Bigger Mistakes 

Doug Nolan

August 27, 2021: Bloomberg Wall Street Week’s David Westin: “Larry, you saw, you read what Jay Powell said [in his Jackson Hole speech]. What was your reaction?”

Larry Summers: “I was glad to see him moving towards beginning tapering this fall. 

I still think he’s operating within the same paradigm that he’s been operating in – which… I don’t think is quite right. 

He made a whole set of arguments on the serene side with respect to inflation. 

And obviously, he may turn out to be correct in those arguments – and there are a lot of people who agree with him. 

But I was struck, for example, that he didn’t say anything about the housing sector. 

That’s the largest part of the consumer price indices. 

I saw a statistic… that said, on average, when a tenant moves into a rented residence, they’re paying 17% more than the old tenant. 

That suggests a lot of rental price inflation. 

If you look at owner-occupied houses, the prices are taking off. 

None of that has been reflected yet in our price indices. 

And yet, on any commonsense definition, that’s surely inflation. 

And, so, my guess is you’ll start to see the housing component of inflation show up as rising pretty rapidly. 

Or if you don’t, it will reflect defects in the way we create the price indices. 

The Chairman mentioned, rightly, that we’ve got record levels of job openings, and workers are turning over very fast. 

Workers are quitting their jobs. 

I’d have thought that all of that would be a signal that in a labor shortage economy, you’d be starting to see much more rapid wage increases than you’d seen historically, but that that was a process that would take a certain amount of time. 

He was more serene about all of that. 

He was referencing that we had had 4% unemployment before covid without rapidly accelerating inflation. 

He was right about that, of course. 

But I see that we’re having far more structural change in the economy, as businesses rethink their business models – when people aren’t going to be coming into the office, as people rethink their lives after a year without commuting – as the whole structure of the economy changes. 

And I think with all that structural change, you’re likely to see some substantial increase in the level of unemployment that the economy can sustain without excessive inflation. 

So, there're no certainties, but I think the inflation risks are graver than those that the Chairman recognized. 

I think that the toxic side effects of QE are rather greater than the Chairman recognized. 

So, in the range of places where this speech seemed likely to come down, I think it came down in a relatively good place from my point of view – pointing towards a taper this year. 

But in terms of the issues I’ve been concerned about for quite some time - that we’re kind of making a bit of a paradigm error, I didn’t expect that the speech was going to represent a deviation from the paradigm, and I don’t think it did…”

“If you think it’s a good idea in order to stimulate the economy – I think the risks are more on the overheating side – but if one thought that it was a good idea to stimulate the economy by printing interest-bearing money, the question would be what you should spend the money on. 

Out of all the things you could spend the money on, the thing that it seems to me that would help the wealthy most and do the least to promote demand, is buying up financial assets. 

And that’s what QE is. 

I’d rather see us – to the extent we want to do this – use fiscal policy. 

Again, I don’t see the problem now as stimulating the economy. 

I see the risk is overheating the economy. 

But if we want to provide stimulus, I don’t think QE is the right way to do it.”

One cannot overstate the critical role played by central banking, especially now that their policies so dictate market excess. 

History informs us that sound “money” is fundamental to stable economic development. 

Moreover, monetary stability is elemental to social and political stability. 

Because we entrust such momentous responsibility to a small group of unelected central bankers, we should at least expect they maintain a cautious approach to monetary management. 

Their decisions can cause great harm, so they should act accordingly. 

That they can be so dismissive of inflation and Bubble risks is deeply troubling. 

We’re now into a third decade of experimental central banking, of which I have chronicled the past two. 

The experiment has failed. 

Monetary disorder has spiraled completely out of control. 

I am reminded of the “rules vs. discretion” policy debate that dates back to the Currency School vs. Banking School debates in nineteenth century England. 

It was recognized generations ago that the risk inherent in discretionary central banking was that one mistake would invariably lead to a series of Bigger Mistakes.

I appreciate Larry Summers’ insight, and he’s clearly more diplomatic than I could ever be. 

This is an unmitigated fiasco.

Federal Reserve credit has now inflated $4.154 TN over the past 77 weeks – and is up $4.597 TN – or 123% – in 102 weeks. 

Let’s not forget the current QE program began months before the onset of the pandemic. 

After beginning 2008 at $850 billion, Federal Reserve assets have inflated almost 10-fold to $8.33 TN. 

Inflationary pressures are the strongest in years, asset markets are conspicuously manic, and much of the labor market faces the tightest conditions in decades. 

And after doubling its balance sheet in less than two years, the Fed is poised to add another Trillion over the coming year. 


Are the risks not obvious?

August 23 – Bloomberg: 

“China’s central bank chief vowed to stabilize the supply of credit and boost the amount of money supporting smaller businesses and the real economy, after both credit and economic growth slowed in July. 

The People’s Bank of China will keep monetary policy stable with a good cross-cyclical design and will support high-quality economic expansion with ‘appropriate money growth,’ according to a statement…”

August 24 – Bloomberg: 

“Promoting the common prosperity will be the focus point of PBOC’s financial work, the Chinese central bank says…, after a meeting on Friday chaired by its party chief Guo Shuqing. 

PBOC calls for strengthening financial infrastructure in rural areas to promote common prosperity among farmers. 

PBOC reiterates not to flood economy with liquidity, will use various monetary policy tools to keep liquidity at reasonably ample level.”

August 26 – Bloomberg: 

“China’s central bank signaled it may reduce the reserve requirement ratio for banks to spur rural finance, a targeted move that would help cushion the economy as it slows. 

The People’s Bank of China said it will use monetary policy tools including the reserve ratio, and relending and rediscounting measures for rural development…”

Beijing followed up last week’s Huarong recapitalization with a string of dovish pronouncements from the People’s Bank of China (PBOC). 

Haurong CDS sank 105 bps this week to a four-month low 453 bps, with an eight-session decline of 380 bps. 

Fellow “asset management company” (AMC) China Orient CDS dropped 46 bps to a four-month low 156 bps – down 70 bps in eight sessions. 

And AMC China Cinda CDS fell 47 bps this week (63bps in eight sessions) to a four-month low. 

