The American consumer’s impotent rage

People sense that service providers pay more attention to regulators than to disaffected customers
 
Matt Kenyon illustration, consumers©Matt Kenyon
 
 
Ask any American if they have lost their temper recently and there is a good chance it was on the phone to one of their service providers. Whether they were venting their spleen at a cable service company, a cell-phone operator, an airline or a health insurer hardly matters. What unites them is the impotent rage that comes from knowing how little you can do to punish the company in question.
 
There was a time when the US consumer was still king. In most service markets, however, those days are over. If you are looking for a key to the American voter’s rage, keep in mind that the consumer is the same person. Most consumers — a steadily rising share according to surveys — are prone to moments of Trumpian rage nowadays. Lashing out usually makes things worse.
 
But that is what people who feel powerless are liable to do.
 
Many people’s instinct is to blame free markets for their sense of consumer impotence. In fact, the problem stems from lack of competition. Much like in politics, where congressional boundaries are rigged in favour of incumbents, most large US service sectors are dominated by a shrinking handful of players.

Sectors where the top four companies have markedly increased their market share in the past decade — and thus their scope to treat consumers with impunity — include telecoms, information technology, transport, retail services and banking, according to a survey by The Economist. If you are still wondering why Bernie Sanders and Donald Trump did so well — taking more than 40 per cent of the two parties’ primary votes between them — both talked of how US politics is rigged. It is no accident that most Americans think the same about their economy.
 
They have sound reasons to do so. The last people to grasp that things have gone wrong are the wealthy, the well-connected and the cognitive elites, which includes half the denizens of Washington. The wealthy’s share of the economy has risen sharply since the start of the century. The share of corporate profits in the economy has also soared.
 
If you are rich you can afford what used to be normal for everyone — the privilege of interacting with human beings. Thus, high net worth individuals receive personalised banking, where your bank manager knows your name and needs. The wealthy also benefit from so-called concierge health services, which come with a human face. Many oligopolistic service providers keep clandestine lists of VIP customers who need not wade through robotic software before reaching a customer service agent. When they pick up the phone, a human answers.

Ordinary consumers, much like most voters, know there are different rules for them. They also sense that the big service providers pay more attention to Washington regulators than to their disaffected customers. It is a perfectly rational thing to do. America’s capital is where the markets are rigged, after all.

Politicians rank their priorities in much the same order. Voters come low on their list. Lawmakers devote chunks of their schedules to raising money from donors. In most districts, the voter barely matters since gerrymandering has rigged the election in favour of one or other party. Politicians with large war chests are far less likely to be challenged for their party’s nomination. The same logic leads companies to keep a strong lobbying presence in Washington.

So what can people do? As consumers very little. If United Airlines keeps bumping you off flights, you might shift your mileage account to Delta or American. But your chances of mistreatment will not fall. Ditto for those who switch their health insurance from Cigna to Aetna, or their broadband from Comcast to Verizon. Perhaps you can start a new company?
 
Alas, what goes in Silicon Valley for people seeking funding for social media start-ups does not apply to markets with high barriers to entry. America’s big four airlines might provide dismal service to most customers. But they are Olympic champions at stopping “open skies” competition.
 
Maybe you should just shout at customer representatives? That is what many people do. But it usually backfires. Besides, on the rare occasions you reach a human, they are the last people you should berate. America’s mostly outsourced contact services industry is staffed by people reading instructions from a software manual. Every minute of their time is monitored. Consumers are not just voters — they are employees too.

There are no easy ways to reduce market concentration, just as there are no easy fixes for corporate America’s grip on politics. But there are two simple ones. The first is to metastasise your consumer rage by voting for Mr Trump. This is the man who is best known to most Americans for saying “you’re fired” on television. For every problem America faces, he has a solution that is clear, simple and wrong. The second is to support aggressive antitrust action.

Since Theodore Roosevelt’s presidency, trustbusting has a great history. It could also have a great future.

Alas, no presidential nominee has yet found the conviction to champion breaking up the monopolies.

The more is the pity. Taking on the titans would not just be great populism. It would also be smart policy.


Productivity Slump Threatens Economy’s Long-Term Growth

Measure’s longest losing streak since 1979 could keep Fed from raising rates to past levels

By Ben Leubsdorf

An employee inspecting an Action Craft Boats vessel at the company's manufacturing facility in Cape Coral, Fla., on Aug. 2. Nonfarm business productivity, measured as the output of goods and services produced by American workers per hour worked, decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours increased faster than output, the Labor Department said Tuesday.


