Crony Capitalism Is A Feature, Not A Bug, Of Contemporary Liberalism

Jeffrey Snider, here:

Employment grows not on the pace of redistribution-derived consumer spending in the lower classes, but as new firms innovate and grow to replace older firms that have seen their last days. Failure and rebirth are the capitalist "secrets", and demand always follows supply in that line. Interrupt it at your peril.

Unfortunately, we see in the 21st century a different strain of imperialism that is rooted in Hobson's preferred solutions to it. By giving government more power over industry and business, Hobson suggested that government would be able to end business agitation toward external colonialism. But in doing so, governments have introduced the seeds of cronyism that take the form of internal imperialism. Big businesses have achieved regulatory leverage in a manner that may preclude the innovation and business cycles from creating that positive economic trajectory. And monetary policy, all in the name of aggregate demand, appears to be playing a large role.

... OWS [Occupy Wall Street] and its sympathizers ... are really protesting their own philosophies put into practice via a bastardized capitalism - so corrupted by devotion to aggregate demand in this era that it can hardly be referred to as such.

There will never be, and has never been, any such thing as fully free markets, nor should there be. What we are arguing is not absolutes but proportions. ... In perhaps the greatest and most tragic of ironies here, the Fed appeals directly to inflation as a means to destroy savings, an impulse to which I have to think Hobson would readily approve, but that inflation is itself a means of redistribution that further concentrates savings among the wealthy. More than an irony, it seems as if this inconsistency is a feature of this philosophy, as taken to its logical ends it produces something akin to circular reasoning. It is a place where the socialists of OWS criticize directly the tools of socialist monetary policy as if they are anything apart from each other.

The Rise Of Patents From The 1980s Is Basically A New Protectionism, Reducing Innovation

So says Jeffrey Snider, here:

Contrary to popular belief, again assuming I am correct in interpreting it, patents are not about innovation at all. The rise in patent applications was not a proxy for a new wave of innovation, but an era of protectionism. A patent is a legal form of destroying competition. Ostensibly, that is assumed to be a cost to the system worth bearing because we largely believe that patents encourage innovation by giving the innovator some protection to reap the benefits of trying to innovate. But is that really the case? Would innovation suffer from competition at the earliest stages?

Markets develop because market demand exists, and I happen to believe that innovation would be better served with competition right from the start. But to the question at hand, the sharp rise in patent applications starting in the 1980's was likely far more related to reducing competition than signaling the continued advancement of technology revolution.

Once Again, It's The Banks Doing The Money Printing, And The Bubble Blowing, Not The Feds

Jeffrey Snider, here:

That is not to say that paper dollars are issued by banks; they are not. Paper currency still takes the form of Federal Reserve Notes, but in the marginal monetary and banking system they are largely irrelevant. Dollars in the banking system, what is called liquidity, are created and dispersed by bank balance sheet accounting. These marginal liquidity units are digital representations of currency, ledger balances that shift daily, even by the minute. Bankruptcy and insolvency are not when you run out of Federal Reserve Notes in your bank vault, they come when you have to settle your accounts with the liquidity provider and there are no positive numbers on the right side of the computerized ledger (or when your ledger does not match your counterparty's, and that counterparty happens to be JP Morgan).

Given that global banks are the primary "money printers" in the dollar trade system (and the dollar swap standard), the Fed's role under interest rate targeting is to backstop the wholesale money markets where banks obtain short-term funding from each other. The implicit promise of interest rate targeting had been enough for the global dollar fraction to expand through accounting, regulatory and derivative leverage, providing the financing for the myriad bubbles of recent decades. The Fed did not create the bubbles directly, just provided the conditions for banks to do it for them.

Revenues Show Global Economy In Full Retreat

Jeffrey Snider, here:

What feels like a still-recovering recovery to so many looks far different in comparison to the real recession that was already in full swing in 2008 – the fact that so many companies and so much of the economy is running below 2008 rates is very revealing and startling in its implication. It should be even more remarkable aside the fact that QE 3 & 4 are right now being pushed into “markets”, and that a renewed housing bubble is building next to myriad other asset bubbles.