August 23 – Bloomberg (Rebecca Choong Wilkins): 

“China Huarong Asset Management Co.’s credit rating was cut by Moody’s… to Baa2 from Baa1, and the borrower remains on watch for a potential further downgrade. 

The ratings firm cited the deterioration of the asset manager’s capital and profitability, after Huarong forecast a 2020 loss of nearly $16 billion last week. 

While a capital injection by a group of state-owned enterprises indicates Huarong’s systemic importance, the plan’s exact impact remains unclear, Moody’s analysts wrote…”

The AMCs pose a major dilemma for Chinese leadership. 

Belatedly, Beijing recognizes the need for some market discipline. 

But China’s now massive $12 TN credit market essentially trades with the perception of implicit central government backing. 

A Beijing move to counter moral hazard with even a modicum of market discipline risks a bursting bubble. 

Chinese officials moved to buy some time by orchestrating a Huarong recapitalization, a move surely in response to rapidly escalating credit instability. 

And then Monday, the People’s Bank of China announced they would be “promoting the common prosperity.” 

Chinese and global markets surged on hopes for further Beijing stimulus measures.

The Shanghai Composite rallied 2.8% this week, with the tech-heavy ChiNext recovering 2.0%. 

Hong Kong’s Hang Seng Index rose 2.3%. 

Taiwan’s TAIEX Index surged 5.3%. 

South Korea’s Kospi recovered 2.4%, and Japan’s Nikkei was up 2.3%. 

Major indices rallied 4.8% in Malaysia, 3.7% in Thailand, and 2.3% in the Philippines. 

Chinese Credit instability was at the cusp of spiraling out of control. 

A crisis of confidence in “AMC” debt would likely push the system over the edge. 

As Moody’s pointed out with its Huarong downgrade, the recapitalization plan’s “exact impact remains unclear.” 

But it does in the near-term likely take a potential highly-destabilizing catalyst off the table. 

That coupled with the typical PBOC emollient was enough to spur a market rally. 

Greed and Fear. 

“Oh no, Beijing is no longer willing to underpin the markets, and this could really start to unwind!” to “Of course they have everything under control - buy the dip and squeeze the shorts!”

It’s easy at this point to dismiss the role China developments are playing in U.S. markets. 

Isn’t it all about the Fed? 

But in a world of highly correlated markets, it’s worth noting the performance of riskier U.S. stocks at the “Periphery.” 

Last week, when the Shanghai Composite dropped 2.5%, the small cap Russell 2000 also fell 2.5%. 

This week, the Shanghai Composite rallied 2.8%. 

The Russell 2000 surged 5.1%. 

U.S. high-yield spreads (to Treasuries) and CDS have also turned more closely correlated to Chinese Credit developments. 

The Bloomberg Commodities Index rallied 5.7% this week, after sinking 4.2% the previous week. 

Global bonds and currencies also whipsawed.  

I struggle to believe this is all a coincidence.

While Beijing did buy some time with the Haurong bailout, Chinese Credit is not out of the woods.

August 26 – Wall Street Journal (Xie Yu): 

“Cash-strapped developer China Evergrande Group said its flagship property business incurred a rare loss in the first half of 2021, after slashing prices of many apartments to boost sales. 

The… property unit’s loss, equivalent to around $618 million, was its first since at least 2009… 

Evergrande, China’s largest developer by contracted sales, warned in a regulatory filing that its reported net profit for the six months to June 30 would be substantially lower than a year ago… 

Since the early months of the coronavirus pandemic last year, Evergrande has discounted sale prices of some of its apartments by as much 25% to lure buyers…”

Evergrande has over $300 billion of debt. 

It’s bond (4-yr) yields traded to almost 45% in Friday trading. 

The “AMC” catalyst may have been pushed somewhat out into the future. 

Meanwhile, Evergrande and the faltering apartment Bubble remain a clear and present danger. 

August 25 – Bloomberg: 

“Beijing’s unprecedented determination to curb the property sector could be China’s ‘Volcker Moment’ as it will cause a ‘significant’ slowdown in economic growth, according to Nomura... 

Unlike in previous economic down cycles, Chinese authorities look set to tighten property sector policy and tame prices this time, in order to reduce wealth inequality and boost the falling birthrate, economists led by Lu Ting wrote... 

Policy makers will be willing to sacrifice near-term economic growth to tame house prices and divert financial resources out of the property sector, which accounts for a quarter of China’s gross domestic product, they wrote.”

They won’t admit as much, but Beijing is determined to finally bring its Bubbles under control. 

The PBOC and “national team” will be employed to try to keep things orderly. 

I don’t expect this to go smoothly. 

It’s fascinating to watch Beijing and the Fed attempt to manage their respective historic Bubbles. 

At least Chinese officials recognize they have a major problem.  

The future of American power

Why America failed in Afghanistan

It was not possible to turn the country into a modern democracy, but creative diplomacy and force might have overcome terrorism, says the American statesman

By Henry Kissinger

THE TALIBAN takeover of Afghanistan focuses the immediate concern on the extrication of tens of thousands of Americans, allies and Afghans stranded all over the country. 

Their rescue needs to be our urgent priority. 

The more fundamental concern, however, is how America found itself moved to withdraw in a decision taken without much warning or consultation with allies or the people most directly involved in 20 years of sacrifice. 

And why the basic challenge in Afghanistan has been conceived and presented to the public as a choice between full control of Afghanistan or complete withdrawal.

An underlying issue has dogged our counterinsurgency efforts from Vietnam to Iraq for over a generation. 

When the United States risks the lives of its military, stakes its prestige and involves other countries, it must do so on the basis of a combination of strategic and political objectives. 

Strategic, to make clear the circumstances for which we fight; political, to define the governing framework to sustain the outcome both within the country concerned and internationally.

The United States has torn itself apart in its counterinsurgent efforts because of its inability to define attainable goals and to link them in a way that is sustainable by the American political process. 

The military objectives have been too absolute and unattainable and the political ones too abstract and elusive. 

The failure to link them to each other has involved America in conflicts without definable terminal points and caused us internally to dissolve unified purpose in a swamp of domestic controversies.

