Quote of the Day: Paying people to borrow money is just crazy; No Money Down Loan Philippine Edition

Sovereign Man's Simon Black on a 2008 Déjà vu bubble but at a larger scale: 

This feeling was only reinforced when I whipped out my phone and saw that German bank Berlin Hyp had just issued 500 million euros worth of debt… at negative interest.

I wondered if I really did go through a time warp, because this is exactly the same madness we saw ten years ago during the housing bubble and the subsequent financial crisis.

To explain the deal, Berlin Hyp issued bonds that yield negative 0.162% and pay no coupon.

This means that if you buy €1,000 worth of bonds, you will receive €998.38 when they mature in three years.

Granted this is a fairly small loss, but it is still a loss. And a guaranteed one.

This is supposed to be an investment… an investment, by-the-way, with a bank that almost went under in the last financial crisis.

It took a €500 billion bail-out by the German government to save its banking system.

Eight years later, people are buying this “investment” that guarantees that they will lose money.

The bank is now effectively being paid to borrow money.

We saw the consequences of this back in 2008.

During the housing bubble, banking lending standards got completely out of control to the point that they were paying people to borrow money.

At the height of the housing bubble, you could not only get a no-money down loan, but many banks would actually finance 105% of the home’s purchase price.

They were effectively making sure that not only did you not have to invest a penny of your own money, but that you had a little bit of extra cash in your pocket after you bought the house.

Paying people to borrow money is just crazy, whether it’s homebuyers, bankrupt governments, or banks.

Global insurance giant Swiss Re calculated that roughly 20% of all government bonds worldwide now have negative yields. And over 35% of Eurozone government bonds have negative yields.

(They would know—along with pension funds and banks, insurance companies are some of the largest buyers of bonds.)

With this deal, Berlin Hyp becomes the first non-state owned company to issue euro-denominated debt at a negative yield.

They won’t be the last.

We’re repeating the same crazy thing that nearly brought down the system back in 2008—paying people to borrow money.

The primary difference is that, this time around, the bubble is much bigger.

Back then, the subprime bubble was “only” $1.3 trillion.

Today, conservative estimates show that there’s over $7 trillion in negative rate bonds.

What could possibly go wrong?

I recently received a text message...

...which indicated of an offer for Philippine properties (high end condos for sale) financed by NO money down loan. So people are being "paid" to borrow money to buy Philippine properties. And that's how Philippine corporate sales and profits are being generated. And most importantly, that's the essence of the real estate-shopping mall propelled domestic demand boom: a credit bubble

Ironically, Mr. Black warned of this in 2014.

Simon Black: Not in the Mood for Moody's

Writes the prolific Simon Black of the Sovereign Man,

In the middle of a heated battle against my jetlag yesterday, I finally decided to exercise the nuclear option and turn on CNBC in order to stay awake.

I figured someone would say something completely ridiculous, and it would get my blood boiling enough to power through the next couple of hours.

Within minutes I saw a top economist for Moody’s (one of the largest rating agencies in the world) saying that there are absolutely zero signs of recession.

Boom. I was suddenly so wide-awake it was like that adrenaline scene from Pulp Fiction.

I couldn’t believe what I had just heard. Moody’s. No recession. Seriously?

In addition to being criminally complicit in committing widespread fraud that fueled the housing bubble ten years ago, Moody’s takes advantage of every opportunity to show the world that they don’t have a clue when it comes to economic forecasts.

It’s like what Churchill said about democracy– it’s the worst form of government, except for all the others.

Well, Moody’s is the worst rating agency and economic forecaster… except for all the others.

These are the same guys (along with their colleagues at S&P, Fitch, etc.) who totally missed the boat on the housing market and slapped pristine credit ratings on subprime mortgage bonds.

They also missed the boat on the subsequent banking crisis, giving strong ratings to Lehman Brothers and AIG right up through September 2008.

Lehman, of course, went bust that month. And AIG had to be bailed out by the taxpayer.

Moody’s and the gang also missed the rest of the global financial crisis, the collapse of Iceland, Greece’s bankruptcy, and just about every other significant financial event since… forever.

These guys are so drunk on their own Kool-Aid that in October 2007, Moody’s announced that “the economy is not going to slide away into recession.”

In December 2007, they called the bottom in the housing market, suggesting that prices would not fall any further.

Of course, the following year, the entire world was engulfed in the biggest financial crisis since the Great Depression.

Moody’s didn’t see it coming. Wall Street didn’t see it coming. The Federal Reserve didn’t see it coming. Governments didn’t see it coming.