There is no hiding the fact that the global economy, including the US, is in full retreat. Investors and observers may choose to ignore it, but that just makes their game of waiting for recovery all the more curious.

Bernanke Contradicts Himself

So says Jeffrey Snider, here:

Chairman Bernanke stole the show yesterday, certainly by his accommodative and now contradictory stand. I suppose that is the danger in trying to talk “markets” toward “targets”, much like Greenspan in the late 1990’s. Toward that end, he made at least one prediction that will likely come true (in sharp contrast to the Fed’s history), namely that the unemployment rate understates the weakness in the jobs market. ... As to the potential for tapering, that has always been about the rock and the hard place; the rock being asset bubbles in housing, credit and, yes, stocks vs. the hard place of lackluster, at best, economic performance. Given the problems of real time economic tracking and the dubious record of ferbus and other econometric models in use it would make sense that the FOMC appears to subscribe to each and every possible outcome concurrently. The committee both backs the accommodative approach (employment might be weaker than indicated) and the taper approach (things are getting much better) all at the same time.

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Still, it's an odd way to behave if you are being shown the door in a few months.

QE Removes Banking Collateral, So Gold Steps In And The Price Plunges

So says Jeffrey Snider of Alhambra Investment Partners, here, who sees it as a sign of big trouble ahead, with banks out front in the lead:

[I]n times of extreme stress, gold acts like a universal liquidity stopgap – when all else fails, repo gold. The operational reality of a gold repo is a gold lease, charged at the forward rate (GOFO). In terms of market mechanics, a dramatic increase in gold leasing is seen as a massive increase in supply on the paper markets. For various reasons in the past five years, collateral chains and the available collateral pool has dwindled dramatically. That has left banks to scramble for operational bypasses, but it also has led to periods of very acute stress. When we match the price of gold against these stressed periods, they coincide perfectly. In other words, whenever collateralized lending has become problematic banks appeal to the universal collateral. Unfortunately, that looks like gold selling to the uninitiated. These large declines in gold prices match date for date the extreme developments in the banking system across several currencies. And in each case the gold selloff has previewed a larger decline in systemic liquidity that eventually catches other asset classes.

Did you get that? The price drops on the appearance of a massive increase in supply, on the paper markets, when in actuality there is nothing of the kind.

"This Is Not A Market System, Nor Is It In Any Relation To A Capitalist System"

So says Jeffrey Snider of Alhambra Investment Partners, here.

Three Dubious Firsts For Obama In Quick Succession In 2011

The dollar hit its all time low under Obama, on 5/2/11 at 67.97, but this has not been much discussed even though it is surely related to the following other firsts.

On 8/5/11 Standard and Poor's downgraded the US for the first time ever, from AAA to AA+, primarily because it was looking for $4 trillion in spending cuts over ten years and only got $1 trillion in the sequestration deal.

And then on 9/2/11 it was reported that for the month of August 2011 net zero jobs had been created, the first time since World War II that a month went by without job creation.

These are remarkable and dubious firsts, three of them in a row in the span of four months.

It is clear how much two of these still rankle Obama, who views them in purely political terms instead of as injuries to all of us. In a press conference on the debt ceiling almost a year and a half later, held this last Monday, Obama brought up both the AAA rating loss and the net zero jobs milestone, seeking to blame them both on Republicans:


"And they'd better choose quickly because time is running short. The last time Republicans in Congress even flirted with this idea [of not raising the debt ceiling], our triple-A credit rating was downgraded for the first time in our history, our businesses created the fewest jobs of any month in nearly the past three years, and ironically, the whole fiasco actually added to the deficit."

The revisionist history on the jobs number is noteworthy. Who would even remember the fact now unless he brought it up?

The fact of the matter is, however, that the weak dollar, which is not even on Obama's radar screen, is the root of the problem for both our out of control debt and deficits and the dearth of jobs.