The longest slide in worker productivity since the late 1970s is haunting the U.S. economy’s long-term prospects, a force that could prompt Federal Reserve officials to keep interest rates low for years to come.

Nonfarm business productivity—the goods and services produced each hour by American workers—decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours worked increased faster than output, the Labor Department said Tuesday.

It was the third consecutive quarter of falling productivity, the longest streak since 1979.

Productivity in the second quarter was down 0.4% from a year earlier, the first annual decline in three years. That was a further step down from already tepid average annual productivity growth of 1.3% in 2007 through 2015, itself just half the pace seen in 2000 through 2007, and the trend shows little sign of reversing.

“In the short term, it’s hard to be anything other than pessimistic, just because this has been going on for so long now,” said Paul Ashworth, chief U.S. economist at consultancy Capital Economics.

Productivity is a key ingredient in determining future growth in wages, prices and overall economic output. It has slowed dramatically since the information technology-fueled boom of the late 1990s, when strong productivity gains translated into robust growth for household incomes and the overall economy.

The slowdown in recent quarters has likely been reinforced by weak business investment in new equipment, software and facilities that could help boost worker efficiency.

Over time, persistently weak productivity would weigh on American living standards by restraining the economy’s ability to grow quickly and generate higher incomes without stoking too much inflation. Already, some economists say slow productivity may be restraining wage growth.

Stagnant productivity and rising labor costs also could squeeze corporate profits, which have been under pressure from the energy sector’s downturn and other forces.

To be sure, economic growth and wages could pick up in the near term despite slumping prospects for productivity. Forecasting firm Macroeconomic Advisers on Tuesday said it expected gross domestic product, the broadest measure of goods and services produced across the economy, to expand at a 3% annual rate in the third quarter. An Atlanta Fed gauge predicted 3.7% growth. The Commerce Department last month estimated that GDP expanded at a modest 1.2% pace in the second quarter.

There are signs of acceleration in wages and income as the labor market has tightened in recent years. Average hourly earnings of private-sector workers rose 2.6% in July from a year earlier, matching the fastest annual growth since mid-2009, the Labor Department said last week. Unit labor costs at nonfarm businesses rose at a 2% annual rate in the second quarter, up from a 0.2% decline in the first three months of 2016, according to Tuesday’s report.

Fed officials will decide whether to raise short-term interest rates in the coming months based on the health of the labor market, the outlook for inflation and their assessment of risks to growth at home and overseas. A move could come as soon as mid-September; the Fed in late July said that “near-term risks to the economic outlook have diminished.”

But in the long run, slow productivity growth and other forces could keep interest rates depressed compared with levels seen in the past.



“It’s a signal that the economy is not going very fast and interest rates should stay low,” said IHS Global Insight economist Patrick Newport. “If we see no growth, which is what we’ve seen over the last year, it would matter a lot.”

Officials at the U.S. central bank already have lowered their expectations for future growth and interest rates. Most policy makers in mid-2012 saw the economy’s longer-run growth rate in the 2.3%-to-2.5% range, and their median projection for the long-run level of their benchmark federal-funds rate was 4.25%. Four years later, their median projections were for 2% growth and a fed-funds rate of 3% in the long run.

The economy’s potential future growth will be slower than previously expected unless productivity recovers, and their economic projections suggest Fed officials “see current policy as less accommodative, the labor market as less tight and inflationary pressures as more limited,” former Fed Chairman Ben Bernanke said Monday on his blog.

The policy implications, Mr. Bernanke said, “are generally dovish, helping to explain the downward shifts in recent years in the Fed’s anticipated trajectory of rates.”

Sluggish productivity growth isn’t limited to the U.S., and a similar pattern has played out across other advanced economies. But its underlying cause or causes remain a bit of a mystery.

Some economists have seen the slowdown as reflecting a secular trend of more modest efficiency gains from new technologies compared with past advances. Others have placed the blame on persistent aftereffects of the financial crisis and 2007-09 recession, and predict it will rebound in coming years. And some have argued productivity is being mismeasured and could be higher than commonly thought.

Fed Chairwoman Janet Yellen in June described the outlook for productivity growth as a “key uncertainty for the U.S. economy” and a “very difficult question” that has divided the economics profession.

“Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars,” she said. “Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains.”

Ms. Yellen described herself as “cautiously optimistic” but said it “would be helpful to adopt public policies designed to boost productivity,” such as promoting investment.