We entered Afghanistan amid wide public support in response to the al-Qaeda attack on America launched from Taliban-controlled Afghanistan. 

The initial military campaign prevailed with great effectiveness. 

The Taliban survived essentially in Pakistani sanctuaries, from which it carried out insurgency in Afghanistan with the assistance of some Pakistani authorities.

But as the Taliban was fleeing the country, we lost strategic focus. 

We convinced ourselves that ultimately the re-establishment of terrorist bases could only be prevented by transforming Afghanistan into a modern state with democratic institutions and a government that ruled constitutionally. 

Such an enterprise could have no timetable reconcilable with American political processes. 

In 2010, in an op-ed in response to a troop surge, I warned against a process so prolonged and obtrusive as to turn even non-jihadist Afghans against the entire effort.

For Afghanistan has never been a modern state. 

Statehood presupposes a sense of common obligation and centralisation of authority. 

Afghan soil, rich in many elements, lacks these. 

Building a modern democratic state in Afghanistan where the government’s writ runs uniformly throughout the country implies a timeframe of many years, indeed decades; this cuts against the geographical and ethnoreligious essence of the country. 

It was precisely Afghanistan’s fractiousness, inaccessibility and absence of central authority that made it an attractive base for terrorist networks in the first place.

Although a distinct Afghan entity can be dated back to the 18th century, its constituent peoples have always fiercely resisted centralisation. 

Political and especially military consolidation in Afghanistan has proceeded along ethnic and clan lines, in a basically feudal structure where the decisive power brokers are the organisers of clan defence forces. 

Typically in latent conflict with each other, these warlords unite in broad coalitions primarily when some outside force—such as the British army that invaded in 1839 and the Soviet armed forces that occupied Afghanistan in 1979—seeks to impose centralisation and coherence.

Both the calamitous British retreat from Kabul in 1842, in which only a single European escaped death or captivity, and the momentous Soviet withdrawal from Afghanistan in 1989 were brought about by such temporary mobilisation among the clans. 

The contemporary argument that the Afghan people are not willing to fight for themselves is not supported by history. 

They have been ferocious fighters for their clans and for tribal autonomy.

Over time, the war took on the unlimited characteristic of previous counterinsurgency campaigns in which domestic American support progressively weakened with the passage of time. 

The destruction of Taliban bases was essentially achieved. 

But nation-building in a war-torn country absorbed substantial military forces. 

The Taliban could be contained but not eliminated. 

And the introduction of unfamiliar forms of government weakened political commitment and enhanced already rife corruption.

Afghanistan thereby repeated previous patterns of American domestic controversies. 

What the counterinsurgency side of the debate defined as progress, the political one treated as disaster. 

The two groups tended to paralyse each other during successive administrations of both parties. 

An example is the 2009 decision to couple a surge of troops in Afghanistan with a simultaneous announcement that they would begin to withdraw in 18 months.

What had been neglected was a conceivable alternative combining achievable objectives. 

Counterinsurgency might have been reduced to the containment, rather than the destruction, of the Taliban. 

And the politico-diplomatic course might have explored one of the special aspects of the Afghan reality: that the country’s neighbours—even when adversarial with each other and occasionally to us—feel deeply threatened by Afghanistan’s terrorist potential.

Would it have been possible to co-ordinate some common counterinsurgency efforts? 

To be sure, India, China, Russia and Pakistan often have divergent interests. 

A creative diplomacy might have distilled common measures for overcoming terrorism in Afghanistan. 

This strategy is how Britain defended the land approaches to India across the Middle East for a century without permanent bases but permanent readiness to defend its interests, together with ad hoc regional supporters.

But this alternative was never explored. 

Having campaigned against the war, Presidents Donald Trump and Joe Biden undertook peace negotiations with the Taliban to whose extirpation we had committed ourselves, and induced allies to help, 20 years ago. 

These have now culminated in what amounts to unconditional American withdrawal by the Biden administration.

Describing the evolution does not eliminate the callousness and, above all, the abruptness of the withdrawal decision. 

America cannot escape being a key component of international order because of its capacities and historic values. 

It cannot avoid it by withdrawing. How to combat, limit and overcome terrorism enhanced and supported by countries with a self-magnifying and ever more sophisticated technology will remain a global challenge. 

It must be resisted by national strategic interests together with whatever international structure we are able to create by a commensurate diplomacy.

We must recognise that no dramatic strategic move is available in the immediate future to offset this self-inflicted setback, such as by making new formal commitments in other regions. 

American rashness would compound disappointment among allies, encourage adversaries, and sow confusion among observers.

The Biden administration is still in its early stages. 

It should have the opportunity to develop and sustain a comprehensive strategy compatible with domestic and international necessities. 

Democracies evolve in a conflict of factions. 

They achieve greatness by their reconciliations.

Henry Kissinger is a former American secretary of state and national security adviser 

Taper Time Is on the Way, Maybe. Powell Sets the Stage With Plenty of Caveats

By Lisa Beilfuss

Fed chief Jerome Powell, shown speaking virutally virtually during the Jackson Hole economic symposium, says interest rate liftoff is being judged by more stringent criteria than tapering of bond purchases. / Daniel Acker/Bloomberg

Federal Reserve Chairman Jerome Powell signaled in his Jackson Hole speech Friday that the central bank may begin winding down its emergency bond-buying program this year. 

Then again, it may not. 

During his appearance at the annual conference hosted by the Federal Reserve Bank of Kansas City, Powell gave a speech that offered something for everyone: Inflation is hot but temporary; hiring is strong but could be better; the Delta variant may or may not be an economic problem. 

He meanwhile avoided answering investors’ biggest questions: When will the Federal Open Market Committee start trimming its $120 billion in monthly Treasury and mortgage-backed securities purchases, and how long will the wind-down take?

“He tried to have his cake and eat it too,” says Joe Brusuelas, chief economist at RSM. 

“And this time, he gets to.” 

Investors seemed to agree, sending stocks to record highs after a speech that, on net, said little. 

It is a case of no news is good news, in that every statement that could be interpreted as a sign that withdrawal of extraordinary monetary-policy accommodation is imminent was caveated by a reminder of why it isn’t. 