And Jeffrey Snider, coincidentally, says just as much today, here, concluding this way:


"The politics of the debt ceiling really should be concerned with monetarism rather than focused solely on spending or deficits. But that is a hard position for either party to take. Democrats won't because their interests are aligned with monetarism, while Republicans have at many times embraced monetarism with equal passion. Neither seems to want to move outside conventional economics that salutes as policy success a 64% increase in total debt without any perturbation in interest costs.


"We have not just a fiscal problem, but a persistent and massive monetary imbalance through dollar debasement that is directly related to both the debt disaster and the weak economy. Without directly facing it and working toward currency stability, we will be stuck with both the continued debt trajectory and no real growth. Neither can be adequately solved without first solving the dollar by ending capital repression."

Previous Bank Trend Treating Gold As Pariah Has Notably Changed

So says Jeffrey Snider of Alhambra Investment Partners here:

The new Basel Rules are positioning gold to enter the all-important ZERO RISK WEIGHTING category (targeted for adoption in 2015). Upon adoption, the new proposed rules would “elevate” gold in the regulatory hierarchy to the same status as cash and OECD sovereign debt in terms of capital ratios and regulatory leverage. Even the FDIC and OCC here in the United States have opened the requisite comment periods to adopt this proposal for US bank treatment. ...

If banks can now, under these proposed rules, keep the physical in their vaults and monetize it as collateral in derivative arrangements (IR swaps mostly), then they have a new outlet to obtain positive cash flows from gold without rendering additional physical selling – an almost exact reversal of the [previous] leasing/swap dynamic. This is also extremely useful if gold is accepted at the zero risk weighting, meaning that it would provide not only direct monetization for gold holders, it would do so with added regulatory and capital leverage (which is all that banks are after for any asset they own). Less selling pressure has been positive for price thirteen years , but it might also lead to banks reclaiming physical stocks from the market place if demand is high as a preferred collateral (which would be the case as uncertainty rises, particularly with regard to currency risk since gold is a good hedge against shifting currency prospects).

This Is Capitalism? Negative Interest Rates Mean Capital Is Being Destroyed.

So says Jeffrey Snider, here:

It cannot be a true capitalist system that is creating negative interest rates throughout the "developed" world since capitalism, at its very core, values capital. Negative interest rates are the very real signal that capital is being destroyed at will. Since this capital destruction is not localized, and does not appear to be temporary, this strongly suggests that some exogenous force (exogenous from the perspective of a system that values capital) is uniformly acting upon the global system in a manner that does not conform to what would fairly be called capitalism. ...

Today's negative interest rates are the prime signal that money is more valuable than capital, a consequence that only monetarism and financial domination could produce willingly. In all those countries experiencing the renewal of the receding economic tide of re-recession (or just continued depression for simplicity's sake) there sits an activist central bank at its modern core. ...

[T]he real economy appears to be fighting back, rejecting money and credit as a workable solution.

Another Person Notices Declining Savings Fueled Personal Consumption

Jeffrey Snider here:

To maintain the post-recovery muddle required a serious correction in the personal savings rate – from a high of around 6% in mid-2010 all the way down to 3.2% earlier in 2012. Without that decline in the savings rate personal spending and consumption would have likely contracted long before 2012. The savings rate has backed up toward 4%, and it appears retail sales are following that.

We noticed the phenomenon already last November here, calling attention to the role that the Social Security tax reprieve was playing in the equation.

Imagine how bad the savings rate and retail sales would look now without that extra cash sloshing around. As it is we're still robbing Peter to pay Paul from Social Security, if anyone out there remembers anymore who those two guys were.

If anyone in the media bothered to check, regular folks out here are getting crushed in this economy at the same time that they are paying for all the handouts given up and down the ladder.

Unfortunately no one will listen to those of us who say stopping the run-away spending train is job one. Not Bush, and now not even Romney.

YOU PEOPLE ARE IN DENIAL.