Everyone assumed that the good times would last forever.

So when the agency that consistently fails to predict recession predicts that there will be no recession, you can pretty much guess what’s going to happen next.

Read the rest here (Mr Black deals with Negative Rates)

It's all about incentives. Add to this the agency problem (principal agent dilemma). Establishment institutions are unlikely to go against political interests, because of the businesses that they generate from such ties, and likewise, the social clout that they accrue from them. That's unless conditions have become so bad to deny them.  And that's why they have been principal advertisers of bubbles or they will remain blind to the risks of recession or of crisis. 

Moreover, they can be extensions of government interests. In the case of credit upgrades and downgrades, geopolitical tensions (particularly trade sanctions) has led to credit downgrade of Russia. I opined that Philippines got credit upgrades in exchange for military bases.

By the way, there is nothing about free markets here. Rather it's all about fascist-cronyism.

Quote of the Day: Mark Zuckerberg's "Charity" as Tax Shield

Like any parent, they want their child to grow up in a better world.

And they outlined their vision to make this happen, including taking risks and making long-term investments, building technology, and backing strong, independent leaders and visionaries.

This sounds conspicuously like the mission statement for any number of high-end Silicon Valley venture capital firms.

In a way, this is what the Zuckerbergs have created.

At the end of the letter, they pledge to contribute 99% of their Facebook shares, currently worth about $45 billion, to “advance this mission”.

The New York Times jumped on this immediately: “Mark Zuckerberg vows to donate 99% of his Facebook shares for charity.”

Incorrect. This isn’t charity.

The Zuckerbergs formed a limited liability company (LLC). It’s not a non-profit or charitable trust.

The Chan Zuckerberg Initiative is a for-profit, privately held vehicle that’s intended to make investments that will advance their vision.

Over the course of their lives, they’ll transfer Facebook shares to the LLC.

But as that transfer is considered a donation, the Zuckerbergs will be able to completely eliminate capital gains tax from their Facebook shares.

Plus they’ll be able to shield billions of dollars of other income from tax by writing off the donation as a charitable contribution.

Perhaps the biggest benefit is that the Facebook shares could now entirely avoid US federal estate tax.

At the end of the day, Mr. Zuckerberg gets to retain -control- of his fortune and shares, directing funds as he sees fit into for-profit, private investments, while drastically reducing his tax bill.

This is no surprise. Zuckerberg has already proven tremendously adept at minimizing taxes.

Facebook paid $178 million in net tax on pre-tax profit of $4.91 billion in 2014, an effective tax rate of 3.6%.

And there is no shortage of critics who have a major problem with this.

These hopelessly delusional and misguided people still actually believe that the way to make the world a better place is to give incompetent, corrupt politicians more money.

And in a height of arrogance, they think they are entitled to some claim on Mark Zuckerberg’s wealth.

Sorry, but this is complete lunacy.

This excerpt is from Sovereign Man founder Simon Black's latest article at his website.

The establishment of the Chan-Zuckerberg Initiative charitable trust represents a deft and an ingenious move: conversion of the Zuchkerberg's Facebook assets to a tax shield which was publicized as charity. It's like hitting two birds with one stone: The move, through PR means, reduce the populist politically incorrect rap on them, as well as, to starve ever esurient Leviathan beast

Recommended Links: A Sense of Ending, Misplaced Belief in Central Bankers and Dangerous Delusions

Bond Maven William H Gross believes that the endgame for central bank magic nears. Selected excerpts from his monthly outlook at Janus Capital, (bold mine)

A “sense of an ending” has been frequently mentioned in recent months when applied to asset markets and the great Bull Run that began in 1981. Then, long term Treasury rates were at 14.50% and the Dow at 900. A “20 banger” followed for stocks as Peter Lynch once described such moves, as well as a similar return for 30 year Treasuries after the extraordinary annual yields are factored into the equation: financial wealth was created as never before. Fully invested investors wound up with 20 times as much money as when they began. But as Julian Barnes expressed it with individual lives, so too does his metaphor seem to apply to financial markets: “Accumulation, responsibility, unrest…and then great unrest.” Many prominent investment managers have been sounding similar alarms, some, perhaps a little too soon as with my Investment Outlooks of a few years past titled, “Man in the Mirror”, “Credit Supernova” and others. But now, successful, neither perma-bearish nor perma-bullish managers have spoken to a “sense of an ending” as well. Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. To them, (and myself) the current bull market is not 35 years old, but twice that in human terms. Surely they and other gurus are looking through their research papers to help predict future financial “obits”, although uncertain of the announcement date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping…

At the Grant’s Conference, and in prior Investment Outlooks, I addressed the timing of this “ending” with the following description: “When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.” We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm.

