Wall Street's Best Minds
Byron Wien: How to Profit From Productivity Puzzle
Tech’s impact on productivity is hard to gauge but industrials, mining and energy may rise says the strategist.
By Byron Wien
The attacks in Paris on November 13 could have a significant effect on the world economy going forward. Geopolitical factors played a role in the Federal Reserve’s decision not to raise short-term interest rates in September.
Similarly, the fear of further terrorism, resultant retaliation and the possible negative impact on economic activity may hold the Fed back in December. There is also the concern that both businesses and consumers will reduce their spending until they become more confident about future world stability.
Finally, with ISIS striking targets beyond the Middle East, there is the clear option that a major coordinated military effort might be organized to subdue its forces in the Middle East.
This could involve troops on the ground from a number of nations, including the United States, although to date President Obama has ruled that out.
The attacks by al-Qaeda on the World Trade Center in New York and other sites in 2001 were not followed by a series of incidents although there was widespread fear of further strikes at the time; the resultant escalation of security precautions proved effective. The U.S. equity market declined sharply in reaction to those assaults, but a month later, with world economies recovering from a recession, the indexes had recovered their lost ground. The market rallied on the Monday after the Paris attacks, even though the economies of the major developed countries have been showing weakness recently. Will the Paris attacks and the response to them slow business activity further?
Prior to the Paris carnage there was some good news in the U.S. We finally got a strong jobs number for October with a 271,000 increase in non-farm payrolls. Construction was the standout among sectors adding workers. The Federal Reserve was probably already planning to raise short-term interest rates in December and this report should encourage them. The Republicans are very likely working on a new message to replace “Obama is not a job creator; he is a job destroyer.” Average hourly earnings increased 2.5% on a year-over-year basis and many observers commented that wages were “accelerating.”
Fed Vice Chair Stanley Fischer has argued that if productivity is not growing, “there is not a lot of force in the economy for real wages to rise.” So perhaps wages won’t “accelerate.” Before we get too carried away with the idea that the long period of wage stagnation is over and consumers will have more spending money available to keep the economy growing in 2016, I think it would be useful to look at the complex factors at work in this economic cycle.
Goldman Sachs has identified three factors influencing their “wage tracker.” The first is labor market slack, which has depressed growth by 0.6%, according to their estimates. The second is weak productivity growth, which has diminished wage growth by an estimated 0.3%. The third is low inflation, which has dampened wage growth by an additional 0.2%. Adjusting for these factors added together would produce wage growth of 3.2%, or 1.1% above the current level, using their data. Recent business cycles have shown wage growth of 3.5% to 4%. So what is holding wages back?
The slow growth of the economy is clearly one factor. The Goldman estimate that the economy is growing about one percentage point below potential seems right to me and accounts for about half of the shortfall in wage gains. What is more interesting is the low level of productivity improvement. In the 1950s it was not uncommon to have productivity growth in excess of 4%.
In the 1960s 3% was a frequent reading, but after the period 2000 to 2005 where productivity growth was 3% to 4%, recent data has shown 1%. The recovery cycles of previous periods have been characterized by forces that increased productivity. According to Strategas Research, “the me decade” and credit cards spurred growth in the 1980s and the computer did in the 1990s.
The problem with the current period is that housing, whose excesses were the principal cause of the recession in 2008-2009 and which is playing an important role in the current recovery, does not improve productivity. It only improves the quality of life.
Looking ahead, I examined opposing views of productivity. One bearish view is espoused by Frank Veneroso, an economist whose work I have followed for twenty years. Veneroso starts with the statement that productivity growth in this cycle has been abysmal, averaging only 0.5% over the last five years. He sees no reason in history or theory for it to change in what he views as a mature economic expansion. In eight of the ten cycles since 1950 there has been a surge in labor productivity in the early part of an expansion and decay in the latter part. One of the exceptions was the 1990s, when capital equipment investment in technology caused a late cycle increase in productivity.
This is not happening now. Many observers explain the current low productivity data by saying the economy is facing “headwinds.” These include: (a) a lack of business confidence in future demand; (b) a decline in entrepreneurship except in certain technology-related areas; and (c) a lack of willingness by financial institutions to provide loans to start-ups. These conditions are unlikely to change soon.
According to Veneroso, valuations in the technology sector may be reaching an extreme point, particularly for promising companies that are not yet public. Businesses have been using leverage to increase earnings per share and borrowing has been expanding at almost twice Gross Domestic Product growth, thereby putting business debt at an all-time high. Mergers and acquisitions, share buybacks and leveraged loans are approaching the 2007 peak. This data suggests that the headwinds are not impeding entrepreneurial activity and innovation so there is no reason to expect a significant gain in productivity.
Goldman Sachs has interviewed two Northwestern professors on the productivity issue. Robert Gordon explains the reason for low productivity is that “we’re using software and computers that are very similar to the ones we used ten years ago.” Gordon may be yearning for the true sea changes in productivity growth like those caused by the steam engine, electricity, the automobile, air travel and air conditioning.
The computer is clearly in that category but follow-on innovations have been less dramatic. He comments that some people think social networking is as important as indoor plumbing. He also cites the slow rollout of digital access to medical records as a case where there is potential to increase productivity but we haven’t taken advantage of it. I would add MOOCs (massive online open courses), which offer the ability to educate people remotely but have not gained the traction I would have expected by this time.
Joel Mokyr is on the other side: “product innovation has been particularly pronounced during the last 20 years and if that is the case, productivity statistics systematically under-measure the rate of technological progress.” Mokyr makes a distinction between product innovation and process innovation. If you can produce the same goods with less labor and less capital, productivity improves. That’s process innovation. Product innovation is harder to measure.
That can improve your life without showing up in the productivity statistics. Antibiotics and anesthesia are examples. So is an automobile that will last longer and require fewer repairs. He sees a significant opportunity in 3D printing.
Unlike some who believe low productivity is caused by “headwinds,” Mokyr believes the wind is behind us.
A third economist, Alan Blinder of Princeton, wonders whether the prevalence of free services on the Internet inflates output growth without concomitant costs and therefore reduces productivity. While that might be a factor, he cites weak investment limiting the ability of labor to leverage its efforts. Blinder further questions whether Twitter and other Internet services that people use at work actually are a form of leisure or entertainment and detract from productivity.
The Goldman Sachs report on productivity looks at changes in productivity over the last fifty years. It views the period from 1960 to 1970 as “the Golden Age” following IBM’s introduction of a computer capable of performing a variety of functions and Intel’s introduction of the microprocessor. Annual productivity in that decade rose to 3.5%, but it sagged in the 1970s, and in 1987, economist Robert Solow said, “Computers are everywhere but in the productivity figures.”