Business investment has been a notable sore spot for the economy in recent months. A closely watched measure of business spending, fixed nonresidential investment, has declined for the past three quarters, according to Commerce Department data. A proxy for spending on new equipment—new orders for nondefense capital goods excluding aircraft—has declined on a year-over-year basis almost continuously for the past year and a half.

If wages continue to climb, companies may seek to contain labor costs by ramping up their investments in new equipment to boost efficiency, aided by low interest rates, or by raising prices.

“We remain extremely focused on managing our labor expense through continued efforts and investments to improve our labor productivity, as well as through targeted price increases,” sandwich-shop chain Potbelly Corp. PBPB 1.23 % Chief Financial Officer Michael Coyne told analysts last week.


Why It Has Been a Sterling Year for Corporate Bond Markets

The sterling corporate bond market is small, but producing outsize returns

By Richard Barley

    Corporate bond markets are betting on Bank of England support. Photo: Bloomberg News


Corporate bonds are putting in another vintage performance. Perhaps surprisingly, the U.K. is a leading light—benefiting despite Brexit in part from a bet on Bank of England support.

Investment-grade sterling corporate bonds are up nearly 13% year to date in local-currency terms, according to Bank of America Merrill Lynch indexes, outpacing the U.S. market, up 9.1%, and euro-denominated debt, up 5.9%. The market had a Brexit blip, but the steep drop in underlying government-bond yields limited the pain—although for foreign investors, the plunge in the pound has hurt a lot. Still, since the vote, corporate bond yields have fallen relative to gilt yields.

The U.K. market ticks a lot of boxes. First, investment-grade corporate bonds are winners given the search for yield and uncertainty about growth. The sterling market offers an average yield of 2.4%.

Second, the U.K. market is unusual in that it contains a lot of long-dated bonds. Indeed, 45% of Barclays BCS 5.10 % ’ sterling corporate bond index matures in 10 years or more, versus 29% for U.S. corporates and less than 10% for Europe. Duration is powering returns here.

 
 And third, investors may be betting on the BOE buying bonds. The European Central Bank started buying corporate bonds in June; the bonds it is targeting have rallied, and now the laggards are starting to catch up, Citigroup C -0.61 % strategists note. The gap between yields on euro-denominated nonfinancial corporate bonds and German government debt has narrowed 0.4 percentage point this year.
After July’s inaction, expectations have built for this week’s BOE meeting. That has been spurred by policy makers like Andrew Haldane calling for a “muscular” easing package and former hawk Martin Weale shifting stance on stimulus and noting that asset purchases could be effective.

That said, the BOE and the ECB face different situations. The fragmented nature of eurozone government bond markets constrains the ECB’s bond-purchase program. The BOE doesn’t face that worry. Indeed, back in 2009, the BOE briefly bought corporate bonds but abandoned the scheme as it ramped up purchases of gilts—where it could deliver a bigger program more quickly.

A big problem for both the BOE and investors is a dearth of bonds. The Barclays corporate index contains £285 billion ($377.03 billion) of bonds, making the market a relative minnow. It has hardly grown in recent years. That has been to investors’ benefit, helping to support prices.

But the small size of the market makes it vulnerable to prices getting out of whack if a big buyer steps in. Investors might get a boost to returns—but they will get new worries too.


Wake Up and Smell the Bull Trap!

By: Chris Vermeulen


We are currently experiencing a "Kondratiev Winter" stage in this stock market which is at its' "tipping" point. This is where nominal to incremental highs on the SPX can be exceeded by 2%, but, by no more than 4%. I am observing a "MARKET FAILURE" right here and now.

This is a BULL TRAP!

Last Fridays', August 5th, 2016 rally in the SPX big price move, on low volume, resulted in no trend change to the larger BEARISH patterns. It does not change the Bearish pattern, but it probably does mean that the current rally will last for at least a few more days. There are multiple times in which rallies are reversed during the early part of the following week after a strong jobs report.

Both investors and traders continue to throw money at stocks every time that there is any hint of "manufactured" good news. The majority of stocks, on the NYSE, are still in "downtrends".

Last Friday, August 5th, 2016, the Bureau of Labor Statistics released their "bogus" jobs report claiming that 255,000 new jobs were created.

This strong number caused gold to drop sharply, which momentum traders could have profited handsomely if they knew about the rouge price spikes taking place in gold just hours before the move.

The labor participation rate rose a mere 0.2 percent to 62.8 percent which is at a 40 year low.

This means that potentially over 90 million Americans are still not working.

