Trade War Games

“We’re already in a trade war with China. The problem is we’ve not been fighting back.”
– Peter Navarro
“The battle for Helm’s Deep is over. The battle for Middle Earth is about to begin.”
– Gandalf the White
This letter should find you buckled in for the turbulence I described last week. If not, I hope this one convinces you. The storm is seven days closer now. There are times when normality slips out of reach, and I believe we are approaching such a time.
I have lived through recessions and bear markets; I know what they look like. I wish I could forget what they feel like. They don’t come out of nowhere; there are always warning signs. Many investors choose to ignore those signs; I choose not to. I hope you make the same choice.
The monster can come from different directions. Imagine the horror movie where the doomed victim knows the creature is out there. He hears its growls and desperately looks all around for their source. Then the camera pans left and you see the darned thing sneaking up on him from behind. [Cut, add scream, fade to black.]
Over the next few letters we will consider the various monsters that may set upon us.
Any one on its own might be manageable, but we’ll be out of luck when several hit us in rapid succession. We’ll start with this big bad boy: Trade War.
For the last 20 years, the biggest monster in my worry closet has been protectionism and trade wars. Last year both presidential campaigns voiced ideas about protectionism and trade that reflected appalling economic ignorance about the importance of trade to global prosperity, and particularly to the prosperity of the US.
As I explained in “The Trouble with Trade,” I hoped then that the talk was all just campaign rhetoric and political pandering. No such luck.
Comparative Advantage
Trade is the global economy’s bloodstream. The more freely it flows, the better for all.
As David Ricardo explained 200 years ago, different peoples have unique characteristics that enable them to produce certain goods at lower opportunity costs than other can. Free trade gives consumers access to the best goods and services at the lowest prices.
However, what we now call “free trade” is not what Ricardo had in mind. We have instead managed trade designed to benefit certain favored parties and to disadvantage others. You can’t blame free trade for our problems, because we haven’t got it.
Those who have seen their interests short-changed in the managed-trade game have had enough. That’s one reason Donald Trump is now president and anti-globalization movements are active in so many countries.
Candidate Trump talked about renegotiating trade agreements to help American workers. I support that goal. The problem is that President Trump seems intent on starting a trade war that will hurt those same workers. We are on a very dangerous course. Worse, if a report I saw last week is accurate, that course is already locked in.
Consequential and Contentious
The report comes from Axios, a Washington-based news site recently launched by some Politico veterans who want to disrupt the mainstream media. This is what Axios reported June 30, based on the input of anonymous Trump-administration sources:
With the political world distracted by President Trump’s media wars, one of the most consequential and contentious internal debates of his presidency unfolded during a tense meeting Monday in the Roosevelt Room of the White House, administration sources tell Axios....
With more than 20 top officials present, including Trump and Vice President Pence, the president and a small band of America First advisers made it clear they’re hell-bent on imposing tariffs – potentially in the 20% range – on steel, and likely other imports....
One official estimated the sentiment in the room as 22 against and 3 in favor – but since one of the three is named Donald Trump, it was case closed.
No decision has been made, but the President is leaning towards imposing tariffs, despite opposition from nearly all his Cabinet.
The following Sunday, July 2, the Wall Street Journal’s William Mauldin (no relation to me) filed this:
The Trump administration missed a self-imposed Friday deadline for concluding a major probe of steel imports, a delay officials said was driven by unanticipated complexities in engineering such a big shift in U.S. trade policy.
The administration has faced challenges in implementing its “America First” policy amid resistance from lawmakers and many business groups who worry that new curbs on steel imports could drive up costs for American manufacturers and spark retaliation from trading partners.
That report suggests that the June 26 meeting was less conclusive than Axios opined – but the trade hawks have not given up. The “America First” side is probably headed by presidential advisor Steve Bannon and Peter Navarro, director of Trump’s National Trade Council (a new office created by Trump), along with Trump himself.
Navarro, a former University of California, Irvine economics professor, was already a well-known protectionist when Trump hired him as a campaign advisor last year.
Author of a book called Death By China, he is opposed to trade deficits and has accused China and Germany of currency manipulation. Very few academic economists share Navarro’s views.
The simple fact is that Navarro embraces fallacious economics ideas. Kevin Williamson in the National Review takes his measure:
Professor Navarro, among other things, makes economics errors that would be obvious to an undergraduate. This has been commented on at some length elsewhere, most prominently after he published a review of the Trump economic plan (a review co-authored with Wilbur Ross, who is not an economist but is now Secretary of Commerce) in which he proffered the schoolboy argument that, because GDP is defined as the sum of consumption, investment, government spending, and net exports, eliminating our trade deficit with China would add substantially to GDP.
In economics terms, he has mistaken an accounting identity for real-world causality; in layman’s terms, this is horsepucky, “a mistake that an econ professor like him really shouldn’t be making,” as Noah Smith of Bloomberg put it.
This is an appalling mistake for anyone, but for an economics professor to do this? And one that is actually in a position to influence trade policy?
In his books and writings, Navarro peddles analogies he pulls out of thin air as “facts,” without a shred of evidence to back them. For instance, as Williamson notes,
His sloppiness with sources is general. Navarro cites a Rand Corporation report suggesting that China is behind Iran’s nuclear program without mentioning that the report is a quarter-century old, that it identifies China as a “moderate threat to U.S. interests,” or that subsequent Rand analysis suggests that Chinese involvement with Iranian nuclear ambitions seems to have ended around 1997. He does not even cite any particular Rand report, simply attributing a long quotation to “the Rand Corporation.”