Global Central Banks Go Hyper-Monetarist But Re-Recession Goes Unimpeded

So says Jeffrey Snider, here:

Yesterday the ECB relented on interest rates, reducing both its benchmark rate and its deposit rate (to 0.00%), bowing to the reality that Europe's hoped-for economic progress is now firmly in reverse. In addition to the ECB's action, the Bank of England increased its quantitative easing program by £50 billion in an effort to pull the UK out of its own sharp and persistent re-recession. Even the People's Bank of China got into the monetary act by reducing its benchmark bank lending rate (the 7-day repo rate on reserve payments, the RRR) and continuing its reverse repo operations.

These measures follow closely the intentional reductions in collateral acceptance parameters at the ECB and the Bank of England from just a few weeks ago. And just before that, the Federal Reserve pledged to keep its Operation Twist program going, extending the maturity of its US treasury portfolio still further. Most significant, however, may have been the first officially sanctioned instance of negative interest rates. The Danish central bank reduced the certificate of deposit rate to -0.20%, commenting that this was a "good problem" to have. In doing so, the Danes have confirmed that money continues to flow out of the European periphery and into the so-called "core" that apparently includes Denmark.

Central banks continue to employ "monetary stimulus" in unconventional ways, through unprecedented means and taken to unbelievable levels. And the arc of re-recession continues and spreads unimpeded.

We Lack Sustainable Streams of Real Income from Productive Activity

So says Jeffrey Snider, here:

Central banks can proclaim that banks and the economy are one and the same, but that does not make it true. Again, there was no real danger of deflation in the real economy as currency, as in the usage of money to transact, was never in short supply. What has been in short supply, and remains in short supply, are sustainable streams of real income due to productive activities - the kinds of activities that have a hard time flourishing under continuously dysfunctional monetary regimes.

A Real Recovery is not Confined to Sectors, But is Ubiquitous

From Jeffrey Snider, here:

I think what is happening in oil, gasoline, electricity and energy is a microcosm of this recovery. In many ways this is not a recovery, certainly not in the sense that most people have of what a recovery is supposed to be. This is the speculators' recovery, as free money finds its way into (and then rushed out of) risky financial assets all over the world. ... 

[I]f you take the perspective of the real economy over the now long-term, what appears to be a cycling period of inflation might start to look like a single period of depression, an economy trapped in artificial financial risk, unable to awaken into a healthy long-term recovery where marginal actors freely choose to accept and welcome true risk so that any economic "success" is no longer concentrated in a few sectors.

A Lovely Question: Why Is Interest Income, Perhaps 10 Percent of GDP in the Past, Trivial to Savers but Ever So Important to Banks?

Jeffrey Snider wants to know, here:

I think everyone understands that credit is vital to businesses, but they also intuitively understand that customers are probably more vital (and the largest problem for businesses of all sizes since 2008). I don't think Chairman Bernanke can claim that interest income is trivial and therefore not really a consideration, both in an empirical sense (the numbers don't bear that out, especially at the margins) or, perhaps more importantly, in the perceptions of the voting public. If he does, then why is such a trivial amount to savers so important to banks? It cannot be the money multiplier effect since bank net income (the pivot in this trade-off) plays no role in that presumed multiplier - ZIRP is a technique of expanding bank balance sheet capacity. It is the method of circulation that is at issue here, and the Fed and its global central bank cousins are placing all their chips on circulating money indirectly through credit creation. If that is a superior option, then they should be able to demonstrate it.

Make No Mistake About It: The Federal Reserve Is The Enemy Of The People

From another insightful meditation by Jeffrey Snider, this time on the consequences of trying to make the artificial financial economy and the real economy one:

The Federal Reserve has gone far beyond TARP into ZIRP (zero interest rate policy). ZIRP is a direct tax on savers, figuratively taking money out of the pockets of those who have acted responsibly in the real economy, transferring it to the banking system (especially the largest investment banks, the very banks responsible for most of the credit creation and monetary imbalance of the past asset bubbles) that was negligent, reckless and complicit in this disaster. Monetary policymakers, the gatekeepers to the realm of the monetary or financial economy, now intentionally and directly penalize real economy actors in favor of financial economy actors. They do so with this narrative that as the financial economy goes, the real economy will follow. Very few people seem to challenge this as backwards, certainly not anyone in a policymaking role.