In 1992, however, the worldwide web became available to the general public and by 2004 productivity was back up to 4%. Now, with 51% of all U.S. adults banking online and 90% having smart phones, it has dropped to 1% in 2014. Goldman suggests there are two areas of possible significant productivity growth. The first is the extractive industries of energy and mining. The second is so-called “old economy” industrial companies, which still have a long way to go in implementing technology. Eric Schmidt of Google expects artificial intelligence to increase productivity in healthcare and the legal profession. “Any repetitive task can be done effectively by a computer,” he says.
If the low productivity numbers are real and not a result of measurement error, they are significant. If productivity does not improve, the implications for the future economic outlook are worrisome. The productivity report for the third quarter showed that employee output per hour increased at a 1.6% annual rate, well above the estimates of most economists. Productivity only increased 0.4% in the third quarter of 2014, but from 2000 to 2013 productivity improved 2.1% annually and that includes the recession of 2008-2009. One explanation for the expectation of lower productivity gains is that there have been no significant technology breakthroughs in the last several years, as Robert Gordon pointed out.
The major contributor to the favorable third quarter productivity number was a decrease in the number of hours worked which dropped by the most in six years as a result of an 18% decline in the number of people working for themselves and not picked up in the surveys. There has been a lot of interest in the importance of the “gig economy” where people get paid for performing tasks but do not have a formal job. Many younger people like the freedom and independence of this work and are willing to give up the structure and benefits of traditional employment to engage in work that conforms to their desired lifestyle. It is hard to assess the long-term impact this phenomenon will have on the productivity data.
The equity market is very much aware of the benefits of producing profits with relatively few employees. Some of the best performing stocks have a very high enterprise value to employee ratio. According to Strategas Research, examples include Facebook (ticker: FB ) with an enterprise value (EV) of $285 billion and 9,200 employees, for a ratio of 31, Visa ( V ) with an EV value of $185 billion and 9,500 employees and a ratio of 20 and Netflix ( NFLX ) with an EV of $46 billion, 2,450 employees and a ratio of 19. We have transitioned to a knowledge-based economy where the computer plays an important role from a manufacturing economy where labor was key to output. There are two important implications of that change. The first is that an entrepreneur can create a very valuable company in a relatively short period of time; the second is that some of the most exciting companies get the job done with relatively few workers.
In some cases they do so while displacing the work done by competitors who employ many more people. Compare the companies above with more worker-intensive examples like Gap ( GPS ) with an EV value of $11 billion and 141,000 employees for a ratio of .08, and Yum! ( YUM ) with an EV of $34 billion and 537,000 employees for a ratio of .06.
In terms of productivity, assessing the impact of technology is hard. There is no question that the cell phone and the computer have made us more productive. Many of us can work effectively away from the office in any location. There is a question as to whether time spent on Facebook is productive, entertaining or a distraction. In any case some of the new, innovative companies like Uber and Airbnb have productivity characteristics that are probably not accurately reflected in the reported statistics.
What we do know is that thousands of jobs in manufacturing and services have been eliminated by technology. This has resulted in favorable productivity figures over the last fifty years and sent profit margins to an all-time high, allowed the stock market to recover and increased the perception of inequality. Both corporate profitability and the standard of living are tied to productivity. If productivity is being properly measured and is, in fact slowing, it will have a profound impact on the future outlook for the economy and the financial markets.
Wien is vice chairman of Blackstone Advisory Partners, where he acts as a senior advisor to both Blackstone and its clients in analyzing economic, social and political trends.
Fourth Turning - Our Rendezvous With Destiny
By: The Burning Platform
In Part 1 of this article I discussed the catalyst spark which ignited this Fourth Turning and the seemingly delayed regeneracy. In Part 2 I pondered possible Grey Champion prophet generation leaders who could arise during the regeneracy. In Part 3 I focused on the economic channel of distress which is likely to be the primary driving force in the next phase of this Crisis. In Part 4 I assessed the social and cultural channels of distress dividing the nation. In Part 5 I examined the technological, ecological, political, military channels of distress likely to burst forth with the molten ingredients of this Fourth Turning, and finally in this final part, our rendezvous with destiny, with potential climaxes to this Winter of our discontent.
We are now in the seventh year of this Fourth Turning. A famous quote from the seventh year of the last Fourth Turning portended the desperate, bloody and ultimately heroic trials and tribulations which awaited generations of our ancestors. What will be our rendezvous with destiny?
"There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected. This generation of Americans has a rendezvous with destiny."
- Franklin Delano Roosevelt - June 27, 1936 - Philadelphia, PA
Our Rendezvous With Destiny
"The seasons of time offer no guarantees. For modern societies, no less than for all forms of life, transformative change is discontinuous. For what seems an eternity, history goes nowhere - and then it suddenly flings us forward across some vast chaos that defies any mortal effort to plan our way there. The Fourth Turning will try our souls - and the saecular rhythm tells us that much will depend on how we face up to that trial. The saeculum does not reveal whether the story will have a happy ending, but it does tell us how and when our choices will make a difference."
- Strauss & Howe - The Fourth Turning
The people have been permitting a small cadre of elitists, billionaire financiers, corporate chiefs, propagandist media moguls, and crooked politicians to make the choices dictating the path of our country since the 2008 dawn of this Fourth Turning. The choices they have made and continue to make have imperiled the world and guaranteed a far more calamitous outcome as we attempt to navigate through the trials and tribulations ahead. Their strategy to "save the country" by saving bankers, while selling the plan to the public as beneficial to all and essential to saving our economic system, has proven to be nothing more than the greatest wealth transfer scheme in human history.
The ruling class is deliberately blind to their own venality and capacity for evil.
They commit evil acts, not for evil's sake but to improve the world for their kind. All men have the capacity for evil, but only those with power and wealth have the ability to destroy the world in the name of their "progressive" ideology. The lust for power, immense hubris, arrogance towards the masses, and belief in utopian visions, by men portraying themselves as enlightened, have led to the deaths of millions in just the last century. The true reign of terror has yet to reveal itself, as this Fourth Turning will unleash the worst in humanity once the insipid and trivial are swept away by the cruel reality of life and death choices.
We are managed by a totalitarian regime and willingly oblige their aspirations for power, control, limitless wealth, and control over the political, social, economic, and financial levers of our society, as long as we can still facebook, twitter, text, post selfies, and generally amuse ourselves to death. Orwell's vision of a totalitarian regime where boot on the face control, repression, surveillance, torture, and endless war had failed to materialize in the U.S. over the 50 years after the publication of 1984. The vision of Aldous Huxley's Brave New World proved more accurate and is still the dominant totalitarian game plan today. The invisible government manipulating the unseen mechanisms of society, forming the habits and opinions of the masses through propaganda and silence about truth, has efficiently convinced the masses to love their servitude.