Navarro makes up stories about a future where poorly made Chinese cars are crashing and killing US citizens (even though a few extraordinarily well-made Volvos are the only cars made in China that are driven in the US). He claims that the Chinese keep unemployment high so that wages can remain low, even though their wages have been rising significantly for the last 15 years.
Professor Peter Navarro and the ideas he espouses are dangerous. Certainly, we can be smarter about how we negotiate trade deals in order to get the best terms possible. Peter Navarro is simply not the man to be advising on that.
Most leaders of larger businesses have no interest in truly free trade, either, but they dislike Navarro’s ideas. There is a stand-off within the administration. The battle pits trade advocates and businesspeople vs. Bannon and Navarro. Trump apparently leans Bannon and Navarro’s way but hasn’t made a final decision yet.
The proposed steel tariffs are more significant than they may seem. A Commerce Department study is trying to determine whether imported steel represents a national security threat to the US. If so, a 1962 law gives the president vast powers to impose tariffs and other barriers, without congressional approval.
If Trump wants to start a trade war, Congress and the courts probably can’t stop him unless they can pass new laws by a veto-proof margin. The chances of that happening are near zero.
That meeting in the Roosevelt Room may turn out to be as consequential as Bretton Woods was, if Trump acts to launch major trade sanctions. Trade sanctions will slow down already slow global economic growth and could trigger a much wider systemic crisis.
What Would Steel Tariffs Really Mean?
It makes a difference whether the administration decides to impose quotas on current steel imports or initiate a tariff. Quotas would be harmful, but a tariff would be far worse.
Let’s look at who would actually be damaged. First, for all the talk about trade deficits with China, we don’t import all that much steel from China. In fact, China isn’t even in the top 10 countries that we import steel from, as shown in this chart from the Financial Times:
Secondly, using national security as an excuse to impose tariffs is really fraught with potential problems. The Financial Times report (well worth reading) in which our chart appears notes two:
The first is that in the trade realm, invoking national security to erect barriers is considered a nuclear option. World Trade Organisation rules include a national security exemption designed to be used in times of war. But many experts believe the forthcoming steel move would flout those rules and would thus be challenged by other WTO members. Such a challenge in itself could be dangerous. It would be the first real test of the WTO’s national security exception. Were the WTO to find against the US and the Trump administration to ignore that decision, it would be a huge blow to the WTO’s credibility. Were the WTO to find in the US’s favour experts fear it could give carte blanche to all WTO members to invoke national security more often, leading to a new protectionist free-for-all. 
The second is that the US is the world’s largest steel importer and a broad move on steel would probably hit US allies such as Canada, Germany, South Korea and Mexico far more than China, its real intended target. In an unusual move, it has prompted Nato allies to complain and to try to have the Pentagon lobby on their behalf.  It also could provoke a messy trade war with other countries feeling compelled either to impose their own national security restrictions on steel imports or to retaliate against the US in other ways. 
The third reason to oppose tariffs is that clamping down on steel imports threatens considerably many more jobs than “protecting” the steel industry from foreign competition can save. As Dan Pearson of the Cato Institute noted recently: “Steel mills employ 140,000 workers. Manufacturers that use steel as an input 6.5 million, 46 times more.” Steel mills’ $36 billion of productivity in 2015 represented just 0.2 percent of US GDP, Pearson explains, while the economic value contributed by US firms that use steel was 29 times larger.
We actually have a recent case study. George W. Bush approved steel import tariffs of 30% in 2002. What happened? Two hundred thousand American workers lost their jobs, as this chart from the Heritage Foundation illustrates.
Scores of different types of steel are used for special manufacturing processes and equipment. The US doesn’t manufacture everything we need or have the capacity to do so.
Thus a tariff would increase costs to consumers without doing one thing for steelworkers.
Yes, the number of American steelworkers is down from 500,000 to 147,000 in the last 35 years. As in so many industries, we simply don’t need the number of workers that we used to. Steelworkers, whose wages have tripled, are producing five times the amount of steel per hour worked as they did 35 years ago.
China is already working to curb its steel production capacity, as demand for steel is flat to down. Now I agree that Chinese overproduction is forcing global steel prices down, but do we really have a problem when gasoline prices go down? Do we feel sorry for the oil companies?
No doubt American steelworkers and steel companies would love to see barriers to entry for their product. I bet McDonald’s would like to have Jack-in-the-Box stores banned, too. Ultimately, higher prices offset the theoretical benefits of a steel tariff or quota. You and I are the ones who pay.
Buy American
The federal government has other ways to punish foreign competitors. In April President Trump visited the Wisconsin headquarters of Snap-on Tools, where he signed a “Buy American, Hire American” executive order. The bureaucracy is now working to implement the order.
Laws dating back to the Great Depression require federal agencies to give first preference, in government contracts, to US-made products. Over time, it became routine for acquisition officers to grant waivers to those requirements. President Trump’s order will crack down on those waivers. This will soon be evident at the Pentagon, where two laws apply:
The two laws in question are the 1933 Buy American Act, which requires the Pentagon to purchase domestically produced products for purchases over a $3,500 threshold, and the more-restrictive 1941 Berry Amendment, which applies mainly to clothing and food products purchased by the military.
Together, these laws ostensibly require that the U.S. military’s entire supply chain be sourced from inside the country….
By enforcing these laws, President Trump can redirect billions of dollars in spending from foreign companies to US suppliers – assuming US suppliers exist. They may not, in some cases, and they may cost more if they do. Defense contractors will face some serious headaches.

