial crisis, but that does not absolve it from responsibility.
The ECB and its banking regulator (the European Banking Authority — EBA) has done nothing since the Lehman failure to reduce banking risk. Figure 1 shows current leverages for the Eurozone’s global systemically important banks, the G-SIBs. Doubtless, there are other lesser Eurozone banks with even higher balance sheet ratios, the failure of any of which threatens the Eurosystem itself.
Even these numbers don’t tell the whole story. Most of the credit expansion has been into government debt aided and abetted by Basel regulations, which rank government debt as the least risky balance sheet asset, irrespective whether it is German or Italian. Throughout the PIGS, private sector bad debts have been rated as “performing” by national regulators so that they can be used as collateral against loans and repurchase agreements, depositing them into the amorphous TARGET2 settlement system and upon other unwary counterparties.
Figure 2 shows the growth of M1 narrow money, which has admittedly not been as dramatic as in the US dollar’s M1. But the translation of bank lending into circulating currency in the Eurozone is by way of government borrowing without stimulation cheques. It is still progressing, Cantillon-like, through the monetary statistics. And they will almost certainly increase substantially further on the back of the ongoing covid pandemic, as state spending rises, tax revenues fall, and budget deficits soar. Bear in mind that the new covid lockdowns currently being implemented will knock the recent anaemic recovery firmly on the head and drive the Eurozone into a new slump. There can be no doubt that M1 for the euro area is set to increase significantly from here, particularly since the ECB is now nakedly a machine for inflationary financing.
In the US’s case, rising interest rates, which the Fed is keen to avoid, will undermine the US stock market with knock-on economic effects. In the Eurozone, rising interest rates will undermine spendthrift governments and the entire commercial banking system.
Government debt creation out of control
The table below shows government spending for leading Eurozone states as a proportion of their GDP last year, ranked from highest government spending to GDP to lowest (column 1). The US is included for comparison.
Some of the increase in government spending relative to their economies was due to significant falls in GDP, and some of it due to increased spending. The current year has seen a recovery in GDP, which will have not yet led to a general improvement in tax revenues, beyond sales taxes. And now, much of Europe faces new covid restrictions and lockdowns which are emasculating any hopes of stabilising government debt levels.
The final column in the table adjusts government debt to show it relative to the tax base, which is the productive private sector upon which all government spending, including borrowing costs and much of inflationary financing, depends. This is a more important measure than the commonly quoted debt to GDP ratios in the second column. The sensitivity to and importance of maintaining tax income becomes readily apparent and informs us that government debt to private sector GDP is potentially catastrophic. As well as the private sectors’ own tax burden, through their taxes and currency debasement they are having to support far larger obligations than generally realised. Productive citizens who don’t feel they are on a treadmill going ever faster for no purpose are lacking awareness.
These are the dynamics of national debt traps which only miss one element to trigger them: rising interest rates. Instead, they are being heavily suppressed by the ECB’s deposit rate of minus 0.5%. The market is so distorted that the nominal yield on France’s 5-year bond is minus 0.45%. In other words, a nation with a national debt that is so high as to be impossible to stabilise without the necessary political will to do so is being paid to borrow. Greece’s 5-year bond yields a paltry 0.48% and Italy’s 0.25%. Welcome to the mad, mad world of Eurozone government finances.
The ECB’s policy failure
It is therefore unsurprising that the ECB is resisting interest rate increases despite producer and consumer price inflation taking off. Consumer price inflation across the Eurozone is most recently recorded at 4.1%, making the real yield on Germany’s 5-year bond minus 4.67%. But Germany’s producer prices for October rose 18.4% compared with a year ago. There can be no doubt that producer prices will feed into consumer prices, and that rising consumer prices have much further to go, fuelled by the acceleration of currency debasement in recent years.
Therefore, in real terms, not only are negative rates already increasing, but they will go even further into record territory due to rising producer and consumer prices. It is also the consequence of all major central banks’ accelerated expansion of their base currencies, particularly since March 2020. Unless it abandons the euro to its fate on the foreign exchanges altogether, the ECB will be forced to raise its deposit rate very soon, to offset the euro’s depreciation. And given the sheer scale of previous monetary expansion, which is driving its loss of purchasing power, euro interest rates will have to rise considerably to have any stabilising effect.