"A really efficient totalitarian state would be one in which the all-powerful executive of political bosses and their army of managers control a population of slaves who do not have to be coerced, because they love their servitude. To make them love it is the task assigned, in present-day totalitarian states, to ministries of propaganda, newspaper editors, and school teachers. Such propagandists accomplish their greatest triumphs, not by doing something, but by refraining from doing. Great is truth, but still greater, from a practical point of view, is silence about truth. By simply not mentioning certain subjects. totalitarian propagandists have influenced opinion much more effectively than they could have done by the most eloquent denunciations, the most compelling of logical rebuttals." - Aldous Huxley - 1946 revised foreword to Brave New WorldAs the decade's long debt fueled economic expansion petered out at the turn of this century, with average Americans experiencing an ongoing fifteen year recession, punctuated with multiple booms and busts created by the Wall Street owned Federal Reserve, a more Orwellian totalitarianism has begun to raise its ugly boot. As the exponential increase in debt reached its zenith and economic progress for the masses stalled, the ruling class embraced Orwell's belief that once a society built upon hedonistic principles and "good times" loses its vitality, the ruling class would need to invoke government morality, patriotic fervor towards state mandated enemies, a quasi-religious belief in governmental omnipotence, and restrictions upon the freedoms and liberties documented in the U.S. Constitution.
The 9/11 attacks marked the turning point for totalitarianism in America. Their lust for power can no longer be sustained by using suggestion to convince the masses to love their servitude, but will require the truncheon, military hardware, surveillance technology, more prisons, and physical intimidation of the masses to maintain the status quo. We are in the midst of experiencing the worst of Huxley and Orwell's dystopian nightmares.
Fourth Turnings are not finished portraits, but a canvas upon which the colors of history are painted. The specific events, timing, duration, and outcomes are not knowable or predictable in advance, but the reaction and mood of generational cohorts to the events are predictable and consistent throughout history. Anyone who denies the dramatic mood change in the country since 2008 and the deepening crisis mindset engulfing the world is either a member of the existing establishment or on their payroll. Denial and propaganda will not reverse the tide as a tsunami of consequences will sweep away the existing social order and replace it with something different. It may be better or worse, and our choices during the next decade will matter.
Strauss & Howe pondered four possible outcomes to this Crisis:
- It could mark the end of man. It could be an omnicidal Armageddon, destroying everything, leaving nothing.
- It could mark the end of modernity. The Western saecular rhythm - which began in the mid-fifteenth century with the Renaissance - could come to an abrupt terminus.
- It could spare modernity but mark the end of our nation. It could close the book on the political constitution, popular culture, and moral standing that the word America has come to signify.
- It could simply mark the end of the Millennial Saeculum. Mankind, modernity, and America would all persevere. Afterward, there would be a new mood, a new High, and a new saeculum. America would be reborn. But, reborn, it would not be the same.
They are also inherently kind, generous, courageous and capable of great feats. The future of our country has hung by a thread during the three previous Fourth Turnings, on the snow covered fields at Valley Forge, at the stone wall in Gettysburg, and on the blood soaked beaches in Normandy. The time will come when the future of our country will be determined by the actions of a few.
One of the crucial problems we face is the inevitable fact positions of power in our society tend to be filled with psychopathic narcissists whose desire for control, ability to manipulate others into trusting them using charisma, lack of remorse or guilt for their lawless acts, and belief in their own infallibility, create a society with no moral boundaries, no truth, no hope, and no sense of right and wrong.
The psychopaths occupy key positions in Washington D.C., on Wall Street, on Madison Ave., within the military, operating the Department of Homeland Security, running think tanks, in corporate board rooms. They count amongst them media moguls, politicians, central bankers, regulators, CEOs, generals, policemen, religious leaders, and shadowy billionaires, who are meticulous in planning their crimes, with contingency plans when their malevolent deeds come unraveled.
The systematic pillaging of the world's wealth by the chosen few is a highly organized strategy designed to offer few clues to the masses regarding its coordination, scope and malicious intent.
The psychopathic ruling class is following a blueprint to enslave the masses in debt, while they fulfill their narcissistic fantasies of domination, control, power and wealth. The people are just pawns in their game of chess, disposable and interchangeable. These people give no pause in sacrificing the lives of millions to achieve their ambition of ruling the world.
We now enter the most dangerous phase of this Fourth Turning. Whether the next financial implosion leads to war or the next war leads to a financial implosion, the consequences will be far reaching and destructive. I see the chances of a unified country choosing shared sacrifice to fight a common foe as almost nil. The eight year reign of Barack Obama drastically increased the divisiveness and mistrust within our borders and around the world.
His failed presidency has left the nation significantly worse off economically, with trillions in new debt added, with more unfunded liability promises totaling tens of trillions added to the $200 trillion bill for future generations. Political, race, religious, generational and wealth divides have grown to cavernous levels, with virtually no chance of compromise or healing. The two leading candidates for the presidency, Hillary Clinton and Donald Trump, promise to divide the country even further if elected.
I believe the Party realizes their game plan since 2008 has failed to revive the U.S. economy, exacerbated the failed socialist experiment in Europe, laid bare the complete and utter failure of quantitative easing in Japan, and as the globalization tide has receded revealed the epic levels of mal-investment in China. The thirty five year delusionary conviction that debt could sustain consumer societies perpetually is coming to its inevitable conclusion.
As more and more debt has been required just to maintain a declining standard of living for the average household, the unsustainability of this paradigm has come into full view. It now appears the contingency plan of the Party is a global war to cull the herd, further enriching the arms dealers and the financiers of war. Politicians around the world have been tasked with stirring patriotic fervor amongst the masses against terrorists - domestic and foreign - and the new axis of evil - Russia and China.
The world is already on the precipice of war, as the situation in Syria and the Ukraine deteriorates. The requirements of alliances and treaties would require a global war if a treaty member is "attacked" or a false flag event is staged to initiate hostilities. With the Chinese economy poised for a debt conflagration destined to be the world's next Lehman moment, the spark which unleashes an inferno of debt going bad across the globe will lead to war.
Once the Rubicon is crossed, there will be no turning back. With Europe already teetering under an unpayable debt burden, enormous unemployment, and now hordes of Muslims invading their lands from the Middle East; oil producing countries undergoing a profound negative economic shock from $40 oil; and countries dependent upon U.S. and European consumption to sustain their mal-investment racked economies; politicians and bankers see war as their last resort for maintaining the status quo.