Read the rest here

Sovereign Man’s Simon Black on Walter Bagehot’s exposition of the public's halo effect on central banking (bold mine)

Bagehot was Editor-in-Chief of The Economist at the time. He was a brilliant finanical thinker, and the book, Lombard Street: A Description of the Money Market, was his masterpiece.

For example, the book describes how, even though the British banking system was the most widely used and powerful in the world, it was dangerously overleveraged:

“There was never so much borrowed money collected in the world as is now collected in London,” writes Bagehot.

He further shines a huge spotlight on the risks of illiquidity, describing how Britain’s largest banks only held a very small percentage of their customer’s funds in cash:

“[T]here is no country at present, and there never was any country before, in which the ratio of the cash reserve to the bank deposits was so small as it is now in England.”

He continues:

“[T]he amount of that cash is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it.”

…

Bagehot also blasts the central banking system (dominated by the Bank of England) which had effective control over the economy:

“All banks depend on the Bank of England, and all merchants depend on some bank.”

Of course, no one truly understood how that system worked. Everyone just had confidence that the central bankers were smart guys and absolutely would not fail:

“[F]ortunately or unfortunately, no one has any fear about the Bank of England. The English world at least believes that it will not, almost that it cannot, fail.”

“[N]o one in London ever dreams of questioning the credit of the Bank, and the Bank never dreams that its own credit is in danger.”

But as Bagehot points out, the data showed otherwise:

“Three times since 1844 [the Bank of England] has received assistance, and would have failed without it. In 1825, the entire concern almost suspended payment; in 1797, it actually did so.”

Clearly these central bankers weren’t particularly good at their jobs. Bagehot sums it up like this:

“[W]e have placed the exclusive custody of our entire banking reserve in the hands of a single board of directors not particularly trained for the duty—who might be called ‘amateurs’. . .”

Read the rest here

Former Chairman of Morgan Stanley Asia, now senior fellow at the Yale Institution worries over the world having gone mad, excerpts from the Project Syndicate

But fear not, claim advocates of unconventional monetary policy. What central banks cannot achieve with traditional tools can now be accomplished through the circuitous channels of wealth effects in asset markets or with the competitive edge gained from currency depreciation.

This is where delusion arises. Not only have wealth and currency effects failed to spur meaningful recovery in post-crisis economies; they have also spawned new destabilizing imbalances that threaten to keep the global economy trapped in a continuous series of crises.

Consider the US – the poster child of the new prescription for recovery. Although the Fed expanded its balance sheet from less than $1 trillion in late 2008 to $4.5 trillion by the fall of 2014, nominal GDP increased by only $2.7 trillion. The remaining $900 billion spilled over into financial markets, helping to spur a trebling of the US equity market. Meanwhile, the real economy eked out a decidedly subpar recovery, with real GDP growth holding to a 2.3% trajectory – fully two percentage points below the 4.3% norm of past cycles.

Indeed, notwithstanding the Fed’s massive liquidity injection, the American consumer – who suffered the most during the wrenching balance-sheet recession of 2008-2009 – has not recovered. Real personal consumption expenditures have grown at just 1.4% annually over the last seven years. Unsurprisingly, the wealth effects of monetary easing worked largely for the wealthy, among whom the bulk of equity holdings are concentrated. For the beleaguered middle class, the benefits were negligible.

“It might have been worse,” is the common retort of the counter-factualists. But is that really true? After all, as Joseph Schumpeter famously observed, market-based systems have long had an uncanny knack for self-healing. But this was all but disallowed in the post-crisis era by US government bailouts and the Fed’s manipulation of asset prices.

America’s subpar performance has not stopped others from emulating its policies. On the contrary, Europe has now rushed to initiate QE. Even Japan, the genesis of this tale, has embraced a new and intensive form of QE, reflecting its apparent desire to learn the “lessons” of its own mistakes, as interpreted by the US.

But, beyond the impact that this approach is having on individual economies are broader systemic risks that arise from surging equities and weaker currencies. As the baton of excessive liquidity injections is passed from one central bank to another, the dangers of global asset bubbles and competitive currency devaluations intensify. In the meantime, politicians are lulled into a false sense of complacency that undermines their incentive to confront the structural challenges they face.

Read the rest here

How Regulations Suffocate the Economy and Restricts Freedom

Sovereign Man’s Simon Black on the deleterious effects of soaring regulations (bold mine)

On March 16, 1936, the government of the United States published the very first edition of the Federal Register.