At least for now. 

Powell said that the Fed’s inflation objective has been met—an acknowledgment that came just after a report Friday showed the Fed’s favored inflation gauge rose a faster-than-expected 4.2% in July, or 3.62% after backing out food and energy prices. That latter rate is the highest since May 1991, and it is well above the Fed’s longstanding 2% inflation target. 

“Businesses and consumers widely report upward pressure on prices and wages. Inflation at these levels is, of course, a cause for concern,” Powell said, throwing a bone to more hawkish Fed officials and concerned investors alike. Still, he went to great lengths in his speech to argue why inflation isn’t a problem, pushing back on a growing cadre of Fed officials expressing concern over rising prices and advocating for tapering to start this fall. 

But pricing pressures aren’t broad, Powell argued, an observation that some investors say doesn’t comport with reality. 

“I think he’s completely off base,” says Peter Boockvar, chief investment officer at Bleakley Advisory Group. 

“Certainly every single good that is produced has major inflation pressures associated with it and services inflation is just heating up.”

Perhaps more importantly, Powell said long-term inflation expectations remain anchored—parlance intended to mean consumer expectations for higher prices more than a year out haven’t risen in a way that are pulling purchases forward and pushing prices even higher. 

So long as consumers don’t see higher prices persisting, the logic goes, they won’t. 

Boockvar notes that longer-term expectations tracked by the University of Michigan are at a 10-year high.

Alongside the inflation two-step came a subtle upgrade in his labor market outlook. 

A reference to “clear progress” toward maximum employment is an upgrade from his earlier assessments, and investors can expect to see that reflected in the September FOMC statement, says Jefferies chief economist Aneta Markowska. 

Yet here, too, Powell, gave an offset that nets to nothing in the scheme of reading policy tea leaves.

“Labor market conditions are improving but turbulent, and the pandemic continues to threaten not only health and life, but also economic activity,” he said, reminding investors that despite solid hiring in recent months, total employment remains six million below its February 2020 level. 

Therein lies Powell’s ability to have it both ways a little longer.

“At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” Powell said. 

“The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant.”

The fast-spreading Delta variant—which caused the Fed to scrap its own plans for an in-person Jackson Hole symposium—is the wildcard that may be the difference between a job market that normalizes in September and a job market that doesn’t. 

Economists, employers, and policy makers have pinned an abundance of hope on September, predicting that the end of generous unemployment benefits and child care challenges that would presumably ease when kids return to in-person school would usher millions back into the labor market. 

Because the labor shortage is the root of the everything-shortage, the idea is that more workers means more supply to satisfy roaring demand, which would in turn relieve price inflation. 

It’s a big gamble. 

It was during his Jackson Hole speech in 2020 that Powell unveiled the Fed’s new inflation framework, designed to let inflation exceed 2% after periods below that level—though by how much and for how long is unclear. 

The point is to push unemployment lower, especially among groups that tend to experience higher rates of unemployment and lower wage gains such as Blacks and Hispanics. 

The new framework was crafted before the pandemic, and investors and central bankers are watching a real-time stress-test of the new approach. 

One key component of the new inflation framework is their insistence on actual data rather than just forecast data, says Mondher Bettaieb-Loriot, head of corporate bonds at Vontobel Asset Management. 

Inflation repeatedly undershot officials’ inflation forecasts for the decade leading up to the pandemic, which explains the Fed’s caution on making moves based on inflation data, Bettaieb-Loriot says.

Focusing on data over forecasts suggests officials have nowhere to be but behind the inflation curve. 

Powell gave no indication Friday that the Fed is questioning its new framework, instead signaling that it hasn’t been fulfilled. 

To that point, Powell stressed Friday that tapering “will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”

Add it all up and the message is a dovish one, for now, that may portend a hawkish surprise later. 

Economists at Goldman Sachs say they continue to expect the Fed to formally announce the start of tapering in November, assigning 45% odds to that outcome, 35% odds of a December announcement and 20% odds of a 2022 announcement. 

Once tapering starts, Goldman sees reductions of $15 billion per FOMC meeting which would take eight months to complete.

The bottom line? 

The Fed likes the box it has put itself in, where it is in some ways shielded from reality. 

The unemployment objective is an elusive one given that current monetary policy may be undermining efforts to reduce joblessness and increase purchasing power. 

For now, that means investors can count on the stock market party persisting.  


By: Peter Schiff

In the 50 years since Richard Nixon officially severed the dollar’s link to gold, many have claimed that the greenback’s strength rests primarily on America’s unchallenged power and prestige around the world. 

As the situation in Afghanistan moves from embarrassment to tragedy, we are witnessing the rapid evaporation of the remnants of American prestige. 

These developments are likely to further decentralize the dollar’s role in global finance and increase the chances that the currency will experience substantial declines in the years to come. 

While the wisdom maintaining a 20-year U.S. military presence in Afghanistan, can be honestly debated, it seems beyond doubt that our government’s strategic assessment of the situation in Afghanistan, and the timing and execution of the evacuation, have been epic, historic, failures. 

The picture that has emerged paints America not just as a paper tiger, but one that is also deaf and blind. 

The pictures themselves tell the story. 

Those who put their lives on the line to advance American interests have been left standing outside the Kabul airport in flooded sewage trenches hemmed in by razor wire. 

There can be little hope that those we leave behind will escape the vengeance of the religious fanatics who have toppled the world’s largest military. 

In Washington, a doddering President comes to the podium and mumbles statements so obviously contradicted by the images we all see, that even the fawning, left-leaning press corps can’t pretend to swallow them. 

In frantic calls under the auspices of the G-7 (the seven-nation bloc of the world’s leading industrial democracies) and NATO, America’s closest allies have publicly expressed their disbelief that Biden could so callously abandon his allies to pursue a domestic political agenda. 

The Left had accused Trump of looking to destroy NATO. But Biden may be able to accomplish that goal far quicker and more completely than Trump ever could.   

It’s clear to everyone that Biden’s self-imposed August 31st evacuation deadline arose because the President feared that an attack on U.S. forces on the ground would blemish his image as a peacemaker. 