After adding only 11,000 jobs, in May of 2016, the Bureau of Labor Statistics would have the public believe that the US has now added over 550,000 jobs, in the sixty-day period, since. I find these numbers still hard to believe.  There is no actual evidence of this having occurred:

It is all just a statistical adjustment as well as the "seasonal adjustment" factor as mentioned by Zero Hedge.

Over the past 120 years, within in a 7-year bull market, it is during the Fall season of the 7th year when the next major decline commences. The SPX is putting in its' final TOP. It will become a well-defined top that usually cannot exceed a 2% to 4% throw over.

We are currently witnessing an extremely aged and overvalued bull market.  The SPX Index, despite the exuberance of "record highs," is just 2% above its' May 2015 peak. The SPX has pushed it to its' most extreme overvalued, overbought and over bullish syndrome in an environment where momentum is slowly rolling over. Whether one is bullish or bearish, one needs to recognize that any current extremes are "unparalleled".
.
S&P500 Weekly Chart


Statistically speaking, the single most probable outcome is actually a small gain which we have experienced and which is then followed by abrupt and severe losses that can have the potential of wiping out weeks or even months of upside progress with an unexpected and rapid decline.

I will have to wait for the market sentiment to shift toward "risk-aversion", before participating in any long-term bearish ETF trades. Within an increased global systematic world, both investors and traders are making "risky and unparalleled" bets, these days.

I can visualize the financial meltdown. Many financial entities will have lower profits since low interest rates persist. Historically, low yields squeeze the net interest income of banks and make liabilities harder to meet for insurance companies. I would cut their EPS forecasts by 5%-7%.

The fall in Treasury yields explains most of the cut. Their strong headwind is headed our way.


Sell into These Rallies:

If you are still in the stock market, I continue to recommend to sell stock positions into the rallies.

Chart End of July 31st, 2016

Take a look at the stock index outflows in July. This shows money continues to leave the leading indicator stocks (Russel 2k, and the Nasdaq).

Major US Equity Index-Based ETF Flows

CNN Chart of Fear and Greed August 6th, 2016

Now, take a look at the fear index. While I personally use a slightly different mix of indicators to measure market sentiment, this is very close to my calculation and shows it in a simple visual format.

CNN Fear and Greed Chart
 

Conclusión:

With all of the "Extreme" complacently and the "Extreme" greed in the stock market, it is the perfect storm for DISASTER!


The Phony Job Recovery

By: Ron Paul


Last Friday saw the release of a bombshell jobs report, with headlines exclaiming that the US economy added over 250,000 jobs in July, far in excess of any forecasts. The reality was far more grim. Those "jobs" weren't actually created by businesses - they were created by the statisticians who compiled the numbers, through the process of "seasonal adjustment." That's a bit of statistical magic that the government likes to pull out of its hat when the real data isn't very flattering. It's done with GDP, it's done with job numbers, and similar manipulation is done with government inflation figures to keep them lower than actual price increases. In reality there are a million fewer people with jobs this month than last month, but the magic of seasonal adjustment turns that into a gain of 255,000.

Delving further into the jobs report, we see that many of the jobs that were supposedly created were jobs in government and health care. Government jobs, of course, are paid for by siphoning money away from taxpayers. And health care jobs are increasingly created solely because of the ever-growing mandates of Obamacare. Other major sources of job growth were temp jobs and leisure & hospitality (i.e. waiters and bartenders). These aren't long-lasting jobs that will contribute to economic growth, they are mostly just jobs that cater to the tastes of the well-to-do who continue to benefit from the Federal Reserve's easy monetary policy.

As New York, San Francisco, Washington, DC, and other political and financial hubs continue to benefit from trillions of dollars of debt-financed government spending and the trillions more dollars the Federal Reserve has created from nothing, the politicians, lobbyists, and bankers who receive that money demand ever more exotic food, drink, and entertainment. The jobs that arise to satisfy that demand, we are supposed to believe, are the backbone of the job market "recovery." Yeah, right.

Eight years after the worst part of the last financial crisis, the US economy still has not fully recovered. The number of people employed may have finally begun to grow past its pre-crisis peak but the quality of jobs has deteriorated, and the number of people who are still looking for jobs or who have even given up looking for jobs and dropped out of the labor force still numbers in the millions and shows no signs of shrinking. Quantitative easing, zero or negative interest rates, and other inflationary central bank policies cannot lead to lasting job creation or economic growth. Try telling that to the central bankers, though. They only care about aggregate numbers, not what is actually behind those aggregates. A castle built of sand is the same to them as a castle built of stone.