AP Photo
Other trade actions are popping up, too. Boeing has asked the government to investigate what it considers to be unfair competition by Bombardier, a Canadian aircraft manufacturer.
If Boeing succeeds in sidelining Bombadier, other US companies are likely to make similar claims.
But, truth is, dozens of countries manufacture major parts of those Boeing airplanes; Boeing doles out contracts to other countries in order to encourage them to buy the planes. Many of those components are made in Canada. And I will bet you a dollar to 47 doughnuts that significant components of Bombardier planes are made in the United States by US workers.
It behooves us to remember that Canada and all our other trade partners have options, too.
Tit for Tat
The trade war, if it happens, will spring from the administration’s failure to appreciate one simple fact: Other countries will respond. The Trump administration’s steel tariff idea, for example, has already provoked European Union officials. EU trade commissioner Cecilia Malmstrom warns, “We want of course to avoid anything dramatic here but if that would have hit our companies we will have to respond, of course.”
The EU and other trade partners will not simply roll over and accept US tariffs. They will retaliate in ways specifically calculated to hurt American businesses and consumers. My fear is that the US will then up the ante with yet more tariffs or other barriers, and the fight will get ugly, causing real pain and losses for both sides.
All this will be completely unnecessary. Can existing trade agreements be improved? Yes, definitely. But trade negotiations are insanely complex in the best of circumstances.
Multiplayer game theory applies. Right now we have general trade equilibrium, with minor adjustments all the time. Not everyone has everything they want, but no one is angry enough to stop playing. If one major player changes the rules, however, all the other players in the game have to respond. Those national players have their own businesses and voters that they must pander to. The game can collapse quickly.
Pile that risk on top of our many other economic vulnerabilities, such as the increasing political turmoil in Europe, and we might see major fireworks.
President Trump campaigned on the promise that he would negotiate better deals. Well then, Mr. President, rather than impose tariffs and destroy a few hundred thousand high-paying jobs in US manufacturing, let’s find out how well you can negotiate. And send Professor Navarro, whose supposed expertise is in utilities, of all things, back to California.
Before I close, I want to announce that we’re hosting another webinar with my friend Marc Chaikin of Chaikin Analytics, on July 25, at 4:15 PM EST.
I’ve long been a fan of the Chaikin Analytics Power Gauge, so last year I told my team of analysts to try it out. A few weeks later they came back to me and said, “It’s great, we’re using it for everything!’’
Because we’re so impressed with the Power Gauge system, we’d like to give you the opportunity to access it, too. You can click here for the free webinar “The Ultimate Stock Checklist & Best Small-Cap Stocks to Buy Today.”
Grand Lake Stream, Colorado (?), and Lisbon
Shane and I will be going to Las Vegas next week for Freedom Fest, then we’ll come back home to Dallas for a few weeks before I’m off to Grand Lake Stream, Maine, for the annual economics schmooze and fishing trip known as Camp Kotok. Afterward, I am thinking about going to somewhere in Colorado for a few days to escape the Texas heat. There are a lot of potential trips in September, but the next outing now on the books will be to Lisbon, Portugal.
Over the weekend what was going to be a short family meeting turned out to be much lengthier and much happier than I envisioned. As a result, this letter is coming to you later than usual. (Sometimes life just happens when you’re making plans.) I hope you, too, have an unexpectedly wonderful week.
Your hoping we walk away from protectionism analyst,