That attack came on Thursday, killing 13 U.S. servicemen and up to 80 Afghan civilians.  

By not committing the resources needed to execute a more robust and orderly withdrawal, Biden is prepared sacrifice the lives of Americans and our Allies to perpetuate a fantasy that he had planned for all contingencies.  

The feckless American performance has inspired allies in Europe to openly ask for a new strategic framework that removes America as the primary security guarantor. 

More ominously China has used the episode to warn the Taiwanese that when the chips are down, America’s weakness on display in Kabul will be repeated in the South China Sea.

While I never supported an extended ground mission in Afghanistan, it doesn’t mean that the visible reminders of America’s dysfunction are not a game changer on the global stage. 

And while some may rightly argue that it’s far past time for America to relinquish the role of global policeman, it doesn’t change the fact that America’s retreat will create a power vacuum that our rivals will fill. 

As China extends its influence throughout Asia and into the Pacific, the Middle East, and Africa, we can be sure that they will see themselves replacing the United States as the world’s dominant economic power. 

Given its power it is certain that China is uncomfortable with the advantages that the U.S. receives through the dollar’s global reserve status..

If a company in Chile wants to do business with a company in Australia, they must buy dollars to effectuate the transactions. 

If the Swedes want to buy oil from the Saudis they need dollars to do it. 

The weight of all this dollar denominated commerce creates a continuous demand that helps support the dollar no matter how much it is abused by Washington’s deficit spending and money creation. 

This has given America a license to steal.

Contrary to the asinine statements that come from economic professors and financial journalists, a weak currency is not a benefit because it allows countries to undercut rivals on price. 

I take the more basic, and apparently controversial, argument that being rich is generally better than being poor. 

A strong currency means that those who hold it have greater purchasing power. 

The strength of the dollar has meant that Americans can afford to buy massive quantities of goods manufactured overseas. 

And since a very large portion of what we buy is imported, it means that we can find relatively low prices for all the things that we use daily. 

A significantly weaker dollar will reverse all of this and will diminish our living standards. 

It’s sobering to think of how easily the Chinese could pull the rug out from under the dollar. 

China could sell just a portion of its multi trillion-dollar stash of U.S. Treasury bonds. 

Or it could mandate its trading partners transact in the RMB. 

Or it could look for strategic partners like Russia to organize commodity exchanges based in other currencies (a development that is already well underway). 

If the dollar loses its global reserve status it will have to rise and fall on its own merits. 

On that score things could hardly be worse. 

The country is experiencing the largest debt explosion in our history, occurring simultaneously with the most dangerous outbreak of inflation since 1981. 

But unlike 1981, there is no will anywhere within 1,000 miles of Washington to do anything to contain these growing threats to the dollar’s fundamentals. 

In 1981 Ronald Reagan and Paul Volcker combined to break the back of an inflation crisis that had been building for more than a decade. 

They did this through a combination of pro-business, supply side economic policies and extremely hawkish monetary policy. 

There is nothing like that even being proposed by either party today, let alone being actively considered by the big spending, negative real interest rate doves in the White House and at the Federal Reserve. 

The American government currently spends more than twice what it raises in taxes. 

It borrows the rest. 

Similarly private debt levels are at record levels across a variety of sectors.  

Yet all the current administration can think of to get us out of the mess is to borrow and print more. 

At some point the rest of the world will grow increasingly uncomfortable with storing their wealth in a currency that is continually created to pay the debts that Americans can’t pay themselves. 

And with America’s power and leadership waning, who would blame them if they decided to follow China into a new century.

In such a scenario were to transpire, big drops in the dollar will also make huge impacts on relative investment performance. 

American investors should prepare for the world to come, rather than be stranded like those unfortunate souls at the Kabul airport. 

COVID Bailouts Have Nothing to Do With COVID

By Matthew Piepenburg

Below, we ask a simple question: Is the war on COVID the needed pretext for even more centralized market “performance?”

After all, who needs free markets when central bank liquidity determines price forces via endless COVID bailouts?

The trend toward centralized controls and centralized markets was in play long before COVID, but has the pandemic given the powers-that-be even more power?

As we discuss below, COVID may just be the final nail in the coffin of free market capitalism.

In this murky light, do traditional market indicators and forces even matter anymore?

Consumer Sentiment: Who Cares?

As stocks reached all-time highs in U.S. markets, consumer confidence recently saw its 7th greatest collapse in history.

Needless to say, cadres of Wall Street spin-sellers (propaganda specialists?) are already hard at work explaining why such a disconnect between sentiment and equity valuations (i.e., price bubbles) doesn’t matter.

After all, when buckets of QE liquidity pour daily into the financial system in a COVID-induced era of unlimited-QE, today’s central-bank driven markets don’t need consumer confidence or even healthy balance sheets (from free-cash-flows to profits & earnings) to make their zombie-like climb toward 34.6 PE levels on the S&P.

In short, who needs consumer confidence (or even consumers at all), when a central bank airbag sits permanently beneath the S&P, NASDAQ and DOW?

Words Replacing Math & Facts

Over a decade ago, when the first controversial bucket of QE1 began, Bernanke promised it would be a “temporary” measure.

But bear or bull, we are fairly clear by now that words like “temporary” and “transitory” coming out of D.C. are as empty as Nixon’s promise in 1971 that decoupling from the gold standard would be equally short-lived:

And when it comes to words vs. reality, it doesn’t take a Sherlock Holmes or even an Inspector Clouseau to see the lighthouse of true motives amidst a fog of false narratives.

Enter COVID—The Ultimate Bailout

Whatever one’s view of the COVID pandemic or its toll on human health and global GDP, one can no longer deny that a virus whose survivability percentage is greater than 99% has been the perfect setting (ruse?) to justify, inter alia, yet another tsunami of Wall-Street bailouts under the guise of a global health crisis.

In short, if Bear Sterns, Lehman Brothers, Morgan Stanley and other TBTF banks playing with MBS fire justified the 2008 bailout, certainly the optics of a “global health crisis” made trillions worth of more market “accommodation” easier to swallow (or sneak in).