But even if they increased only into modestly positive territory, the ECB would have to quicken the pace of its monetary creation just to keep Eurozone member governments afloat. The foreign exchanges will quickly recognise the situation, punishing the euro if the ECB fails to raise rates and punishing it if it does. But it won’t be limited to cross rates against other currencies, which to varying degrees face similar dilemmas, but measured against prices for commodities and essential products. Arguably, the euro’s rerating on the foreign exchanges has already commenced.
The ECB is being forced into an impossible situation of its own making. Bond yields have started to rise or become less negative, threatening to bankrupt the whole Eurozone network as the trend continues, and inflicting mark-to-market losses on highly leveraged commercial banks invested in government bonds. Furthermore, the Euro system’s network of national central banks is like a basket of rotten apples. It is the consequence not just of a flawed system, but of policies first introduced to rescue Spain from soaring bond yields in 2012. That was when Mario Draghi, the ECB’s President at the time said he was ready to do whatever it takes to save the euro, adding, “Believe me, it will be enough”.
It was then and its demise was deferred. The threat of intervention was enough to drive Spanish bond yields down (currently minus 0.24% on the 5-year bond!) and is probably behind the complacent thinking in the ECB to this day. But as the other bookend to Draghi’s promise to deploy bond purchasing programmes, Lagarde’s current intervention policy is of necessity far larger and more destabilising. And then there is the market problem: the ECB now acts as if it can ignore it for ever.
It wasn’t always like this. The euro started with the promise of being a far more stable currency replacement for national currencies, particularly the Italian lira, the Spanish peseta, the French franc, and the Greek drachma. But the first president of the ECB, Wim Duisenberg, resigned halfway during his term to make way for Jean-Claude Trichet, who was a French statist from the École Nationale d’Administration and a career civil servant. His was a political appointment, promoted by the French on a mixture of nationalism and a determination to neutralise the sound money advocates in Germany. To be fair to Trichet, he resisted some of the more overt pressures for inflationism. But then things had not yet started to go wrong on his watch.
Following Trichet, the ECB has pursued increasingly inflationist policies. Unlike the Bundesbank which closely monitored the money supply and paid attention to little else, the ECB adopted a wide range of economic indicators, allowing it to shift its focus from money to employment, confidence polls, long-term interest rates, output measures and others, allowing a fully flexible attitude to money. The ECB is now intensely political, masquerading as an independent monetary institution. But there is no question that it is subservient to Brussels and whose primary purpose is to ensure Eurozone governments’ profligate spending is always financed; “whatever it takes”. The private sector is now a distant irrelevance, only an alternative source of government revenue to inflation, the delegated responsibility of compliant national central banks, who take their orders from the economically remote ECB.
It is an arrangement that will eventually collapse through currency debasement and economic breakdown. Prices rising to multiples of the official CPI target and the necessary abandonment by the ECB of the euro in the foreign exchanges in favour of interest rate suppression now threaten the ability of the ECB to finance in perpetuity increasing government deficits.
The ECB, TARGET2 and the repo market
Figure 3 shows how the Eurozone’s central bank balance sheets have grown since the great financial crisis. The growth has virtually matched that of the Fed, increasing to $9.7 trillion equivalent against the Fed’s $8.5 trillion, but from a base about $700bn higher.
While they are reflected in central bank assets, TARGET2 imbalances are an additional complication, which are shown in the Osnabrück University chart reproduced in Figure 4. Points to note are that Germany is owed €1,067bn. The ECB collectively owes the national central banks (NCBs) €364bn. Italy owes €519bn, Spain €487bn and Portugal €82bn.
The effect of the ECB deficit, which arises from bond purchases conducted on its behalf by the national central banks, is to artificially reduce the TARGET2 balances of debtors in the system to the extent the ECB has bought their government bonds and not paid the relevant national central bank for them.
The combined debts of Italy and Spain to the other national central banks is about €1 trillion. In theory, these imbalances should not exist. The fact that they do and that from 2015 they have been increasing is due partly to accumulating bad debts, particularly in Portugal, Italy, Greece, and Spain. Local regulators are incentivised to declare non-performing bank loans as performing, so that they can be used as collateral for repurchase agreements with the local central bank and other counterparties. This has the effect of reducing non-performing loans at the national level, encouraging the view that there is no bad debt problem. But much of it has merely been removed from national banking systems and lost in both the euro system and the wider repo market.