John Mauldin

How Healthy is the Global Financial System?

Mohamed A. El-Erian

financial markets

LONDON – In recent weeks, policymakers on both sides of the Atlantic have affirmed that the financial system is sound and stable. The US Federal Reserve announced in June that all US banks passed its latest annual stress test. And Fed Chair Janet Yellen has now suggested that we might not experience another financial crisis “in our lifetimes.”
At the same time, the Financial Stability Board (FSB) – which monitors regulatory practices around the world to ensure that they meet globally-agreed standards – has declared, in a letter to G20 leaders, that “toxic forms of shadow banking” are being eliminated.
In short, ongoing measures to buttress the global financial system have undoubtedly paid off, especially when it comes to strengthening capital cushions and cleaning up balance sheets in important parts of the banking system. The latest assurances from policymakers are comforting to those of us who worry that not enough has been done to reduce systemic financial risk and to ensure that banks serve the real economy, rather than threaten its wellbeing.
Yet it is too soon to give the financial system as a whole a clean bill of health. Efforts to shore up the banking sector in some parts of Europe are still lagging far behind. And, more important, financial risks have continued to migrate to non-bank activities.
After irresponsible risk-taking almost tipped the global economy into a multi-year depression in 2007-2008, regulators and central banks in advanced economies launched a major effort to strengthen their financial systems. To that end, they focused initially on banks, which have since bolstered their risk-absorbing capital cushions, cleansed murky balance sheets, increased liquidity, enhanced transparency, narrowed the scope of high-risk activities, and partly realigned internal incentives to discourage reckless behavior. Moreover, the process for resolving failing and failed banks has been improved.
In addition to strengthening the banking sector, policymakers have also made progress toward standardizing derivative markets and making them more robust and transparent, which also reduces the risk of future taxpayer bailouts for irresponsible institutions. Moreover, the system for payments and settlement has been made safer, thereby lowering the threat of a “sudden stop” in economic activity, like the one that occurred in the fourth quarter of 2008.
It has been encouraging to watch national authorities coordinate their efforts under the auspices of the FSB. Better coordination has reduced the risk of regulatory arbitrage, and address the threat that banks will be, as former Bank of England Governor Mervyn King memorably put it, “international in life but national in death.”
The United States and the United Kingdom took the lead on reform, and Europe has been catching up. Assuming that it does, as policymakers there intend, Yellen’s assurance of a “much stronger” banking system in the US will apply to all of the other systemically important banking jurisdictions in the developed world, too. And the FSB’s confident assertion that “reforms have addressed the fault lines that caused the global financial crisis” will receive more support.
Still, it is too early to declare victory. Although the FSB describes the financial system as “safer, simpler and fairer,” it also acknowledges “nascent risks that, if left unchecked, could undermine the G20’s objective for strong, sustainable and balanced growth.”
As an observer and participant in global capital markets, three of these risks stand out to me.
First, as more carefully regulated banks have ceased certain activities, voluntarily or otherwise, they have been replaced by non-banks that are not subject to the same supervisory and regulatory standards.
Second, certain segments of the non-bank system are now in the grips of a “liquidity delusion,” in which some products risk over-promising the liquidity they can provide for clients transacting in some areas – such as high-yield and emerging-market corporate bonds – that are particularly vulnerable to market volatility. And at the same time, exchange-traded funds have proliferated, while financial intermediaries have shrunk relative to bigger and more complex end users.
Third, the financial system has yet to feel the full impact of technological disruptions fueled by advances in big data, artificial intelligence, and mobility, which already are in the process of upending a growing number of other established sectors. And the financial-technology (fintech) activities that have expanded are inadequately regulated, and have yet to be tested by a full market cycle.
To be sure, another systemic financial crisis that threatens growth and economic prosperity worldwide likely won’t originate in the banking system. But it would be premature to assert that we have put all the risks confronting the financial system behind us.
Because risks have morphed – and migrated out of the banking system – regulators and supervisors will have to step up their efforts and widen their focus to see beyond the banks.
After all, as Greg Ip of the Wall Street Journal pointed out in 2015, “Squeezing risk out of the economy can be like pressing on a water bed: the risk often re-emerges elsewhere. So it goes with efforts to make the financial system safer since the financial crisis.”