Until the notion that wealth and prosperity can come from a printing press is eradicated from the thinking of policymakers, economies around the world will remained mired in this malaise.

Jobs are created by meeting consumer demand. If you provide the goods and services that customers want at the price they want, your business will grow, jobs will be created, and everyone in society will be better off.

If, on the other hand, jobs are created through government money creation and heavily protectionist laws and regulations, those jobs will not meet the needs of consumers, will add nothing to productivity, and ultimately will not last. When politicians pursue policies that incentivize jobs like the latter to those of the former, economic stagnation is the unfortunate but predictable result.


Musical Chairs

by Jeff Thomas



You’re familiar with the children’s game of musical chairs. Ten children walk around nine chairs whilst listening to music. When the music stops, each must quickly find a chair and sit in it. One child is out of luck and is out of the game. Then a chair is removed and the nine remaining children walk around the eight remaining chairs, waiting for the music to stop again.

Economics is a bit like musical chairs. In a recession, the economy takes a hit and there are some casualties. Some players fail to get a chair in time and are out of the game. The game then goes on without them. The economy eventually recovers.

But a depression is a different game entirely. Since 2007, the world has been in an unacknowledged depression. A depression is like a game of musical chairs in which ten children are walking around, but suddenly nine of the chairs are taken away. This means that nine of the children will soon be out of the game. But it also means that all ten understand that the odds of them remaining in the game are quite slim and that desperate times call for desperate measures. It’s time to toss out the rule book and do whatever you have to, to get the one remaining chair.

Of course, the pundits officially deny that we have even been in a depression. They regularly describe the world as “in recovery from the 2008–2010 recession,” but the “shovel-ready jobs” that are “on the way” never quite materialize. The “green shoots” never seem to blossom. So, what’s going on here?

Depressions do not occur all at once. It takes time for them to bottom and, if an economy is propped up through economic heroin (debt), the Big Crash can be a long time in coming.

In that regard, this one is one for the record books. As Doug Casey is fond of saying, a depression is like a hurricane. First there are the initial crashes, then a calm as the eye of the hurricane passes over, then, we enter the trailing edge of the other side of the hurricane. This is the time when things really get rough—when even the politicians will start using the dreaded “D” word. We have entered that final stage, as the economic symptoms demonstrate, and this is the time when the game of musical chairs will evolve into something quite a bit nastier.

In normal economic times, even including recession periods, we observe financial institutions maintaining their staunchly conservative image. For the most part, they deliver as promised.

But, as we move into the trailing edge of the second half of the hurricane, we notice more and more that the bankers are rewriting the rule book in order to take possession of the wealth that they previously held in trust for their depositors.

And they don’t do this in isolation. They do it with the aid of the governments of the day. New laws are written in advance of the crisis period to assure that the banks can plunder the deposits with impunity. Since 2010, such laws have been passed in the EU, the US, Canada and other jurisdictions.

Trial balloons have been sent up to ascertain to what degree they will get away with their freezes and confiscations. Greece has been an excellent trial balloon for the freezes and Cyprus has done the same for the confiscations. The world is now as ready as it’s going to be for the game to be played on an international level.

So what will it look like, this game of musical chairs on steroids? Well, first we’ll see the sudden crashes of markets and/or defaults on debts. Shortly thereafter, one Monday morning (or more likely one Tuesday after a long weekend) the financial institutions will fail to open their doors.

The media will announce a “temporary state of emergency” during which the governments and banks must resolve some difficulties in order to “assure a continued sound economy.” Until that time, the banks will either remain shut, or will process only small transactions. (This latter announcement is a nice way of saying that the depositors will be on an allowance from the bank until further notice.)

Just as Greeks may now withdraw €420 per week, much of the rest of the world will operate under a similar allowance. What about a business that would need to pay that amount for even one salary?

What of a restaurant that would pay that amount for even a small food delivery? That remains to be seen—but business will not be robust.

Of one thing we can be sure. The banks will part with no more than they absolutely have to in order to avoid riots. Their wish will be to confiscate as much as possible themselves, and the new laws allow them to do just that.

And that’s when we’ll discover that nine chairs have disappeared.

Remember, what we’re looking at is the end-game. The banks will no longer maintain the ruse of client concern beyond this point. Each player grabs as much as he is able, because banking as we know it will come to an end.

To be sure, a new banking system will rise from the ashes in a few years, but for now, the wealth that’s on the table will be swept up by those who have the law on their side.