President Roosevelt had been taking a lot of heat over the previous year; under his New Deal program, dozens of government agencies were passing new rules, regulations, and codes at an absolutely feverish pace.

It became impossible for anyone to keep track of them—even the other agencies within the government.

So in the summer of 1935 they created a new law requiring every executive agency to publish a daily, official record of their activities.

This official record was called the Federal Register. And it would contain a complete set of every rule, regulation, code, and proposal issued by each of the executive agencies.

The first edition was published on March 16, 1936. It was sixteen pages.

Every single work day since then, without fail, the government has published the Federal Register.

Its first full year (1937) contained a total of 3,450 pages. By 1942, the Federal Register had grown to over 10,000 pages.

It passed 20,000 for the first time in 1967. More than 30,000 in 1973. And more than 40,000 the following year in 1974.

The Federal Register exploded during the 1970s, in fact, touching nearly 90,000 pages by the end of the Carter administration.

During Reagan’s time, the publication shrank to under 50,000, only to rise again under subsequent presidents.

The longest edition ever published was logged at 6,653 pages in a single day, during the administration of Bush II.

President Obama has averaged nearly 80,000 pages per year, far and away the highest of any President in US history.

This morning’s edition, in fact, is a whopping 358 pages full of new rules, regulations, and proposals.

Did you read it? Neither did I. But as the old saying goes, ignorance of the law is not an excuse.

This is absurd. Every single one of those regulations makes people less free.

They criminalize the most innocent behavior and make it impossible for the average person to know what’s legal and what’s not as if we all have some some civic duty to read and memorize 80,000 pages per year of government regulation.

4,500 criminal statutes now exist under US Code. That’s 1,500 times more than the three crimes outlined in the Constitution– piracy, treason, and counterfeiting.

(Ironically, the Federal Reserve and commercial banks commit the latter on a daily basis…)

We’ve seen this theme countless times throughout history.

Under Diocletian’s reign, the Roman Empire’s body of laws and regulations multiplied like rabbits.

He centralized all aspects of the economy, controlling wages, prices, commerce, and agricultural activity. Violations in many cases were subject to the death penalty.

And when people complained, he told them that the barbarians were at the gate, and that individual liberty needed to be sacrificed for the greater good of security.

By Diocletian’s time, Rome was already bankrupt. His regulations pushed the Empire over the edge.

It’s not much different today. Each and every one of these obscure regulations COSTS MONEY.

So it’s not surprising that as the number of pages in the Federal Register has increased, so has the US federal debt.

In order to pay for all of this bureaucracy, every citizen has become subject to an increasingly complex and punitive tax system, enforced at the point of a gun by a bankrupt government desperate to keep the party going.

Let me add graphics of…

…the US government budget (deficit spending), and the...

...US federal debt. Both charts have been sourced from the Heritage Foundation

Yet the link between regulation and debt.

Every enacted regulation needs enforcement. Enforcement entails spending. And spending requires financing. Government financing are sourced from taxes, debt and inflation. Essentially, every increase in regulation entails higher taxes, debt or inflation. Hence, “Each and every one of these obscure regulations COSTS MONEY.”

And if the tax revenues can’t keep up with the pace of regulatory profligacy, thus the recourse towards deficit spending financed by debt: as “Federal Register has increased, so has the US federal debt.”

In addition, desperate governments will dragoon its citizens via innovative and increasingly repressive tax regimes, thereby “to pay for all of this bureaucracy, every citizen has become subject to an increasingly complex and punitive tax system, enforced at the point of a gun by a bankrupt government desperate to keep the party going.”

Yet every government spending represents resources extracted from the private sector, and mostly, resources taken away from the productive agents of the economy. Hence, regulatory overload impedes economic activities, and consequently, spawns black markets.

In addition, there are costs (time, effort and resources) to comply with regulations.

Economist Robert Higgs on estimated compliance costs endured by the US economy:

According to Wayne Crews, who makes an annual estimate of the cost of compliance with federal regulations alone, “Costs for Americans to comply with federal regulations reached $1.863 trillion in 2013”—which is equivalent to more than 13 percent of national income. Compliance with state and local government regulations surely adds a large amount to Crews’s estimate for federal compliance alone. No one needs to tell Americans, however, how onerous and exasperating the entire mass of government regulations and related red tape has become. Virtually every part of economic and social life now bears these heavy burdens, and any truly meaningful appraisal of the size of government today must take them into consideration along with the amounts the various governments are spending.