When the dominoes of debt begin to topple, a global depression will ensue, leading to an enormous surge in unemployment, skyrocketing budget deficits, intensifying currency wars, plunging global trade, and a final discrediting of central bankers and puppet politicians around the world. Civil unrest will unfold in urban enclaves across the U.S. and around the world. The police state will attempt to crush civil disturbances, but if they go too far, a backlash from heavily armed Americans will be in the offing.
The militarization of local police will inflame the situation. If race riots in the urban areas spread to the more rural domain of white America, the animosity created during the Obama years would result in much bloodshed. The elites living in NYC, Washington D.C., and California will insist upon an overwhelming Federal response to the chaos. States occupied by more liberty minded citizens and governors may well resist Federal interference, setting in motion secession scenarios and adding fuel to the fire of civil disarray.
In the midst of economic collapse, plunging stock markets, swelling unemployment rolls, surging home foreclosures, skyrocketing bad debt losses, avalanche of bankruptcies, and chaos in the streets, how will psychopaths controlling our political and financial systems react? Their immense egos, belief in their own brilliance, arrogance, disregard for the consequences of their actions, lack of empathy for mankind, and hubris will lead them to gamble it all on war.
Any attempt to conscript young people to fight wars on behalf of corporations and bankers will potentially be met with armed resistance from people who have seen the truth, as the Deep State veil is pierced. That will leave the psychopaths with only the current volunteer soldiers, their high tech weaponry, cyber-warfare, and most alarmingly their nuclear arsenal. The toxic mixture of human malevolence, miscalculation, bad luck and technological sophistication could lead to Oppenheimer's nightmare.
"Now I am become Death, the destroyer of worlds."
Strauss & Howe pondered four possible big picture outcomes to this Fourth Turning. The first two are almost too horrendous to ponder, with the world destroyed in an Armageddon scenario or an end to modernity, with a complete collapse of science, culture, politics, and society. They are not the most likely scenarios, but their probability is certainly not zero. That leaves the remaining two likelihoods - the end of our nation in its current form or a successful resolution of the Crisis with a rebirth of the nation and a new High.
The reason I cannot fathom a positive resolution of this Crisis is the deeply entrenched corruption and diseased institutions controlling the levers of society. The system cannot be reformed from within and must crash, with the existing social order replaced. There is no gallant leader poised to bring the country back to its former glory. The Roman Empire lasted twelve generations, the Soviet Union one generation, and I fear the American Empire will not survive until its fourth generation in its current form.
So the question remains, what form will our nation take at the end of this Fourth Turning?
Rome is still a city in Italy. The people who lived under the Soviet empire still live their lives today. The U.S. could become a drastically reduced nation state, no longer policing the world, with a lowered standard of living, less debt, less government, a currency based on the productive assets of the nation, an economy driven by savings and investment, small local banks that take deposits and lend money to businesses and people, and absolutely no Federal Reserve controlling the currency and interest rates of the country. A desperate public could also turn to a dictator who promises them even more safety and security, with the loss of all freedom and liberty. Or the country could break-up into a multitude of regional countries with like-minded values, economic interests, and beliefs.
I don't know what the future holds for my country, my family, or the world. I do know our individual choices over the coming decade will matter. I do know we are in a fight for the survival of humanity where good people must prevail or evil will triumph. Victory will require individual and communal courage. The fight will require perseverance, determination, foresight, intelligence, and a willingness to die for the ideas of liberty and freedom.
Whether you lead or follow, the only way to bring the country back to its founding principles and restoration of the U.S. Constitution is to act with honesty, integrity, and honor. Leading by example rather than words, while setting high moral standards for your actions, will inspire others to do the same. It may not seem so at this moment, but the very survival of our country is at stake. There are no guarantees and believing God will always be on our side is wishful thinking. The glory or ruin of our country will be decided in the next decade and we will have a say in that outcome.
"Eventually, all of America's lesser problems will combine into one giant problem. The very survival of the society will feel at stake, as leaders lead and people follow. The emergent society may be something better, a nation that sustains its Framers' visions with a robust new pride. Or it may be something unspeakably worse. The Fourth Turning will be a time of glory or ruin.
History offers no guarantees. Obviously, things could go horribly wrong - the possibilities ranging from a nuclear exchange to incurable plagues, from terrorist anarchy to high-tech dictatorship. We should not assume that Providence will always exempt our nation from the irreversible tragedies that have overtaken so many others: not just temporary hardship, but debasement and total ruin. Losing in the next Fourth Turning could mean something incomparably worse. It could mean a lasting defeat from which our national innocence - perhaps even our nation - might never recover."
- Strauss & Howe - The Fourth Turning
a time to be born and a time to die,
a time to plant and a time to uproot,
a time to kill and a time to heal,
a time to tear down and a time to build,
a time to weep and a time to laugh,
a time to mourn and a time to dance,
a time to scatter stones and a time to gather them,
a time to embrace and a time to refrain,
a time to search and a time to give up,
a time to keep and a time to throw away,
a time to tear and a time to mend,
a time to be silent and a time to speak,
a time to love and a time to hate,
a time for war and a time for peace.
(Ecclesiastes 3:1-8, NIV)
The World’s First Cashless Society Is Here - A Totalitarian’s Dream Come True
Central planners around the world are waging a War on Cash. In just the last few years:
• Italy made cash transactions over €1,000 illegal;
• Switzerland proposed banning cash payments in excess of 100,000 francs;
• Russia banned cash transactions over $10,000;
• Spain banned cash transactions over €2,500;
• Mexico made cash payments of more than 200,000 pesos illegal;
• Uruguay banned cash transactions over $5,000; and
• France made cash transactions over €1,000 illegal, down from the previous limit of €3,000.
The War on Cash is a favorite pet project of the economic central planners. They want to eliminate hand-to-hand currency so that governments can document, control, and tax everything.
This is why they’re lowering the threshold for mandatory reporting of cash transactions and, in some instances, simply making it illegal to pay cash.
In the U.S., central planners ratchet up the War on Cash every time the government declares a made-up war on something else…a war on crime, a war on drugs, a war on poverty, a war on terror…
They all end with more government intrusion into your financial affairs.
Thanks to these made-up wars, the U.S. government is imposing an increasing number of regulations on cash transactions. Try withdrawing more than $10,000 in cash from your bank.
They’ll treat you like a criminal or terrorist.
The Federal Reserve is at the center of the War on Cash. Its weapons are inflation and control over the currency denominations.
Take the $100 note, for example. It’s the largest bill in circulation today. This was not always the case. At one point, the U.S. had $500, $1,000, $5,000, and even $10,000 notes. But the government eliminated these large notes in 1969 under the pretext of fighting the War on Some Drugs.