What You Should Know About Quantitative Tightening (QT)

“The Federal Reserve is embarking on a new path, a path that started several years with QE (quantitative easing)” says Jim Rickards, economist and currency expert.

Rickards’ has identified the next “path” forward from the Fed as quantitative tightening, “QT,” which is the opposite of QE and will have the same effect as raising interest rates.

To understand that, dissect America’s central bank policymaking and what its wide ranging tools mean.

What is Quantitative Easing?

In the literal sense, quantitative easing is most commonly referenced as a form of “money printing,” but the Federal Reserve cannot actually print money.

However, these days the majority of money is electronic. So, yes, quantitative easing involved the Fed creating new money. In return the Fed applies that money generated to purchase bonds, which it intends to be a catalyst for injecting added money into the banking system.

During the global financial crisis the Fed’s QE program had multiple rounds of irregular spurts in purchasing programs. Those are what economists often reference as QE1, QE2, QE3.

     St. Louis Federal Reserve Bank

Ranging from 2008 to 2013 the Fed had three different spurts of QE. Eventually, the Fed reduced (or tapered) its purchasing program to zero by 2014.

The problem now? The Fed has been holding lots of extra reserve money. In fact it is currently stuck with $4.5 trillion in bonds purchased on its balance sheet. The excess reserves held by the Fed has skyrocketed since the crisis.

Excess Reserves of Depository Institutions
    St. Louis Federal Reserve Bank

What is the Fed doing about it at the moment?

Federal Reserve Chair, Janet Yellen while speaking after the quarterly Federal Open Market Committee (FOMC) meeting said as a press conference:

“What we’d want to have is confidence in the economy’s trajectory, a sense that the economy will make progress, that we’re not overly worried about downside risks with adverse shocks that could hurt the economy.”

Translation, the Fed is certainly thinking about reducing the mammoth balance sheet but doesn’t want to mess up the markets. The key term to listen to going forward is gradual.

The Federal Reserve has attempted to paint this gradual narrative as “predictable, slow and as boring as possible.” As one Fed official said, the policy attempt will be as boring as “watching paint dry.” But does the bank have the luxury of time to do so?

The fact is the degree to which the Fed acts will depend heavily on the U.S Treasury Department. While the Fed may have been the conductor for QE, the Treasury under Sec. Mnuchin will ultimately decide the overall impact on how it reduces its balance sheet.

Supply and demand economics shows that increasing the supply of bonds and market based Treasury debt will make its price drop, causing bond yields to rise.

This is because although the Fed may choose to stop buying bonds, the debt does not just simply cease to exist. The Treasury will be in charge of finding an allocated purchaser – even if that process is hoping to be “boring” or gradual.

What is Quantitative Tightening (QT)

As the Federal Reserve prepares to outline a blueprint for how best to reduce the current balance sheet, officials are expected to embark on a new path of quantitative tightening.

Jim Rickards lays this out noting that, “the Fed will let the old bonds mature, and not buy new ones. That way the money just disappears and the balance sheet shrinks. The new name for this is “quantitative tightening,” or QT.”