Many of the most august names in banking may well disappear over the next few years. Some institutions folded in 2008, but re-opened under new names (minus the debt that sank them in the first place). Others, like Bear Stearns and Lehman Brothers, are gone for good. They will be joined by a host of other stalwarts of the industry. Merrill Lynch, AIG, Royal Bank of Scotland, Fortis, Fannie Mae and Freddie Mac all teetered on the edge of collapse in 2008.

These and many more stand to go off the cliff in the coming crisis.

And they will not go with dignity. They will go out with a last-minute grab of as much of the deposits as they can manage. (Those who have taken part in a bank liquidation will know that what little the departing bankers leave behind on the table, the liquidators gobble up in fees. Depositors, at best, get the scraps.)

Well. Pretty grim. If history repeats, as it generally does, more than 95% of depositors will lose most or all of their savings. But there will be those who are only impacted in a minor way—those who decided to get their wealth (no matter how large or small) out of the banks before the crash.

How so? First, and most essential, remove all your wealth (except for a maximum of three months’ operating capital) from the bank. Second, move it to a jurisdiction that’s at a lesser risk than the jurisdictions stated above. (Pick the healthiest one you can find, with the lowest taxation rate and a reputation for stable government over decades.) Third, since banks in other jurisdictions may also be at risk, place your wealth in those forms of ownership that are least likely to be under attack from your home government (precious metals and real estate).

Overseas real estate is the safest bet, as any attempt by a foreign government to confiscate it amounts to an act of war. However, real estate is not the most liquid means of holding wealth, so quite a bit must be held in precious metals—again in the overseas jurisdiction where it’s harder to confiscate.

Should you need a sudden cash infusion at home, precious metals are always easy to sell quickly and the proceeds are easily repatriated (countries in economic trouble never complain about money coming in, only money going out.)

Finally, if possible, create an overseas location for yourself, either where your wealth is or another location—one that’s likely to be peaceful to live in, when crisis reaches your home jurisdiction.

In this game, the odds of being the lucky one who gets the last chair are very slim. The alternative requires more preparation, but is, by far, the safer choice.


4 Stages of Monetary Madness

By: Michael Pento


There are four stages of fiat money printing that have been used by central banks throughout their horrific history of usurping the market-based value of money and borrowing costs. It is a destructive path that began with going off the gold standard and historically ends in hyperinflation and economic chaos.

Stage one is the most benign of the four, but it sets the stage for the baneful effects of the remaining three. The first level of monetary credit creation uses the central banks' artificial savings to set short-term interest rates through the buying and selling of short-duration government debt. This stage appears innocuous to most at first but is insidiously destructive because it prevents the market from determining the cost of money. This is crucially important because all assets are priced off of the so called "risk-free" rate of return. A gold standard keeps the monetary base from rising more than a few percentage points per annum and thus restrains bank lending. However, having a fiat currency also means a nation has a fiat monetary base. This leads to unfettered bank lending and the creation of asset bubbles.

The second stage of monetary madness has been around for decades but is now commonly known as Quantitative Easing (QE). After several cycles of lower and lower short-term interest rates that are intended to bring the economy out of successive recessions, the central bank (CB) ends up pegging rates at zero percent or below. Once CBs run out of room on the downside of short-term rates they go out along the yield curve and begin to artificially push down borrowing costs for long-term debt. It is important to note that at this stage CBs only purchase assets on private banks' balance sheets and at least pretend they will someday liquidate these holdings.

The third level of monetary madness is now being threatened to be imposed upon the population by central banks across the globe. This stage is called "Helicopter Money" and is the brainchild of noted economist Milton Friedman. But in reality, versions of it have been used many times prior to Mr. Friedman's appellation of central bank money drops. Friedman argued the use of Helicopter Money to combat deflation, but it has been traditionally used to help an insolvent government service its debt.

At its core, Helicopter Money is defined to be the issuance of non-maturing government debt or the direct issuance of credit to the public that is financed by the central bank. Both forms of money drops operate most efficiently by circumventing the private banking system. This is because CBs and governments don't have to worry about private banks deciding to forgo buying more government debt if favor of holding the fiat credit as excess reserves. Helicopter Money allows citizens the direct access to new credit without the threat of having it unwound from the CB. The main difference between non-maturing debt issuance and direct public credit is the former allows the government to direct who gets the new money, and the latter gives the CB that discretion. But in either case, Helicopter Money amounts to a direct increase in the broad money supply and inflation.

As I mentioned in last week's commentary, The Bank of Japan and perhaps even The European Central Bank are seriously contemplating saying "get to the chopper" very soon.