Even more, increasing regulations drives a chasm between the economic (productive) class and the political (parasitical) class, making the former subservient to the latter.

In her classic novel Atlas Shrugged, the late Ayn Rand honed in such politically induced societal entropy...

Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion- When you see that in order to produce, you need to obtain permission from men who produce nothing- when you see that money is flowing to those who deal, not in goods, but in favors- when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you- when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed.

Yet this is a universal phenomenon or applies to every government.

Regulating people’s lives means LESS freedom. 

Arbitrary regulations, not only "criminalize the most innocent behavior" for being ignorant of what's legal and what's not, instead they have frequently been used as instruments of repression based on political expediency and the advancement of power over the citizenry. 

Therefore, increasing enactments of arbitrary regulations signify a slippery slope path towards corruption and dictatorship.

As Roman lawyer, orator and senator Publius Tacitus wrote (Annals 117 Book III, 27) Corruptissima re publica plurimae leges (The more numerous the laws, the more corrupt the government.)

Financial Times: The UK economy is a ticking time bomb

Sovereign Man’s Simon Black quotes of the “scathing assessment” by the Financial Times on the UK’s political economy

(bold original)

Despite being an otherwise staid, traditional news service, the professional banking division of the Financial Times recently released an utterly scathing assessment of the British economy.

It was entitled, “The UK economy is a ticking time bomb,” and the editor didn’t pull any punches in completely shattering the conventional fantasy that ‘all is well’, and that advanced economies can simply print and indebt their way to prosperity.

I’ll quote below, emphasis mine:

“What is the problem? Quite simply, the key numbers are terrible. According to the OECD, after five years of ‘austerity’ the UK’s budget deficit is 5.3%, down from 11.2% in 2009.

“In other words, it has gone from being close to meltdown to a situation that is merely dreadful.

“Since the government is spending more than it earns, it is hardly surprising that it is borrowing more, and that the debt-to-GDP has risen from 68.95% in 2009 to 93.30% in 2013, again according to OECD figures.

“As the UK is currently growing it should really be running a budget surplus, providing it with the means to run deficit financing during the next downturn.

“This is one of the tenets of the Keynesian philosophy that underpins a lot of left-of-centre economic thinking.

“Unfortunately Europe’s political parties of all persuasions have bastardised Keynes’ ideas – running deficits in both good and bad times – so as to render them almost meaningless.

“To make matters worse the UK, again similar to most advanced economies, is an ageing society with pension, welfare and healthcare systems that are wrongly structured and financially unsustainable.”

“We can blame the politicians for failing to be honest with the electorate about the challenges ahead.

“Or we could blame the voters who punish at the ballot box any party that tells them anything other than good news and wants to hear that taxes can be cut, spending raised and the budget balanced all at the same time.”

The Slippery Slope of Deposit Confiscation: Australian Edition

In the  recent  G-20 meeting, deposit confiscation (bailIns) had been included as part of the multipartite political agenda. Yet unknown to most, this serves as handwriting to the wall for the formal banking system.

Here is what I wrote then: (bold mine)

In short, the formalization of the G20 accord on the downgrade of bank deposits implies, the greater risks of bank runs.  Yet the institutionalization of bail INs will not likely to be limited to G20s but should spread even on Emerging-Frontier markets.

Governments around the world have been in a state of panic. They are desperately manipulating stock markets in the hope that these may produce “wealth effect”, a miracle intended to save their skin or the  status quo (the welfare-warfare, banking system and central bank troika), as well as, camouflage current economic weakness and or kick the debt time bomb down the road.

Yet the same political institutions recognize that inflating stocks are unsustainable. So during this current low volatile tranquil phase, they have been implementing foundations for massive wealth confiscation.

What better way to confiscate than do it directly. Yet the more the confiscations, the greater risks of runs on banks and on money.

Well Sovereign Man’s Simon Black identifies Australia as one of the would be pioneers to such path… (bold original, italics mine)

Several months ago, the government of Australia proposed to tax bank deposits up to $250,000 at a rate of 0.05% (5 basis points).

Their idea was for the money to be invested in a rainy day Financial Stabilization Fund to insure against in the unlikely event of a banking crisis… or all-out collapse.

And as of this morning, it looks like the levy might just pass and become law in Australia. All parties support the idea. Which means that Australia might just have a tax on bank deposits starting January 1, 2016.

To be clear, the proposal seems to plan on taxing the banks based on the amount of deposits they’re holding—but it’s pretty obvious this will be passed on to consumers in the form of lower interest rates.