Rickards’, a long standing expert in central bank policy, believes that quantitative tightening will be a major factor in monetary policy over the weeks and months going forward.

He reports skeptically, “The Fed wants to start shrinking its balance sheet by letting the bonds mature, receiving the cash and not reinvesting. That way the balance sheet shrinks and the money just disappears.”

The Taylor Rule and Why it Matters to QT

John Taylor, a Stanford economist, designed a set of recommendations for how the Fed should set its interest rate based around economic conditions.

The Federal Reserve cites his formula as: “Guidance to policy makers on how to balance these competing considerations in setting an appropriate level for the interest rate.”

The Taylor Rule looks for a high (“tight” monetary policy) interest rate when inflation goes above target and under desired “full employment” levels. The Taylor Rule also indicates that conditions for a low interest rate exist when the converse conditions prevail (“easy” monetary policy).

The Taylor Rule is important to the quantitative monetary policy settings because under normal Fed conditions within our current economy we should be experiencing higher interest rates than current levels and less than half of the current balance sheet that exists.

Fed officials, while not explicitly required to follow such norms, have been shown to conduct policy that reflects such guidelines. The Taylor Rule allows for an understanding of what kind of formula to anticipate the Fed might be pursuing and currently signals that, logically, a tightening pattern is overdue.

What Happens if Quantitative Tightening Fails?

As of June 2017, Barron’s reported that the Fed funds rate is expected to hit at 2.5%-2.75% by the end of 2018. Expectations from the largest bank in America has signaled that the Fed will look to lower its balance sheet to $2 trillion by 2020.

All of that equates to the Fed needing time in order to gradually digress the quantitative monetary programs.

Unfortunately, time does not appear to be on the side of the Fed this round.

David Stockman, the former White House budget director recently told CNBC, “There is a massive fantasy built in that an economy 93 months into an expansion, almost the longest in history, can suddenly get up on its hind-legs and start growing again.”

As the Fed begins to tighten, that long growth trend could come under siege.

Even the OECD’s recent June 2017 report noted:

“The extent of US fiscal support in 2018 also remains very uncertain, given the challenges being experienced in reaching political agreement about policy choices.”

That all relays a considerable signal that time, uncertainty and economic “clean up” might not be possible, regardless of the Fed’s quantitative tightening ambitions. Time is simply not a luxury the Fed seems to have.

Jim Rickards leaves a final warning that, “The Fed will definitely raise interest rates on June 14 and indicate plans for at least one more rate hike, maybe two, later this year that markets will have to factor in…” Indications, he believes, would be a “double-dose of cold water” to Washington’s current economic ambitions.

“With this Fed double-dose of tightening into weakness, and Trump’s policies dead on arrival, we’re set up for a recession and stock market crash by this summer.”

This Inevitable Crisis Just Became Imminent

By Justin Spittler, editor, Casey Daily Dispatch

It’s about to become the first U.S. state with a “junk” credit rating.

It’s broke...and running out of time. It doesn’t have enough money to fix its roads. It can’t feed its prisoners. It can’t even pay its lottery winners.

I’m talking about Illinois.

Two weeks ago, I told you how the state was on the edge of a major debt crisis. Since then, state politicians have scrambled to keep the situation from spiraling out of control.

In fact, they just passed their first budget in over two years. It raised personal income taxes by 32% and the corporate tax rate by 33%.

Those are huge tax increases. Surely this fixes the problem, right?

Not exactly.

The budget will raise just $5 billion. That will barely put a dent in the state’s $15 billion deficit.

In short, it won’t fix anything. At best, it buys Illinois some time.

Bruce Rauner, the governor of Illinois, agrees:

This is a two-by-four smacked across the foreheads of the people of Illinois... This tax hike will solve none of our problems and in fact, long run, it’ll just make our problems worse.

Moody’s sees major “shortcomings” in the budget, too. The credit rating agency is especially worried about a lack of “broad bipartisan support.”

Because of this, Moody’s may cut Illinois’ credit rating to “junk” status. Standard & Poor’s, another major credit rating agency, has threatened to do the same.

If this happens, Illinois’ borrowing costs will skyrocket.

• And that’s the last thing Illinois can afford right now...

After all, it’s already $15 billion behind on its bills. And that doesn’t even include the state’s biggest liability: its broken public pension system.

A public pension, as you may know, is a state-run retirement fund. Teachers, firemen, and police officers finance these funds out of their paychecks.