Alas, once you get to level 3 there will be an inexorable march towards the next level. This is because there is no calling in the helicopters without causing a devastating plunge in asset prices and a bond market collapse, which results in massive economic chaos.

This brings us to the final stage of central bank intervention, which is the interminable and direct purchase of sovereign debt by a central bank for the sole purpose of keeping interest rates from spiraling out of control. Hence, the 4th stage of Monetary Madness occurs once inflation becomes fully entrenched in the economy.

It would be pure folly to assume that central banks can achieve their 2% inflation targets with impeccable precision. Years' worth of deficit spending, surging debt to GDP ratios and a gargantuan increase in central banks' balance sheets will eventually lead to a significant erosion in the confidence of central bankers to maintain the purchasing power of fiat money.

Therefore, inflation won't just magically stop at 2%; it will eclipse that level and continue to rise.

But that's only half of the issue. Sovereign bond yields have been slammed so far down by CBs that nearly 30% of the entire supply of government-issued debt now trades below zero percent.

The return of inflation must surely cause a mass exodus of longs from the bond market, just as short sellers begin to pile on top. The bond market will also respond in violent fashion -- taking yields up 100's of basis points rather quickly -- due to the anticipation of waning bond bids from central bankers.

Of course, surging debt service payments will render debt-saturated governments completely insolvent, which forces central banks into stage 4. Sadly, this is the conclusion that lies ahead for the developed world. Investors should not become complacent with the current innocuous state of global bond yields. In reality, they have become incendiary bombs that will inevitably explode with baneful implications for those that are not fully prepared.


A Purge Is a Purge Is a Purge

Four major global powers are in the midst of different types of purges.

By Jacob L. Shapiro


Coups may be going out of style, but purges are in vogue. Some of the world’s most powerful countries are in the midst of purges that reach deep into their political, military and security structures. Chinese President Xi Jinping calls it an anti-corruption campaign, and it has targeted everything from regional governments to vice chairman of the Central Military Commission. In Russia, President Vladimir Putin has reorganized his various security and intelligence services, is cracking down on corruption and cleaning house in some parts of the military. In Turkey, whether you want to call it a counter-coup or President Recep Tayyip Erdoğan taking advantage of the situation to eliminate what he refers to as the “parallel state,” the crackdown is wide ranging. In the U.S., we simply call it “elections.”

A purge can be a sign of strength, a sign of weakness or both. Some purges help to clear the road toward consolidating power. Other purges can so cripple a country’s institutional powers that the short-term benefits give way to disorder and chaos.

Xi’s purges in China began when he rose to the presidency in 2012. One of the slogans of the campaign is “tigers and flies” – it means to target senior officials (the tigers) and minor players (the flies) with the same level of urgency. The campaign has delved deep into the Communist Party and put various organizations like the Communist Youth League in its crosshairs. In the past year, the purges extended to the military, with a special commission set up early in 2016 to carry out investigations just within the military. Last week, a major general involved in planning an important military parade in 2015 came under investigation, and Guo Boxiong, a former vice chairman of the powerful Central Military Commission, was given a life sentence for violating the Communist Party’s “political discipline.”

China is no stranger to purges. In the 20th century, these purges have had profound effects on the way China has developed. In 1942, in the midst of war with Japan and conflict with the Chinese nationalists, the Rectification Campaign began in Yan’an. The Anti-Rightist Movement from 1957 to 1959 penalized hundreds of thousands among China’s most educated citizens for running afoul of Mao Zedong and the party. The Great Proletarian Cultural Revolution is perhaps the most famous purge. It began in 1966 and among the targets were Liu Shaoqi, Deng Xiaoping (who came to power after Mao) and eventually Lin Biao, the presumed successor to Mao until his mysterious death.

Xi is not Mao. But China is still China. Xi is striking a delicate balance. He is trying to make sure that the Communist Party is loyal to him and that the People’s Liberation Army (PLA) is loyal to the Communist Party. But he cannot purge with the same breadth and depth as Mao because he needs the institutions of the Chinese government to work. Xi’s supply-side reforms, his desire to remake the PLA into a modern fighting force, even basic issues like making sure the Chinese stock markets run with some level of consistency all require a functioning government and army. So far there has been little observable resistance to Xi’s moves and the Communist Party is not in a state of paralysis. But paralysis is at stake for Xi. He purges because he must. That makes him strong in one sense and profoundly weak in another.