Demand for collateral against which to obtain liquidity has led to significant monetary expansion, with the repo market acting not as a marginal liquidity management tool as is the case in other banking systems, but as an accumulating supply of raw money. This is shown in Figure 4, which is the result of an ICMA survey of 58 leading institutions in the euro system.
The total for this form of short-term financing grew to €8.31 trillion in outstanding contracts by December 2019. The collateral includes everything from government bonds and bills to pre-packaged commercial bank debt. According to the ICMA survey, double counting, whereby repos are offset by reverse repos, is minimal. This is important when one considers that a reverse repo is the other side of a repo, so that with repos being additional to the reverse repos recorded, the sum of the two is a valid measure of the size of the market outstanding. The value of repos transacted with central banks as part of official monetary policy operations were not included in the survey and continue to be “very substantial”. But repos with central banks in the ordinary course of financing are included.
Today, even excluding central bank repos connected with monetary policy operations, this figure probably exceeds €10 trillion, allowing for the underlying growth in this market and when one includes participants beyond the 58 dealers in the survey. An interesting driver of this market is negative interest rates, which means that the repayment of the cash side of a repo (and of a reverse repo) can be less than its initial payment. By tapping into central bank cash through a repo it gives a commercial bank a guaranteed return. This must be one reason that the repo market in euros has grown to be considerably larger than it is in the US.
This consideration raises the question as to the consequences of the ECB’s deposit rate being forced back into positive territory. It is likely to substantially reduce a source of balance sheet funding for commercial banks as repos from national central banks no longer offer negative rate funding. They would then be forced to sell balance sheet assets, which would drive all negative bond yields into positive territory, and higher. Furthermore, the contraction of bank credit implied by the withdrawal of repo finance will almost certainly have the knock-on effect of triggering a widespread banking liquidity crisis in a banking cohort with such high balance sheet gearing.
There is a further issue over collateral quality. While the US Fed only accepts very high-quality securities as repo collateral, with the Eurozone’s national banks and the ECB almost anything is accepted — it had to be when Greece and other PIGS were bailed out. High quality debt represents most of the repo collateral and commercial banks can take it back onto their balance sheets. But the hidden bailouts of Italian banks by taking dodgy loans off their books could not continue to this day without them being posted as repo collateral rolled into the TARGET2 system and into the wider commercial repo network.
The result is that the repos that will not be renewed by commercial counterparties are those whose collateral is bad or doubtful. We have no knowledge how much is involved. But given the incentive for national regulators to have deemed them creditworthy so that they could act as repo collateral, the amounts will be considerable. Having accepted this dodgy collateral, national central banks will be unable to reject them for fear of triggering a banking crisis in their own jurisdictions. Furthermore, they are likely to be forced to accept additional repo collateral rejected by commercial counterparties.
In short, in the bloated repo market there are the makings of the next Eurozone banking crisis. The numbers are far larger than the central banking system’s capital. And the tide will rapidly ebb on them with rising interest rates.
Inflation and interest rate outlook
Starting with input prices, the commodity tracker in Figure 6 illustrates the rise in commodity and energy prices in euros, ever since the US Fed went “all in” in early 2020. To these inputs we can add soaring shipping costs, logistical disruption, and labour shortages — in effect all the problems seen in other jurisdictions. Additionally, this article demonstrates that not only is the ECB determined not to raise interest rates, but it simply cannot afford to. Being on the edge of a combined government funding crisis and with a possible collapse in the repo market taking out the banking system, the ECB is paralyzed with fear.
That being so, we can expect further weakness in the euro exchange rate. And the commodity tracker in Figure 6 shows that when commodity prices break out above their current consolidation phase, they will likely push alarmingly higher in euros at least. The ECB’s dilemma over choosing inflationary financing or saving the currency is about to get considerably worse. And for probable confirmation of mounting fear over the situation in Frankfurt, look no further than the resignation of the President of the Bundesbank, who has asked the Federal President to dismiss him early for personal reasons. It was all very polite, but a high-flying, sound money man such as Jens Weidmann is unlikely to just want to spend more time with his family. That he can no longer act as a restraint on the ECB’s inflationism is clear, and more than any outsider he will be acutely aware of the coming crisis.
Let us hope that Weidmann will be available to pick up the pieces and reintroduce a gold-backed mark.
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