For decades, government employees in Illinois could count on their pensions. But not anymore.

Today, Illinois’ pension system owes $250 billion more than it has. That’s more than the combined market value of four major Illinois-based corporations: Boeing (BA), Caterpillar (CAT), United Continental (UAL) and Allstate (ALL).

At this point, the pension system is bleeding so much cash that it’s bankrupting the state.

But Illinois isn’t the only state with this problem...

• Kentucky, New Jersey, Arizona, and Connecticut have huge holes in their pension funds, too...

To be fair, this isn’t a new problem. People have known that the public pension system is a ticking time bomb for years.

But the government hasn’t done a damn thing about it. All they’ve done is kick the can down the road.

Well, I have news for you. We’re now at the end of that road. Illinois’ budget crisis is proof of this.
In other words, the inevitable U.S. public pension crisis has become imminent.

And it will affect you, whether or not you live in Illinois or have a pension plan.

That’s the bad news. The good news is that it’s not too late to take action. Today, I’ll show you how to protect yourself. I’ll also explain why this crisis will soon reach every man, woman, and child in America...even those who don’t depend on a pension.

This isn’t hype. It’s not hyperbole. It’s basic math...

• Pension funds pay out more money than they take in...

A lot more.

According to Moody’s, U.S. public pensions are underfunded to the tune of $1.8 trillion. Other experts put the figure as high as $8 trillion.

Frankly, it doesn’t matter what figure you use. The point is that these funds owe more than they could ever pay back.

They’re insolvent. And it’s only getting worse.

• Last year, the average pension fund made a 1.5% return on its investments...

That’s well short of the 7.5% return that these funds projected to make.

It was the second straight year that pension funds missed their return targets.

It’s now virtually impossible for these funds to dig themselves out of the hole they find themselves in.

Even if these funds made 25% over the next two years, they would only reduce their liabilities by just 1%. And that’s the “best-case scenario,” according to Moody’s.

Even if they make 19% over the next two years (the base-case scenario), their liabilities will swell by 15%.

But even that’s a long shot. After all, these funds couldn’t even make 2% last year.

• At this point, governments should dismantle the public pension system...

But that obviously won’t happen. It’s political suicide.

So instead, pension funds have tried to close the gap by “reaching for yield.” In other words, they’ve loaded up on stocks.

That’s a big problem.

After all, stocks are risky. They fall much faster and harder than bonds during panics.

• The public pension system has never been more fragile...

Not only that, it’s cracking before our eyes.

But don’t worry. It’s not too late to prepare.

Here’s how you can protect yourself before the public pension system comes crashing down:

Move to another state. This might sound crazy. But if you live in a state with a broken pension system, your government will come after you. It will raise taxes just like the government of Illinois did. It’s the only way these states can keep their pension systems from collapsing.

So, it might be time to get out of Dodge if you live in a state like Illinois, Kentucky, New Jersey, Arizona, or Connecticut.

And you might want to consider living in one of the states below. They all have relatively stable pension systems and fairly low taxes:

1. Texas

2. Michigan

3. Alabama

4. Washington

5. District of Columbia

Buy gold. Right now, the pension crisis is a state problem. But the next time we have a major economic shock, it will become a nationwide crisis almost overnight.

When that happens, the federal government will step in. And it will try to “paper over” the pension crisis by printing more money.

This will destroy the value of the U.S. dollar. But it will make gold, which is real money, more valuable. So pick up some physical gold if you haven’t already.

The Second Half of the Pincer

by Jeff Thomas

“Welcome to America, where your assets are literally the government’s business, and freedom is anything but free.”

—Claire Bernish, The Free Thought Project

For some time, I’ve been forewarning readers that, as the governments of the former “free” world unravel, they’ll introduce capital controls, both to continue to fund their failing policies and to limit the freedom of their citizenries.

I’ve envisioned this as a “pincer” of sorts. First, it would be necessary to institute laws that allow authorities to confiscate the assets of anyone whom they “suspected” of a crime. (It’s essential to understand that an actual arrest is unnecessary, as that would allow the individual the opportunity to prove his innocence in a trial. No trial means he can never regain the confiscated assets.)
The second half of the pincer would be a law requiring the reporting of assets—a detailed declaration of all monetary holdings. (Of course, it would not be possible to keep such reporting thoroughly up to date, as it would be ever-changing. This would ensure virtually continual guilt through the failure to report.)