Let’s look at what this means:

1. Taxes on bank deposits are generally the same as negative interest rates. Australia is a rare exception.

Interest rates on bank deposits in most developed nations are practically zero… if not already negative.

So charging a tax above and beyond this would clearly push rates (further) into negative territory.

I have, for example, a small bank account in the United States that pays me about .03% interest (three basis points). If the government imposes a tax of 5bp on interest of 3bp, I’m left with negative interest.

Australia (along with New Zealand) is a rare exception since interest rates are actually positive. You can get 2-3% on a savings account. So a 5bp tax still results in positive interest.

2. Taxes always start small… then increase over time.

Of course, the proposal on the table right now is a 5bp tax. There’s nothing that says this can’t increase to 50bp over time.

When the United States government first imposed the modern federal income tax a century ago, the top tax rate was just 7%. These days that would qualify the US as a tax haven.

Over time, tax rates rose to as high as 92%. Tax rates can (and do) rise. And once they’re passed, they’re almost never abolished.

3. Taxes are rarely used for their stated purpose

Politicians create and raise taxes all the time for special purposes. And again, over time, they are often diverted away from those purposes.

In 1936 after a devastating flood in Johnstown, Pennsylvania, the state government passed a ‘temporary’ 10% tax on all alcohol sold in the state in order to help pay for disaster relief.

Six years later the work was complete. But the tax is still on the books (now at 18%), with all the revenue going to whatever the state lawmakers want to blow it on.

FICA is another great example. Though payroll taxes in the US were initially established to fund Social Security and Medicare, the federal government steals this revenue every year to haplessly try and plug budget deficits.

So a tax to build a financial stabilization fund might sound comforting in theory… but will all the revenue actually be allocated for that purpose? Doubtful.

4. If this can happen in Australia, is anyone foolish enough to think it can’t happen in the US or Europe?

Australia has a sound and sturdy banking system.

Banks in Australia are actually, you know, solvent. Capital ratios and liquidity rates are solid. Australia’s is a well-capitalized banking system—far more than in the US and Europe.

The numbers tell a very clear story. Banking systems across Europe in particular have had to be routinely bailed out over the past few years—Slovenia, Spain, Greece, Cyprus, etc.

In the United States it is perhaps even more absurd. Based on their own numbers, US banks are highly illiquid, still gambling away customer funds in trendy investment fads that will likely suffer an epic meltdown.

Backing up this little scam is the FDIC, which itself is pitifully undercapitalized to support any significant problem in the banking system.

Backing up the FDIC is the US federal government, which is already drowning in more than $60 trillion in liabilities (based on the most recent GAO report).

And supplying crack to the crack head is the US Federal Reserve, America’s central bank.

With net capital just 1.26% of total assets, the Fed is so pitifully capitalized they make Lehman Brothers look like Berkshire Hathaway.

So if the government of Australia is concerned that their well-capitalized banking system needs a safety net and wants to tax deposits for such purpose, how in the world can we possibly expect the US and Europe, with all of their banking system risk, won’t do the same?

One thing leads to another.

When the next global crisis appears (very soon), domestic currency confiscation will likely spread to foreign currency deposits. The buck won’t stop here. As part of the manifold means to capture resources, capital controls will be imposed, trade controls, price and wage controls will most likely be  also implemented. 

Government’s use of monetary inflation or the inflation tax will intensify. 

Proof? In Ireland, Irish politicians has proposed of the nationalization of money creation. They want to bar banks of this role and shift money creation to solely the domain of the central bank

From Telegraph (bold mine)

Iceland's government is considering a revolutionary monetary proposal - removing the power of commercial banks to create money and handing it to the central bank.

The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for Iceland".

"The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy," Prime Minister Sigmundur David Gunnlaugsson said.

The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

According to a study by four central bankers, the country has had "over 20 instances of financial crises of different types" since 1875, with "six serious multiple financial crisis episodes occurring every 15 years on average".

Mr Sigurjonsson said the problem each time arose from ballooning credit during a strong economic cycle.

So instead of dealing with the incentives that whets on the appetite of the banking system to expand credit, politicians see knee jerk reactions as solutions. 

Yet by monopolizing credit allocation, this will lead to even more politicization of  distribution of credit. And because governments via central bank will pander to populist short term oriented political agenda, this heightens the risks of, or eventually paves way to, hyperinflation. 

Going back to negative rates, yet the opportunity cost of negative rates will be the cost of storage of currency/banknotes. This means that if negative rates will go deeper, at a certain point, people will look at cash/banknotes (in safety boxes? or in pillow mattresses?) as a more feasible alternative to bank deposits. 