Since then, the $100 note has been the largest. But it has far less purchasing power than it did in 1969. Decades of rampant money printing have inflated the dollar. Today, a $100 note buys less than a $20 note did in 1969.
Even though the Federal Reserve has devalued the dollar over 80% since 1969, it still refuses to issue notes larger than $100. This makes it inconvenient to use cash for large transactions, which forces people to use electronic payment methods.
This, of course, is what the U.S. government wants.
It’s exactly like Ron Paul said: “The cashless society is the IRS’s dream: total knowledge of, and control over, the finances of every single American.”
Policymakers or Central Planners?
On stories related to the War on Cash, you may have noticed that the mainstream media often uses the word “policymakers,” as in “policymakers have decided to keep interest rates at record low levels.”
When the media uses “policymakers,” they are often referring to central bank officials. It’s a curious word choice. As far as I can tell, there is no difference between a policymaker and central planner.
Most people who want to live in a free society agree that central planning is not a good idea. So the media uses a different word to put a more neutral spin on things.
To help you think more clearly, I suggest substituting “central planners” every time you see “policymakers.”
The World’s First Cashless Society
In 1661, Sweden became the first country in Europe to issue paper money. Now it’s probably going to be the first in the world to eliminate it.
Sweden has already phased out most cash transactions. According to Credit Suisse, 80% of all purchases in Sweden are electronic and don’t involve cash. And that figure is rising.
If the trend continues - and there is nothing to suggest it won’t - Sweden could soon be the world’s first cashless society.
Sweden’s supply of physical currency has dropped over 50% in the last six years. A couple of major Swedish banks no longer carry cash. Virtually all Swedes pay for candy bars and coffee electronically. Even homeless street vendors use mobile card readers.
Plus, an increasing number of government restrictions are encouraging Swedes to dump cash. The pretexts are familiar…fighting terrorism, money laundering, etc. In effect, these restrictions make it inconvenient to use cash, so people don’t.
So far, Swedes have passively accepted the government and banks’ drive to eliminate cash. The push to destroy their financial privacy doesn’t seem to bother them. This is likely because the average Swede places an unreasonable amount of trust in government and financial institutions.
Their trust is certainly misplaced. On top of the obvious privacy concerns, eliminating cash enables the central planners’ latest gimmick to goose the economy: Negative interest rates.
Making The Negative Interest Rate Scam Possible
Sweden, Denmark, and Switzerland all have negative interest rates.
Negative interest rates mean the lender literally pays the borrower for the privilege of lending him money. It’s a bizarre, upside down concept.
But negative rates are not some European anomaly. The Federal Reserve discussed the possibility of using negative interest rates in the U.S. at its last meeting.
Negative rates could not exist in a free market. They destroy the impetus to save and build capital, which is the basis of prosperity.
When you deposit money in a bank, you are lending money to the bank. However, with negative rates you don’t earn interest. Instead, you pay the bank.
If you don’t like that plan, you can certainly stash your cash under the mattress. As a practical matter, this limits how far governments and central banks can go with negative interest rates.
The more it costs to store money at the bank, the less inclined people are to do it.
Of course, central planners don’t want you to withdraw money from the bank. This is a big reason why they want to eliminate cash…so you can’t. As long as your money stays in the bank, it’s vulnerable to the sting of negative interest rates and also helps to prop up the unsound fractional reserve banking system.
If you can’t withdraw your money as cash, you have two choices: You can deal with negative interest rates...or you can spend your money. Ultimately, that’s what our Keynesian central planners want.
They are using negative interest rates and the War on Cash to force you to spend and “stimulate” the economy.
If you ask me, these radical and insane measures are a sign of desperation.
The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.
Most people have no idea what really happens when a currency collapses, let alone how to prepare…
By: Steve Saville
If you listen to the top central bankers of the world talk for long enough you will come away with the impression that central banks are attempting to give us "price inflation", as if rising prices were beneficial. However, nobody wants to pay more for stuff. In fact, rational people prefer to pay less, not more. Therefore, when central banks claim to be giving us "price inflation" what they are really doing is stealing the "price deflation" from which we would otherwise benefit.
We are told that a general expectation of rising prices is important, because if people start expecting prices to be lower in the future then they will curtail their spending in the present.
This, apparently, will lead to an economically-disastrous downward spiral in which the general expectation of lower prices leads to reduced spending and reduced spending leads to even lower prices.
The economic 'logic' contained in the idea that expectations of higher prices are needed to promote present-day spending explains why companies like Apple can never sell anything.
After all, who in their right mind would buy an Apple product today when they can be sure that a better product will be available at a lower price by this time next year?
And just imagine how bad it would be if prices trended lower throughout the entire economy the way they do in the computing and mobile communications industries. There would be almost no spending anywhere! That operation to save your life that you have scheduled for next week could be postponed until healthcare charges have declined to much lower levels. And all of the eating you were planning on doing over the next few months could be delayed indefinitely in anticipation of more attractive food prices. And there would never be a good reason to buy a house or a car because each year you did without these things, the more of a bargain they would become and the better off you would be for not having bought earlier.
Also, try to imagine how bad it must have been before there were central banks to guarantee a continuous rise in the general price level. If expectations of rising prices are needed to promote spending and growth, then in pre-central-bank days, when money often increased in purchasing-power from one year to the next, there must have been almost no spending anywhere in the economy.
That is, there must have been relentless economic contraction. Thankfully, we now have people like Ben Bernanke, Janet Yellen, Mario Draghi and Haruhiko Kuroda to save us from such a predicament.
The point that hopefully hasn't been totally obscured by my sarcasm is that central bankers are thieves. They are stealing our deflation. It isn't fair to compare them with common burglars, though, because common burglars don't claim to be doing you a favour while they make off with your valuables.
Can the Islamic State Unify Europe?
Thanksgiving With a Side of Public Distrust
Americans may be thankful at home but are unhappier than ever with Washington.
By William A. Galston
On the eve of Thanksgiving, Americans are not in a particularly thankful mood. That’s the conclusion I draw from the latest Pew Research center study of our attitude toward government.
Trust in government is near historic lows. Yet our expectations from government are very high.
Diminished trust and elevated hope yield the dominant sentiment of this presidential election year—not anger, but rather profound frustration.
The research I’ve just summarized applies to both political parties. It isn’t exactly news that Democrats see a major role for government in most areas. But so do majorities of Republicans in 10 of the 13 areas covered in Pew’s study. Nor is it news that 57% of Republicans are frustrated with government. But so are 59% of Democrats.