Toward this end, as the needed and all-too important debates continue to rage (despite open censorship) about health passports, nation-wide shutdowns, case fatality rates, vaccine safety/efficiency facts and health ministry fictions in a backdrop of dying civil liberties, free-market forces and governmental trust, one thing is becoming clear…

COVID (and more specifically COVID bailouts) saved the global financial markets.

That is, despite the competing fear-porn vs. “we care for you” narratives from NYC to Sydney, COVID has been Wall Street’s greatest ally since the Geithner-Bernanke-Paulson era of 2008.

Stated even more simply, while millions wonder when they can travel, work or save money again, the markets got another bail-out at the expense of the real economy.

And COVID, whether man-made or bat-made, came just in time to bailout a credit market that was near death’s door by late 2019.



We’ll never find those answers in a carefully/privately censored Google search or YouTube video.

Meanwhile, policy makers (like bees buzzing galvanically around a pot of honey) continue exploiting the COVID narrative to justify an unprecedented era of centralized control over public free markets and individual free choice with a sanctimonious carte blanche the likes (and dishonesty?) of which history has never seen before.

Playing along or following along, companies like Amazon, the NY Times, BlackRock and Wells Fargo continue to push back their return-to-office dates as individual states debate whether mask mandates make sense, despite censored science which suggest that masks stop the spread of viral microbes about as well as chain-link fences stop mosquitos…

Has the world gone mad as a gullible herd following fork-tongued shepherds, or does Big Brother just care a lot about your health?

That’s for each of us to decide, but when it comes to what we can expect from central bankers, my view is clear: COVID will continue to be exploited to justify more liquidity and hence more market “support.”

The Taper or No-Taper Debate

This means investors can expect more market bubbles, volatility, and distortion alongside more inflationary tailwinds, currency debasements and policy double-speak as the taper vs no-taper debate takes on a prominence in the public discourse similar to the mask or no-mask comedy de jour.

That is, as Wall Street continues to debate whether the Fed will begin tapering its magical money printing, the growing volume of Delta variant headlines pouring from the global Ministries of Truth leads me to believe that a narrative is already being telegraphed to justify more rather than less monetary expansion in the near-term.

This may explain why BTC and gold, despite bumpy rides of late, have been recovering rather than hiding in a corner, as more and more investors see the currency debasement writing on the wall, despite such realities never making the headlines or FOMC meeting notes.

We’ve also written elsewhere that the “taper debate” is ultimately (and realistically) a non-debate, as any significant form of tapering means less sovereign bond support, and less sovereign bond support means bond-decay followed by immediate yield (and hence interest rate) climbs.

If interest rates climb in a $280T backdrop of global debt, the market party (i.e., artificial “recovery”) enjoyed since 2009 comes to an immediate end. 

Period, full stop.

Central bankers and politicos, of course, know this, which explains why more rather than less QE is all that keeps the current risk asset bubble (from stocks to real estate) alive.

In this sad yet seductive light, policy makers—and investors—have two choices: 1) keep the QE going and send inflation to the moon, or 2) taper and send the global markets to the basement of time.

At some point, of course, even unlimited QE becomes unsustainable and the entire house of cards collapses under its own grotesque weight.

When that moment (planned or natural) occurs, the very policy makers who caused this inevitable catastrophe will have the convenient excuse to blame the financial rubble on COVID rather than their bathroom mirrors.

Again, COVID is a very convenient narrative, no?

Near term, the cynical yet realist take on the taper ahead is that it will be postponed rather than embraced. 

That’s our view.

The Case for Tapering—Michael Burry’s Next Big Short

In fairness to open debate, however, it’s worth noting that far smarter folks have taken other views.

For example, Michael Burry of Scion Capital, the misunderstood genius behind the “Big Short” during the Great Financial Crisis of 2008, has been shorting US Treasuries to the tune of $280 million in put options against the iShares 20+ Year Treasury Bond ETF (ticker TLT), which makes him money if bond prices fall rather than rise.

Michael Burry, it seems, is expecting less rather than more FED bond support, and hence rising rather than “repressed” yields on long-term Treasuries.

And Burry, I’ll confess, may be right.

Even the Fed can’t print forever to keep yields and rates artificially suppressed.  

Hence, they may actually signal actual rather than semantic tapering, which is why all eyes will be on Jackson Hole to look for further signs of Fed tightening by year end.

This brings us back to COVID and the deliberate fear campaign from on high, as Powell has confidence that stoking the COVID narrative will force more investors into buying “safe” bonds, thus taking some of the onus off the Fed to buy the bulk of Uncle Sam’s debt via extreme QE.

If the Fed taper becomes a reality rather than debate, bond prices will fall, which means bond yields could easily and rapidly rise from the current 1.2% range to 1.8% or higher mark.

Rising bond yields, of course, mean rising interest rates, and rising interest rates means a rising cost of debt, which ultimately means that the debt-driven “party” which markets have been enjoying for years will see a genuine “hangover” moment worse in scope to what the rising rate window of late 2018 witnessed.

In short, should the Fed indeed turn naively hawkish and “taper,” this would be a disaster for just about every asset class but the dollar, and would likely be a short-lived and immediately reversed policy, akin to the 2019 reversal after the 2018 Q4 rate hike. 

We may even get a new variant and COVID bailout to mark the occasion!

Tapering & Gold

As for gold investing, rising rates would send gold lower and the dollar higher if inflation doesn’t rise measurably faster or higher than potentially rising bond yields.

Given the Fed’s primal fear of that anti-dollar known as gold, we can expect more fictionally downplayed bad CPI inflation reporting from DC in the near-term, especially if a dollar-surging taper were to occur.

Longer term, however, the damage created by years of expansionary monetary and fiscal policy will continue to be an inflationary tailwind for precious metals whose patience in the face of drunken fiscal policy is historically confirmed crisis after crisis after crisis…

Real Rates: Deeper Down Seems Inevitable

As all precious metal investors know, gold price moves inversely to real (i.e., inflation-adjusted) rates. 

That is, as real rates plunge, gold prices rise.

This would explain why gold bought from Switzerland is moving to patient gold investors in zip codes like China and India.