So the likely unintended consequence will be intensified “debt deflation” as more people horde cash. And instead of global economies experiencing a renaissance, the opposite will occur, capital consumption will intensify, thus economies will falter if not collapse, thereby leading to massive debt defaults.

Stashing cash may increase security risks as robbery and theft. This will raise the cost of holding cash. So the public will be immersed in a conundrum: the devil or the deep blue sea; Submit to government confiscation or to heightened security risks of holding cash. This points at how inflationism destabilizes society

Although, some entrepreneurs may see this as commercial opportunities. They may offer large scale storage/safety box facilities with stringent security. I am hopeful that there will be private sector alternatives even if it means black market substitutes.

But governments will always attempt to employ a dragnet on the resources of her constituency by imposing controls. Example, the French government has been en route to outlaw or impose increase restrictions on cash holdings.

From Reuters: From September onwards, people who live in France will not be allowed to make payments of more than 1,000 euros ($1,060) in cash, down from 3,000 now. The cap for foreign visitors, left higher for reasons that include facilitating tourism, will be cut to 10,000 euros from 15,000.

So while stock markets have been running records, behind the scenes, perhaps in anticipation of violent adjustments from the current unsustainable arrangements, governments have been working 24/7 on the legal, political, technical platforms towards direct confiscation of people’s resources.

The Effects of Inflationism on Sex Life

Sovereign Man’s Simon Black has been on a roll. Here is another terse but eloquent article explaining the effects of money printing (inflationism) to private lives, particularly in the realm sex and demography (population changes). 

The public doesn’t see it, but political control of money and credit leads to political control of people’s private lives. This is, of course, coursed through the pricing system. Changes in the pricing system, which consequently alters the purchasing power of money (by lowering it), indirectly affects people’s values, preferences, actions and therefore lifestyle. The changes are subtle and runs over a period of time. The casual link has been non-linear.

Or stated differently, the problems from such policies will prompt for political interventions in many aspects of social lives, be it commercial or personal. In essence, intervention begets intervention. 

And it’s why political control of money and credit is in the fifth plank of Karl Marx’s communist manifesto: "Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly." 

Political control over money and credit serves as an instrument to expand political control over society.

Simon Black on the Libido crisis: (bold mine)

You know that we talk a lot about the insane level of government interference in our lives. About what we can and cannot put in our bodies. The amount of interest we’re entitled to receive on our savings. Etc.

But I’m noticing now even more ridiculous trends of governments wanting to get involved in people’s sex lives.

Last year the Danish government promoted an initiative called “Do it for Denmark”, encouraging Danes to travel abroad and have sex while on holidays. They even have a pretty racy Youtube video featuring a scantily clad gorgeous blonde waiting to do her duty for her country and procreate. 

Singapore as well has a catchy jingle about going out and making babies, brought to you by the same guys who did the Mentos theme song.

The Swedish government actually spent taxpayer money on its new genitals song, so it can start indoctrinating children early on how they can make babies.

Here in Japan, which has one of the lowest birthrates in the world, the government is desperate to find solutions to what it calls its libido crisis.

According to their data, Japanese men aren’t terribly interested in sex and the women find sex to be bothersome.

Japanese being expert process engineers are coming up with a government solution to reengineer sexual desire in their country.

(I have to imagine that if this solution reached US soil, the government option would include the smooth sounds of Barack Obama whispering some pillow talk: “C’mon, lemme give you this big tax cut, baby…”)

Easily the most ridiculous solution they came up with is to impose a ‘handsome tax’ on attractive men. I thought this was a headline from the Onion, the greatest news source in the world, but it turned out to be true.

The idea being that if you tax handsome men, then less attractive men would have more money and hence be able to attract women.

 

Zerohedge covered this in fantastic detail—I encourage you to check it out. This is not a joke.

The thing that many of these countries have in common, Japan, Denmark, etc., is a rapidly declining birthrate. 

A declining birthrate is disastrous for an economy, particularly for an ageing place like Japan. 

Ironically, the oldest person in the world turned 117 years old yesterday—and no surprise that she’s Japanese. In fact, Japan is home to one of the oldest populations in the world and has one of the longest life expectancies. 

Curiously they also have one of the largest pension programs in the world. You put all that together and you have fewer and fewer young people paying more and more of their income to support a disproportionately large population of retirees who are living for decades after they stop working. 

Each one of these governments is trying to find a solution to fix this unsustainable fiscal problem.

In Denmark they seem to think that people aren’t going on vacation enough. In Japan they think it’s a problem of sexual desire. But in actuality it has everything to do with cost of living.