Americans are critical of their elected officials. Only 23% say that our leaders care what people like me think; only 22% see these officials as putting the country’s interests ahead of their own; only 19% think that they try hard to stay in touch with the voters. Overall, Americans regard their elected officials as intelligent but selfish and dishonest.
That may be why 55% of Americans say they could do a better job solving the country’s problems than the people they elected to do that job, even though 56% believe that most big issues facing the country lack clear solutions. People with the least education, a high-school diploma or less, are most likely to express confidence that they could do better than their representatives in Washington.
Public disapproval of political parties has risen as well. Fifty-nine percent of Americans say that the Republican Party is too willing to cut government programs, even when they work. The same percentage also say that the Democratic Party too often sees government as the only way to solve problems. Not surprisingly, the share of Americans expressing disapproval of both political parties has quadrupled since 2002 and now stands at 24%.
But the public is doing more than looking for individuals and institutions to blame. In 2015 Americans are not only critical, but also self-critical. As recently as 2007, 57% expressed confidence in the wisdom of the people when it comes to making political decisions. Today, only 34% do. And the loss of self-confidence is almost identical between Republicans and Democrats.
There’s another convergence across the partisan divide: On the issues that matter most to them in politics, both sides see themselves as losing more than winning. Seventy-nine percent of Republicans think they are drawing the short straw. But so do 52% of Democrats, despite historic liberal victories on matters ranging from health insurance to same-sex marriage. These sentiments may help explain the rise of Bernie Sanders as well as Donald Trump.
This oddly shared sense of victimization goes hand-in-hand with deep partisan divisions. Fifty percent of Democrats regard government as their friend, compared with only 21% of Republicans. Seventy-one percent of Republicans think government is doing too many things better left to businesses and individuals, versus 29% of Democrats. Eighty percent of Republicans want a smaller government providing fewer services; only 31% of Democrats agree.
Sixty percent of Republicans attribute America’s success to its principles; 66% of Democrats say that our country’s ability to change is more responsible. Fifty-nine percent of Republicans like elected officials who stick to their positions; 60% of Democrats prefer leaders who make compromises.
When it comes to the conduct of politics, it seems, Democrats are from Venus, Republicans from Mars.
On one key point there is emphatic agreement: Seventy-nine percent of Americans see their country as more politically divided than in the past. (In January 2009, 46% did.) Only 15% expect these divisions to diminish over the next five years. Polarization may help explain why only 45% of Americans express a lot of confidence in their country’s future.
The people haven’t entirely given up hope. Despite their frustration and lack of trust, 50% believe that ordinary citizens can influence government if they make the effort, and 58% agree that the most traditional way of doing so—casting their vote—gives them some say in government. People who believe in their own political efficacy are significantly more likely to report confidence in the future.
After the buoyant optimism of the 1990s, the 21st century has come as a deep disappointment. When I look at the state of our country and of the world, I find it hard to maintain a positive outlook.
That’s why, this holiday, I’m lowering my gaze to take in the nearest things. When I stare, endlessly mesmerized, at the pictures of my grandsons, my soul swells with joy, and I am freed to imagine a better future.
That’s what I’m giving thanks for this Thanksgiving. I doubt that I’ll be alone.
Our Reaction to Terrorism Is More Dangerous Than the Terrorists
From crazed demagogues like Donald Trump to uncoordinated, strategically incoherent, leaderless counterstrikes, we're spiraling toward a riskier tomorrow.
By David Rothkopf
Donald Trump could not do more to aid the terrorists of the Islamic State were he to put on a suicide vest and detonate himself in the lobby of one of his apartment buildings. His demagoguery and hate-mongering in suggesting that we create a national database of Muslims — or promoting the sick fantasy that on 9/11 crowds of Muslims in New Jersey celebrated the destruction of the Twin Towers — is precisely the kind of reaction on which the extremists were counting to compound the impact of their depravity. It stokes the fears of Americans and alienates Islamic audiences worldwide. And having the leading candidate of one of America’s two principal political parties promoting such ideas suggests that they are not his alone but representative of the view of a great cross-section of the American people.
God help us if they do.
Trump’s words are the most vile and ignorant sort of pandering.
Trump’s words are the most vile and ignorant sort of pandering. They test the bounds of free speech because they are, in fact, a kind of hate speech designed to turn one portion of the populace against another. They are also profoundly un-American, ignoring the values of openness and tolerance that are fundamental foundations of our national greatness.
Trump has undergone a metamorphosis as a candidate from being a joke to a curiosity to a phenomenon to a full-fledged force with a chance to win. That he now seems to be unwittingly playing directly into the hands of terrorists by producing just the kind of rhetoric that is certain to stir outrage across the Islamic world and drive recruitment efforts upward — as he clearly has not concerned himself with either the lessons of past attacks or the moral implications of his proposed plans — is maybe the most disturbing development of this distended, perverse campaign so far.
Nonetheless, Trump’s actions are even more unsettling because they are symptomatic of a broader, deeper, and much more profound problem. Terrorism has, since 9/11, mushroomed into a greater global threat than it has ever been before — and it has been a problem in one form or another since the dawn of history. But as bad as terrorism is, our reactions to it have triggered a kind of worsening risk spiral that has made the world a much more dangerous place. Not only are we playing into the terrorists’ hands, and thus giving them needed momentum, the countries of the world are reacting in such an uncoordinated and even conflicting fashion that new geopolitical fissures are emerging that are far more worrisome than any strike or campaign extremists could orchestrate.
In 2002, the year after 9/11, there were fewer than 1,000 deaths from terrorist attacks worldwide, according to the U.S. State Department. This past year, that number was more than 30,000. Al Qaeda delivered a shocking blow to the United States in 2001, but it was a small organization, incapable of repeating such an attack. Today, the terrorists of the Islamic State have changed the game, controlling territory in Iraq and Syria, recruiting fighters globally, and essentially offering the world’s first open-source terrorist organization. Download a flag, embrace the name, and you are basically in. As open-source enterprises in other sectors have found, this is a great force multiplier. Suddenly, we are confronted with a “group” capable of brutality across many countries, and the threat posed by them and other terrorist groups that align with them or seek to rival them (see the recent New York Times article on the competition between al Qaeda and the Islamic State) only seems to be growing.
The problem, however, has been compounded since 9/11 by the spasmodic, impulsive, ill-considered, and generally uncoordinated response of major powers and victims of extremism to terrorist attacks. The invasion of Iraq was the alpha error in this respect. It was the wrong mission against the wrong country for the wrong reasons that produced, not surprisingly, the wrong outcomes.