Putin is in a similar situation in Russia. After Russia’s intelligence failure in Ukraine, Putin announced publicly in November 2014 that Russia’s most important security service, the FSB, would be “restructured” – a common euphemism for the type of purges we are talking about. Once the FSB was reorganized to his liking, Putin didn’t hesitate to put it to good use. Earlier this year, Putin embarked on something of an anti-corruption crusade of his own, and thus far the FSB has arrested mayors, governors and deputy government ministers (among many others) on various charges. Just earlier this month, Putin fired more than 50 officers of Russia’s Baltic Sea fleet, including a vice admiral.

Russia is also no stranger to purges. Josef Stalin’s Great Purge from 1936 to 1938 is perhaps the most famous, but they were a fixture of his rule. Historian Robert Conquest once estimated that 20 million died as a result of purges during the Stalin era and Alexander Solzhenitsyn immortalized the grim conditions of the gulag in print in 1973. The Soviet Union maintained its cohesion after Stalin’s death through its security services and Putin has gone back to that formula to keep his hold on the country as its economy suffers from low oil prices that will not be improving significantly anytime soon.

Putin is also no Stalin and these campaigns pale in comparison to what Stalin was capable of at the heights of his rule. Even more so than China, Putin is operating from a place of weakness.

The Russian economy is in shambles, it misplayed its hand in Ukraine and now Putin is trying to keep his vast and struggling country together. It’s not clear whether this is one larger concentrated effort or whether Putin’s targets are more surgical. Perhaps like the FSB, Putin’s moves with the Baltic Fleet are a bit of spring cleaning to make sure his forces are competent in case of conflict. Or perhaps it is an issue of loyalty and Putin is eliminating sources of dissent throughout the system. Clearly, Putin is under pressure and he is doing what he can to control the situation.

Turkey has a less storied history of purges. Coups were the main vehicle for the Turkish military to maintain a degree of control over political affairs in the country. They happened in 1960, 1970, 1980 and 1997 (although often purges follow the coups). Much is being made of Erdoğan’s purges in response to the failed coup, but the ground for the failed coup this past month was in part laid in the early 2000s, when Erdoğan’s Justice and Development Party (AKP) and the Gülenists sought to declaw some of the military’s authority.

Evidently, the AKP was not able to eliminate all opposition to its power. But it was able to do enough damage to cripple military opposition to the point that the recent coup attempt was simply not strong enough to take control of Turkey as it had in 1960 or 1980. Together, the AKP and the Gülenists took on the “deep state” in Turkey. Now, Erdoğan has turned on the Gülenists – the “parallel state” – to get rid of another potential challenger.

Unlike Russia or China, Turkey is an ascending power. Every major power in the world went through a period of chaos and violence before they rose to prominence. The United States had the Civil War. France had the French Revolution. Japan fought a civil war before the Meiji Restoration. The list goes on. Erdoğan is retiring hundreds of senior military officers and firing thousands of judges and academics. CNN estimated that over 50,000 officials have been purged from the government so far, and there are likely to be more in the future. If Turkey is to emerge as a regional power, it must first develop internal cohesion. That can happen as a result of democracy or purges; the method isn’t important. The crucial fact is that unlike Russia or China, here the purge is not just about domestic control, but also a potential vehicle for power projection.

Some might balk at the inclusion of the United States in this piece. I would respond by saying that Chris Christie’s recent comment that Donald Trump would ask Congress to change civil service laws so he could more easily “fire” – read, purge – Barack Obama’s appointees should raise this question in the mind of U.S. readers. Reuters used the word “purge” in its headline on the story. However, purges in the U.S. government aren’t something new. Obama named an entirely new Cabinet of officials (except for Robert Gates) when he ascended to the presidency in 2009. That is a form of a purge. Franklin D. Roosevelt tried to pack the Supreme Court. In 1828, after Andrew Jackson won the presidency, New York Senator William L. Marcy famously said that “to the victor belong the spoils.” Both are also forms of purges. The U.S. just carries out its purges once every four years rather than letting the pressure build up in the system over a span of decades. It’s a mark of the health of a liberal democracy if its politicians, generals and officials can be summarily dismissed.

I am not trying to establish a direct equivalence between these countries. Obviously, the U.S. isn’t Russia. And obviously Russia isn’t the Soviet Union. I am, however, arguing that purges are a necessary and at times healthy part of politics, and that it just so happens that four countries crucial to our geopolitical model are either in the throes or on the cusp of major purges. One of these – the United States – is doing it on schedule. The others are on the front lines of global crises, and each is looking inward as a result. The fact that the word “purge” has a negative connotation can often hide its import or lead to a sense of moral superiority. Neither are productive when trying to understand what’s really at stake.