Month to month, year to year, it’s hard to notice the subtle changes in costs of living and standards of living, but after a long period of time it’s easy to look back and remember how things used to be.

You used to be able to support a family on a single income. You used to be able to afford medical care and higher education.

It’s often said that the greatest expense that someone will have in their life is his or her home. That’s total nonsense.

Now, I’m not saying it’s not worth it, but the biggest expense most people will have is family, and particularly children.

And after years and years of suffering through pitiful, destructive policies that have chronically made people less prosperous, it’s no surprise that they’re coming to the conclusion—you know, we can’t really afford to have a child right now.

There are consequences to conjuring money out of thin air. There are consequences to destructive policies.

So destructive in fact that central bankers and politicians even have the power to make a population disappear.

How ironic that they try to fix their own problem by trying to introduce themselves into our bedrooms.

As repeatedly been stated here, inflationism has natural limits. Those limits are being manifested through various crises, financial, economic, political or social

Quote of the Day: Accounting Magics

Back then, just as today, few people really understood it. And those who did were often clever enough to find loopholes in the system to hide their fraud. Especially banks.

There are some really stunning (and sometimes hilarious) examples of early banks who learned how to cook their books and misstate their capital using Pacioli’s system.

Curiously very little has changed. Banks still use accounting tricks to hide their true condition.

Bloomberg showcased one such technique last year, exposing the way that many US banks are rebooking their assets from “available for sale (AFS)” to the “held-to-maturity (HTM)” designation.

This is a very subtle move that means nothing to most people.

But to banks, it’s a highly effective way of concealing losses they’ve suffered in their investment portfolios.

Banks ordinarily buy bonds and other securities with the purpose of generating a return on that money until they have to, you know, give it back to their depositors.

That’s why they’re called “available for sale,” because the bank has to sell these assets to pay their depositors back.

But here’s the problem– many of these investments have either lost money, or they soon will be. And banks don’t want to disclose those losses.

So instead, they simply redesignate assets as HTM.

It’s like saying “I don’t care that these bonds aren’t worth as much money as when I bought them because I intend to hold them forever.”

Thing is, this simply isn’t true. Banks don’t have the luxury of holding some government bond for the next 30-years.

This is money they might have to repay their customers tomorrow, which makes the entire charade intellectually dishonest.

That doesn’t stop them.

JP Morgan alone boosted its HTM mortgage bonds from less than $10 million to nearly $17 billion (1700x higher) in just one year. This is a huge shift.

Nearly every big bank is doing this, and is doing it deliberately. This is no accident. And there’s only one reason to do it—to use accounting minutia to conceal losses.

But the accounting tricks don’t stop there. And in many cases they’re fueled by the government.

One recent example is how federal regulators created a new ‘rule’ which allows banks to consciously reduce the risk-weighting they assigns their assets.

The Federal Financial Institution Examination Council recently told banks that, “if a particular asset . . . has features that could place it in more than one risk category, it is assigned to the category that has the lowest risk weight.” 

This gives banks extraordinary latitude to underreport the risk levels of their investments. 

Bankers can now arbitrarily decide that a risky asset ‘has features’ of a lower risk asset, and thus they can completely misrepresent their investments. 

Bottom line, it’s becoming extremely difficult to have confidence in western banks’ financial health.

They employ every trick in the book to overstate their capital ratios and understate their risk levels.

This, backed by a central bank that is borderline insolvent and a federal government that is entirely insolvent.

It certainly begs the question—is it really worth keeping 100% of your savings in this system?

(bold mine)

This is from Simon Black from his website the Sovereign Man.

Such statistical charade can be epitomized by the recent experience of Hong listed Kaisa Group. As I wrote last weekend:

The camouflaging of debt reminds me of the Kaisa Group, a property and shopping mall developer in China but whose shares are listed in Hong Kong.

The once “fundamentally” strong company suddenly surprised the market when they announced of their inability to pay interest rates on foreign denominated loans. So the Chinese government worked behind the scenes to find a buyer to bailout the beleaguered company.

Last week, the company’s debt suddenly DOUBLED. Since the company didn’t disclose why the debt has swelled, media has been speculating on its possible causes. They point out that “home buyers may have unwittingly turned into lenders” where advance proceeds and deposits were converted into debts. They also attributed the possibility of debt from trade credit (credit to suppliers and contractors) and from legal actions, or even from off balance sheet debts.

The obvious lesson is that credit booms have always masked the disease. It’s when the loans have been called in, when the proverbial Pandora’s Box gets to be opened.

Beware of those embellished statistics.