But since then we have seen a stunning lack of strategy, coordination, or even coherent thinking about how to deal with the threat. We have had the “Obama doctrine”; a “light footprint”; the employment of a surgical approach when force was needed; massive overreach on the surveillance front; rhetoric about restraint; confusion about red lines; tactical half-measures; and strategic incoherence. In the Middle East, we continue to see a wide variety of approaches linked to some variation on the “enemy of my enemy is my friend” doctrine and a kind of national hierarchy of hatreds and fears.
This is complicated by the proliferation of terrorist groups with conflicting agendas. So, in Syria, we have the real possibility that Bashar al-Assad’s regime helped stoke the fires of the Islamic State through prisoner releases, etc., to justify its cause — which seemed to have worked to some degree as we now have the world’s leading powers being more patient with the Syrian strongman if he will help fight the Islamic State. We might even see, after a political deal in Damascus (which will likely create an “Assad-lite” regime after a transition period and provide amnesty for the brutal dictator currently in power), an alliance between that regime and major powers and an al Qaeda spinoff, al-Nusra Front, to work to defeat the Islamic State.
Key to the anti-Islamic State alliance will be the Kurds, who themselves are locked in a struggle with another key player, Turkey. The Turks are, of course, the same key player that this week shot down a Russian fighter jet. That a NATO nation could shoot down a Russian fighter plane and the story would be overshadowed by the hydra-headed threats of the current global security landscape says much about where we are.
The Russians, of course, are ostensibly in Syria to fight extremists with us but are really there to defend Assad or whatever successor regime they may accede to. The Iranians are there doing likewise. The United States is not allied with these powers, as we regularly say, but if our primary immediate national security objective is degrading and ultimately defeating the Islamic State these days, the Russians and the Iranians are our most important allies. Even though the Iranians are themselves one of the world’s most important state sponsors of terrorism and even though the Russians are actually benefitting from the chaos in Syria, because refugee flows from there to Europe are stimulating the rise of the European right, a group that is likely to weaken the EU as it gains power — which is in Moscow’s interest.
The Europeans are all over the place on these issues. They are united in outrage at the Paris attacks and working together to stem related terrorist threats like those which emerged in Brussels this past week. But whereas the French are eager for action (except to the extent that it involves ground troops), their neighbors on the continent are not. European attitudes toward refugees are equally muddled.
There is only one constant: Almost every response European leaders and opinion-shapers have had has exacerbated the problem. Hate speech empowers extremists. So, too, do anti-refugee politics that make ethnic tensions worse. So, paradoxically, do symbolic airstrikes without methodical follow-up on the ground. So, too, do apparent divisions among the nations of the world’s leading military alliance about how to handle these situations or even about who the enemy is. (This last problem is worse still among America’s allies in the Middle East.)
That is to say nothing of the conflicting views toward terrorism in places like Africa (see Mali or Boko Haram’s continuing depraved run through Nigeria or the growing extremist threats in the Horn of Africa or the likely consequences of a further meltdown in Libya) or Asia, where China, India, Indonesia, and other nations face similar threats with differing approaches.
In my view, we have long overstated the threat posed by terrorists.
In my view, we have long overstated the threat posed by terrorists. This threat has not been strategic or existential. Creating an analogy between the “War on Terror” and past global conflicts (like the Cold War or World War II) was a great error. We have devoted too many resources to this issue, and the opportunity costs associated with our being distracted by it have been enormous.
Further, overreaction is precisely the wrong response to terrorism. And it’s exactly what terrorists want. As noted at the outset, it does the work of the terrorists for the terrorists.
Focused, purposeful retaliation, sound intelligence and police work, national vigilance and a resolve not to let extremists change our way of life or control of our airwaves, fears, or national debates are the essential elements of a wise reaction.
But such moderate reactions have not been the norm. We have had the worst possible combination of overreaction, misreaction, underreaction, and a lack of both international leadership and coordination. The result has been the vastly more complicated and dangerous landscape we face today. And whereas I believe, even in its current state, the threat posed by terrorists is considerably less than much hysterical political rhetoric and understandable post-attack emotion would suggest, I am now concerned that the compound effects of our reactions to terrorism are creating a genuinely perilous situation warranting the urgent attention of global leaders.
The problem stems not from the terrorists directly but from the conflicts and instability that are being left in the wake of our responses to their attacks. Invading Iraq was step one. Pulling out too quickly compounded it. Failure to address the issues of Sunni representation in that country compounded it and led to the rise of the Islamic State. Failure to address the problems in Syria when they were early enough to contain compounded it. Belated, uncoordinated halfway measures against the Islamic State were another problem. Failure to stand up to allies funding extremists compounded it.
Conflicted policies in Afghanistan did too. Conflicting policies among allies on issues like Mohamed Morsi’s government, the Muslim Brotherhood, the Iran nuclear deal, the future of the Assad regime, the situation in Libya, the situation in Yemen, inaction in the face of spreading threats in Africa, and a host of other related problems now have us in a grave situation. In the Middle East, Syria, Iraq, Yemen, and Libya are in chaos. Lebanon and Jordan are bending under the weight of the refugee burden. Refugee flows are posing a major political challenge in the EU. Nationalists and political opportunists are inflaming the situation and further weakening alliances with their rhetoric.
There is very little alignment and very serious conflict among a wide-ranging group of powers that are allegedly in some areas working together. This list of collaborators at risk of coming to blows with one another includes the United States, Russia, Iran, Turkey, Saudi Arabia, the Gulf states, Israel, France, Iraq, and others.
I once referred to the risks associated with the destabilization of the region as echoing the problems in Europe prior to World War I when complexity and miscommunication led to a conflagration. “The Balkans on steroids” is what I called it. The thicket of interconnected problems has only grown more complex and thorny. The more we struggle with it, the worse the problems become for us.
This is the kind of problem that comes from a lack of leadership on the international stage. As the world’s richest and most powerful nation and the historic leader of its largest alliances, the United States bears a special responsibility in this regard — but it is not alone. This is a moment when the world’s leading powers need to work toward greater collaboration, set clearer priorities, and focus on the long-term issues (many economic and social in nature) associated with stabilizing the regions at risk from which these spreading problems are emerging.
It was very heart-warming in the wake of the Paris attacks to see so many people take to social media with new decorations for their Facebook and Twitter sites — tiny French flags were very popular. Setting aside for a moment the fact that similar displays did not crop up after the Beirut or Mali attacks, it is touching that people seem to care and want to show solidarity. The problem is that we have anything but solidarity among our leaders.
And if we do not find our way to better coordination and a focus on effective collaboration and common goals soon, we are going to be inviting a further deterioration of the global situation of the type we have witnessed over the past decade-and-a-half. What is more, we will be inviting the kind of accidental conflict that comes from situations like these, situations in which everyone wants to take action but no one is leading.