Despite genuine arguments in favor of tapering and the genuine intelligence of traders like Michael Burry, the realists play the long-game. 

They know, in short, that tapering is a self-inflicted bullet wound to risk assets.

Furthermore, they understand that the massive mountains of debt upon which countries in the West now sit would make rising rates impossible for countries like the U.S. to re-pay.

For this reason alone, I see more rather than less QE ahead, as the only real buyers of government debt needed to keep rates repressed come from central banks, not natural market demand.

As U.S. debt to GDP skyrockets past 100% and now 130% for the twin-deficit USA, the only solution/option available to such a debt-soaked nation is lower rather than higher real rates.

In such a light, tapering, again, is a dangerous option.

Since 2014, when the U.S. lost its external finance base (i.e., when global central banks stopped buying Uncle Sam’s debt on net), the Fed has had no choice but to be the buyer of last resort for its own IOUs.

This means Uncle Sam has a vested interest in keeping rates low while inflating away its debt with higher (albeit mis-reported) inflation rates—the perfect backdrop for falling rather than rising real rates—and hence a clear tailwind for gold.

Despite such realism, many are arguing that the negative 1.1 real rate figure seen last August represents a floor.


A New War, a New Excuse to Print Money

Returning to that all-too-convenient COVID narrative (scapegoat?), I am of the strong opinion that the “war on COVID” will be the dominant and continued narrative moving forward, as wars are historically confirmed (as well as historically convenient) justifications for further rate repression and even lower real rates.

That’s good for gold.

Be reminded, for example, that the U.S. is no stranger to seeing real rates fall as low as -14%, as was seen in the Civil War, as well as World Wars I and II. 

In the post-Vietnam 70’s, real rates sank to -7%.

My cynical realism suggests therefore that the -1.1% real rates observed last August were anything but a “floor” and that the War on COVID will be deliberately exaggerated, promulgated, extended and alas conveniently exploited to justify even greater negative real rates ahead—all very good conditions for gold and silver.

As hard as it may be for modern investors lulled into thinking the Fed has actual intelligence and choices when it comes to tapering or managing inflation like a home thermostat, the only means they have for keeping the tragi-comical levels of U.S. debt sustainable is to see real rates closer to -15% not -1.1%.

To achieve this, they will need more COVID bailouts and QE, and hence more liquidity, and hence more dollar-debasing policies to pay their debts cheaply. 

Again, a very nice setting for precious metals.

But -15% real rates? 

No way? 

Crazy, right?

Growing Rather Printing Our Way Out of Debt?

Optimists, of course, will call me crazy, and pundits will say we can “grow our way out of debt.”

Fair enough.

But to “grow” our way out of debt in a normal rather than increasingly more negative real-rate environment would require GDP growth rates of 20% or higher for the next 5 years.

Does anyone actually believe that will happen?

We don’t either.

Taper or no taper, real war or a politically-contrived “COVID war,” pandemic altruism or pandemic scapegoat, the debt reality facing the world in general or the U.S. in particular suggests that COVID will be the politically-correct pretext for more rather than less “accommodation” from the Eccles Building.

Longer term, this means an already grossly debased dollar will become even more so, and that negative real rates can go far lower than expected, thereby ushering in a new yet all-too familiar era for gold.

Let’s wait and see. 

Are Central Banks to Blame for Rising Inequality?

The view that central-bank interest-rate policy can and should be the main driving force behind greater income equality is stupefyingly naive, no matter how often it is stated. Central banks can do more to address the inequality problem, but they cannot do everything.

Kenneth Rogoff

CAMBRIDGE – Judging by the number of times phrases such as “equitable growth” and “the distributional footprint of monetary policy” appear in central bankers’ speeches nowadays, it is clear that monetary policymakers are feeling the heat as concerns about the rise of inequality continue to grow. 

But is monetary policy to blame for this problem, and is it really the right tool for redistributing income?

Recently, a steady stream of commentaries has pointed to central-bank policy as a major driver of inequality. 

The logic, simply put, is that hyper-low interest rates have been relentlessly pushing up the prices of stocks, houses, fine art, yachts, and just about everything else. 

The well-off, and especially the ultra-rich, thus benefit disproportionately.

This argument may seem compelling at first glance. 

But on deeper reflection, it does not hold up.

Inflation in advanced economies has been extremely low over the past decade (although it accelerated to 5.4% in the United States in June). 

When monetary policy is the main force pushing down interest rates, inflation will eventually rise. 

But, in recent times, the main factors causing interest rates to trend downward include aging populations, low productivity growth, rising inequality, and a lingering fear that we live in an era where crises are more frequent. 

The latter, in particular, puts a premium on “safe debt” that will pay even in a global recession.

True, the US Federal Reserve (or any central bank) could impulsively start increasing policy rates. 

This would “help” address wealth inequality by wreaking havoc on the stock market. 

If the Fed persisted with this approach, however, there would almost certainly be a huge recession, causing high unemployment among low-income workers. 

And the middle class could see the value of their homes or pension funds fall sharply.

Furthermore, the dollar’s global dominance makes emerging markets and developing countries extremely vulnerable to rising dollar interest rates, especially with the COVID-19 pandemic still raging. 

While the top 1% in advanced economies would lose money as one country after another was pushed to the brink of default, hundreds of millions of people in poor and lower-middle-income economies would suffer much more.

Many rich-country progressives, it seems, have little time for worrying about the 66% of the world’s population that lives outside the advanced economies and China. 

In fact, the same criticism applies to the burgeoning academic literature on monetary policy and inequality. 

Much of it is based on US data and gives no thought to anyone outside America.

Still, it is useful to try to understand how, under different assumptions and circumstances, monetary policy might affect the distribution of wealth and income. 

It is possible that, as artificial intelligence advances and monetary policy becomes much more sophisticated, economists will find better metrics than employment to judge the stabilization properties of monetary policy. 

That would be a good thing.

Even today, central banks’ regulatory role means that they can certainly help at the margins in addressing inequality. 

In many countries, including Japan, banks are essentially required to provide very low-cost or free basic accounts to most low-income citizens. 

Oddly, this is not the case in the US, although the problem could be elegantly solved if and when the Fed issues a central bank digital currency.