Civil Asset Forfeiture
In observing the US, we’re witnessing the completion of the pincer. The first half has been in place for some time, under civil asset forfeiture laws. It’s been described as a process in which law enforcement officers take assets from persons suspected of involvement with crime or illegal activity without necessarily charging the owners with wrongdoing.
That concept may seem odd to the reader, as, surely, if someone had committed a crime, the authorities would wish to charge him, then see to it that he was tried in court, so that he could be punished for his transgressions.
But what if the individual in question was not, in the traditional sense, a criminal; that a law had been written that would effectively define virtually all citizens as criminals? And what if the objective were not to prosecute offenders, but simply to rob them of their possessions?
In this light, civil asset forfeiture makes complete sense. First, the authorities decide that they want to take what they desire from others. Then they target an individual who possesses desired assets (i.e., home, car, business, bank accounts, wealth in a safe deposit box, etc.). They then detain the individual, state that he’s suspected of a crime (suspected drug dealer? Terrorist sympathiser? Possible tax cheat?) and seize his assets.
In this scenario, the authorities are actually advantaged by not charging the individual. He has no recourse, as he can’t demand his day in court for a charge that hasn’t been laid against him.
Therefore, he can’t regain his assets, and they become the property of the authorities.
Although civil asset forfeiture never seems to appear on the evening news, it’s not because it’s a minor operation. Indeed, the total annual take now exceeds that of the annual total for burglaries by traditional criminals (those who rob others without a badge).

Declaration of Assets

Considering the severity of the above, it would be difficult to imagine that civil asset forfeiture laws are only half of the pincer, yet that’s exactly the case. The other half is Senate Bill 1241, which is intended “to improve the prohibitions on money laundering, and for other purposes.”

It requires that anyone travelling beyond US borders declare his assets in writing and in detail, plus provide ongoing access to all accounts held by the individual. In essence, it’s providing the government with a license to track your cash, cryptocurrencies, and other assets in perpetuity.

Should, at any point, your declaration come into question as to its accuracy, the entirety of those assets could be seized, not just those that were unreported. In addition, you could face a prison sentence of up to five years.

The bill also seeks to curtail the individual’s right to travel outside the US. Whilst this may seem to be a less significant loss, as compared to the above, it serves the purpose of making it impossible for the individual to escape the clutches of his government by relocating to another country. He is, in effect, a trapped rat.

In addition, he’s a trapped rat who, having lost his assets to arbitrary confiscation, has been crippled economically. He can no longer defend himself, as he no longer has the means to pay an attorney.

How This Is Likely to Play Out

At present, asset confiscation is undertaken largely at a local level. Police go after many people at random. However, they also have the ability to target specific individuals that they know of, either for personal reasons or because they feel the haul would be substantial. Senate Bill 1241 places the robberies on a national level. It provides a database by which authorities can review possible targets, based upon their assets. It also allows the authorities the opportunity to go after those people who behaved in a manner deemed unacceptable to authorities.

For example, a national repository of information would allow authorities to target specific individuals who questioned the government or sought to live independently of governmental controls.

Both Aldous Huxley and George Orwell described this concept as being central to the assurance that all citizens would be fully compliant with their rulers’ edicts, 100% of the time.

One deviation from acceptable behaviour could result in a total loss of assets and freedom.

It would work like this: Like the FATCA legislation in the US, the premise is:

a. An individual is required to provide a detailed report of his wealth (however small).

b. The regulatory body chooses to regard the report as “in error,” or “incomplete.”

c. The law then allows all the assets to be confiscated, including those portions that were correctly reported.

Of course, we’d like to think that no reasonable government would abuse power in this way.

Unfortunately, history shows that any government that issues a license to itself to rob its citizenry, invariably uses (and abuses) that license.

The beauty of such a system is that it need not be enforced often. Once people understand that, at any moment, they could lose everything and have no recourse whatsoever, they learn to keep their heads down and be compliant.

From that point on, fear of government is a constant, and the population is effectively under house arrest.

In the late eighteenth century, American founding father Thomas Jefferson reportedly stated, “When government fears the people, there is liberty. When the people fear the government, there is tyranny.”

When a country degrades to the point that the government can grip its people in the pincers of arbitrary loss of assets, with no chance of recompense through the justice system, it’s safe to say that people can plan on henceforth living in fear.