The False Perception of Living in a World of Infinite Credit
By: Gordon Long & Alasdair Macleod
Alasdair Macleod began his career as a stockbroker in 1970 on the London Stock Exchange.
Through experience he rapidly learned about things as diverse as mining shares and general economics, within nine years he had risen to become senior partner of his firm.
Subsequently, he has held positions at director level in investment management, as a mutual fund manager, and also at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, he has been de-mystifying macro-economic events for his investing clients. From the accumulation of his experience he concluded that unsound monetary policies are the most destructive weapon governments' use against people.
"I want to destroy this business of printing money as the solution to everything."Mr. Macleod strives to educate and inform the public in layman's terms what governments do with money and how to protect themselves from the consequences.
What is Austrian Economics
"Prices are entirely subjective."It began with Carl Menger who was one of the 3 economics who came up with marginal theory of prices. Where Menger differed from other two was that he appreciated that prices were purely subjective. You cannot forecast tomorrow's prices because prices are determined by the consumer who always has the option to buy.
"It overturns the cost theory of prices which is what Adam Smith believed in. It is completely irrelevant."The law of the markets, the reason you and I work is we go out to earn something. We need to transform our skills into consumption. In a free market economy we have people who use their skills to earn money for consumption; the intermediary in this is money. Money is nothing more than the temporary storage of someone's labour that is transferrable into goods. If you understand this you will see how unsound money is bad for an economy. The idea by printing money which runs a budget deficit that a government can generate economic growth is nonsense.
"In regards to investing one thing that is desperately important to understand is that asset prices always refer back to their production."This applies across every asset that you buy. If you see that the prices of assets have moved away from their underlining productive value then you know that you are in a bubble.
A World of Infinite Credit
"The world post 1970's is a completely different world from before the 1970s."
After 1981 rates had been lifted to a point which stopped the relationship between businesses and savers. This is what killed the price inflation up until the early 90s. Banks not only had the liberty to print credit but also to monopolize and control securities markets, if you combine these two thongs together; it is basically a money making machine, which is what we have today.
The end point in credit comes from the logical conclusion of that development. At every cyclical peak the level of interest rates which collapse the economy gets lower. The reason it gets lower is because this combination of credit control in securities markets does nothing more than just pumps up the level of debt. The overhang of debt means the rise in interest rates to stop the economy from getting out of control is getting lower. You cannot raise interest rates by more than one or two percent without serious economic dislocation.
Negative Nominal Interest Rates
"The effect of negative interest rates would be to throw every commodity into backwardation."
There is no doubt that negative interest would drive up inflation, or rather, it would lower the purchasing power of said currency. Negative interest rates for the reserve currency in which all commodities are priced have a severe risk which we will generate runaway inflation, but in fact it is a collapse. In order to make negative interest rates work you need to ban cash entirely. I have no doubt at all that that is the underlying reason why there is so much emphasis on anti-money laundering.
The FMQ Concept
"The fiat money quantity is the amount of money that would have to be redeemed for gold that once was deposited."
The fiat money quantity was put together to try to quantify the amount of money that Is being issued in return for the gold that we originally gave to our banks which the banks then handed to the federal reserve.
The reason for doing this is to try to get an idea of how much money is not only in public circulation, but also not in public circulation and potentially in public circulation. From looking at the Feds balance sheet and considering other factors like repos and reverse repos, we see that the growth curve has taken off; and in the very broadest sense we have monetary hyperinflation.
China’s bond market
Debt issuance booms despite a wave of defaults
CHINA’S domestic bond market has never been riskier. It was only last year that it suffered its first default. This year at least six companies have defaulted. The miscreants are a diverse lot, including a beverage bottler, a solar-panel maker and a cement company. As economic growth grinds lower, defaults will inevitably rise.
A gloomy outlook of this kind would normally lead investors to demand a premium before buying bonds. Instead, they have lapped them up, making it cheaper for China’s companies to borrow. Bond issuance has boomed this year, reaching almost 12 trillion yuan ($1.9 trillion) so far, up from the record 7.7 trillion sold in all of 2014, according to Wind Information, a data provider. This has prompted warnings that, much like the stockmarket earlier this year, China’s bond market is swelling into a bubble.
Banks accounted for almost all lending in China until a decade ago. Today, for every five yuan of loans companies take out, they also finance themselves with one yuan of bonds. That has made China the world’s third-biggest bond market, behind America and Japan—a development that should help shield the economy from the expensive busts to which banks are prone.
At the moment, though, the bond market seems to be stoking risk. For most of the past five years, yields on highly rated corporate bonds were two or three percentage points higher than on government bonds of the same maturity. This year the spread has narrowed, hitting a low in early November of just 1.3 percentage points (see chart). This implies that investors think corporate bonds have become less risky, despite the proliferation of defaults.
Look at individual bonds, and signs of excess are even more obvious. Vanke is China’s biggest listed property developer and, by most accounts, a well-managed company. But the Chinese property business is going through a painful retrenchment after years of overbuilding, which suggests Vanke’s bonds are not without their risks. Yet in late September they were treated as just as safe as official issuers. Vanke sold five-year bonds at a yield of 3.5%, the same as the bonds of some provincial governments at the time.
Despite these ominous portents, many Chinese bond analysts take a sanguine view. The increase in issuance has been exaggerated by a debt swap: local governments are on track this year to replace about 3 trillion yuan of expensive loans with cheaper bonds. The average interest rate paid on outstanding debt in China has fallen from nearly 7% last year to just over 6% this year, according to Hua Chuang Securities, making it easier for borrowers to keep up with payments.
Besides, with growth sluggish, the central bank will probably keep interest rates low. Shi Lei, head of fixed-income research at Ping An Securities, expects yields to come down by as much as half a percentage point over the next year. Spreads between interest rates on corporate bonds and government ones are also starting to widen again. Their compression had been spurred by the stockmarket crash in July, when much of the money that fled stocks ended up in bonds of all ratings.
Chen Kang of SWS Research believes that now the stockmarket has rebounded, investors are starting to differentiate again between private and government-backed issuers.
Whether those government-backed issuers deserve their low yields is another question. The handful of defaults to date shows that China is willing to let some companies fail, but so far no big firms in which the central government retains a sizeable shareholding have met that fate.
Instead, those that have got into trouble have been rescued, leading investors to treat their bonds as virtually risk-free.
SinoSteel, a struggling miner and steel trader, is the latest test of this implicit guarantee. It had been due to repay bondholders some 2 billion yuan in October, but pushed the date back to December 16th. A default would shake investors’ faith in government-backed bonds—bringing some sobriety to a market that sorely needs it.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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