But interest-rate adjustments are far too blunt a tool for conventional monetary policy to play any kind of leading role in mitigating inequality. 

Fiscal policy – including taxes, transfers, and targeted government spending – is far more effective and robust.

One popular solution to the problem of wealth inequality, notably advocated by economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, is a wealth tax. 

But although far from a crazy idea, it is difficult to implement fairly and does not have a great track record across advanced economies. 

Arguably, there are simpler approaches, such as reforming the estate tax and raising capital-gains taxes, that could achieve the same end.

Another idea would be to shift to a system of progressive consumption taxes, a more sophisticated version of a value-added or sales tax that would hit wealth holders when they go to spend their money. 

And a carbon tax would raise huge revenues that could be redirected toward low- and lower-middle-income households.

Some might argue that political paralysis means none of these redistributive proposals are advancing fast enough, and that central banks need to step into the gap if inequality is to be tamed. 

This view seems to forget that although central banks have a certain degree of operating independence, they are not empowered to take over fiscal policy decision-making from legislatures.

As extreme poverty has declined in many countries in recent decades, inequality has become the leading societal challenge. 

But the view that a central bank’s interest-rate policy can and should be the main driving force behind greater income equality is stupefyingly naive, no matter how often it is stated. 

Central banks can do more to address the inequality problem, particularly through regulatory policy, but they cannot do everything. 

And please, let’s stop ignoring the other two-thirds of humanity in this crucial debate.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

The Death of Citizenship

by Chris MacIntosh


The dictionary describes citizenship as:

"The state of being a member of a particular country and having rights because of it."

The concept is simple. 

Citizens pay the State and the State provides various protections and rights in return. 

Citizenship is the result of a need for collectivism. 

There are times within historical cycles when this sort of cooperation is necessary for survival.

The Sicilian mafia, for example, came about due to a need for Sicilians to protect themselves from Northern bureaucrats who came down demanding a share of their produce. 

They got pissed off, banded together, and formed a group to repel them. 

In order for this group to function and be effective villagers initially willingly contributed to them. 

They called it "protection money," and it was — protection from those bastards up north. 

When the threat retreated, instead of disbanding, the mafia moved into continuing to demand protection money. Not from invaders up north but from… themselves. 

That is, of course, a very condensed simplified version of events, but it is broadly accurate.

Citizenship formed in a similar fashion.

In earlier centuries, it was the thugs better known as kings and queens who ruled.

The modern-day concept of the nation state is a relatively new phenomenon viewed through the arc of history.

The Enlightenment and The Nation State

The 17th and 18th centuries birthed the nation state in Europe, and then in the United States after the American Revolution brought forth the concept of a State.

It was after the Civil War between the North and the South that the overriding theme of unification and the birth of the American State known today as the United States of America came into existence. 

As for the other parts of the world, they were either ruled by kings and princes or colonized by Western powers.

The growth of the modern nation state picked up pace after the war and during the 1960s when many African states became independent from their colonial rulers. 

This was because their rulers found that the cost to maintain these outposts outweighed the benefits, and they also found that if they controlled the industry, there really wasn’t much need to simultaneously incur the costs of government.

Further, with the spread of modern communication technologies, it was easier for the indigenous people to rise up as a unit and overthrow their colonial masters which itself accelerated the birth of the modern nation state.

While all of this was happening something else was taking place that, while it was visible, the power structure was masked from view.

That trend was globalisation.

What globalisation did was to cede power from governments to large corporations and giant conglomerates.

Consider that at over $7 trillion, the combined market cap of Apple, Microsoft, Amazon, and Google is greater than the GDP of every single country in the world, with the exception of the US and China.

Today the corporations are in control.

We have moved solidly into a state of affairs where those who are supposed to be providing citizens protection are in fact the aggressors. 

Modern day mafia, only far more sophisticated because they own and control the narrative via both mainstream media as well as social media.

Today I am going to make the case here that we are experiencing the death of the concept of citizenship and hence the nation state as we’ve known it.

I’m not sure what follows it but citizenship as we know it is over.  


When I think back to my grandparents who survived World War II, I remember people used to dry out tea bags for quadruple usage.

People who would have thought it the height of extravagance to be drying their clothes in a dryer when the wind and sun did the job.

Patience, hard work, resilience, and fortitude were required and developed. 

And with real stresses and concerns, perspective was provided.

If you were a naughty little snot as a kid, you got your bottom smacked and sent to your room. 

You never put your feet on the table, and when speaking with an elder you were respectful and polite even if your elder was being a muppet.

That was then, and this is now.

Today’s snowflake generation, glued to their mobile phones and angered if they don’t get a prize for just "being", haven't learnt how to deal with discomfort.

Discomfort for this generation involves hyperventilating due to a difference in opinion on social media, by someone on the other side of the world whom they’ve not met and never will. 

Imagine a generation this fragile. Imagine a generation so fragile they have built themselves "safe spaces" to retreat to when their delicate ears or eyes encounter things that upset them.

These are children, clearly, and children need to be cared for. 

But these children are of adult age, so what now?

Well, the State has stepped in, and the citizens have championed this intrusion into their lives, believing it both necessary and desirable.

This has been the case for decades now.

The period of time we’ve entered now is where those in power realise there is no out to this. 

And so, in order to retain control — before it all implodes — they are actively forcing a self-demolition with the idiotic and murderous idea that they’ll "build back better" using communism instead.

What Happens Now?

Did you know that Australians who happen to live in India are not allowed back into the country?

Did you know that Australians are not allowed to leave the country?

So much for rights.

As citizens wake to the harsh reality and look at this agreement with their government it isn’t long before trust completely evaporates?

What does this mean?

Well, what exactly do you own when you lose faith? 

Not only what do you own — where do you own it?

These considerations have been comparatively trivial in our lifetimes, and they are fast becoming entirely nontrivial.

On the positive side of things this brings with it extraordinary asymmetry.

Editor’s Note: Disturbing economic, political, and social trends are already in motion and now accelerating at breathtaking speed. 

Most troubling of all, they cannot be stopped.

What comes next is a chaotic period for your wealth and personal freedom.