Quality Collateral is King

From another in a series of incisive meditations upon the continuing global banking crisis from Jeffrey Snider, here:

The collateral problem is not going away no matter how authorities on either side of the Atlantic try to dress up fake guarantees. The system of wholesale lending through repo is terminally broken, since both quality reputations as well as quality collateral are in short supply. In other words, the inside participants of the global banking scheme know all too well that the system pyramided far too much paper on top of far too little actual cash flow. Liquidity is not the real problem since all the worthless collateral still stuck inside the system is likely worthless because the mathematical predictions of 2005 and 2009 proved utterly inept. Those accounting notions of equity during the credit bubbles were just as phantom as the valuations of the assets that were created from it. This coming year will be just a dance or game of musical chairs to determine who gets stuck with the bill. ...

As the progression of crisis has moved from paper asset to paper asset, from banks to countries and back to banks again, the trajectory is entirely clear. Some form of actual, exogenous restraint on credit creation will be imposed, either by someone currently in power that finally "gets it", or by a free market shaking free from the shackles of the over-enlarged financial economy and its hell-bent attempts toward unlimited money. Collateral is king in this banking world, and the rapid decay of "quality" is a testament to the intentional imbalance of finance over economy, to the hubris of modern economics and monetary "science". Unfortunately for the dreamers of true money elasticity, and too late for the rest of us, this was never supposed to happen.

The Fed's Dollar Swap Operation in Europe is a Sign of the Desperation of Monetarism

So says Jeffrey Snider, here:

Rising credit equals rising economic activity, so the advancement of the banking system necessarily and uniformly leads to advancement in the real economy. This is a pervasive belief that is accepted in too many places without critical questioning, especially in the political arena.

As I (and many others) have said numerous times, it is a deliberate prevarication. The Fed and central banks around the world coordinate dollar swap lines to save the banking system from its umpteenth moment of illiquidity simply because the banking system, through credit creation, equals control over the economies those central banks are supposed to serve. ...

The Fed, the economics profession and the financial media spread the idea that this unfettered credit creation paradigm is part and parcel to the basic economic philosophy of capitalism. It is not. Capitalism represents the free expressions of a free society, so leeching onto it achieves another shortcut to allow free people to accept a degree of economic central control. ...

The central control of modern economics seeks to control credit independent of actual demand; indeed, it seeks to create demand from nothing.

If a housing bubble achieves the philosophical aims of "stimulating" the economy to some predetermined target or range, then the political aims of the central bank are fulfilled no matter how shortsighted that may be. ...

The detachment of credit money from actual money demand to engage in productive transactions is both the glaring difference between capitalism and monetarism, and the ultimate weakness of superimposing the latter on the former. ...

As the façade plummets to earth in the messy aftermath of what it, not capitalism, has wrought, the central authorities cling desperately to their system. It matters little if bailing out the eurodollar market for the fifth time actually advances the real economy. All that matters is that the tools for maintaining the elitist utopia are preserved for future use. They just want us to accept that they know better, having already crowned themselves Lords of the global economy.

The Farce of Letting Banks Simply Refigure Themselves to be Far Less Risky

From Jeffrey Snider's latest in a series of penetrating meditations on contemporary banking:

Basel II gives banks latitude in "modeling" the potential riskiness of each specific asset since banks long ago successfully argued that it was inappropriate to assign broad weightings and definitions to idiosyncratic assets.

So instead of selling stock into a bad market or engaging in asset fire-sales (concrete expressions of a "bad" bank), banks will simply refigure themselves to be far less risky, thereby increasing their capital ratios, "fixing" the problem without much fuss. Reality no longer has a seat at the banking table since it is a demonstrable fact that banks are holding far riskier assets than they estimated only a few months ago (just ask MF Global), especially since default risk is not the only concern.

To what purpose do capital ratios serve if they are to be so easily discarded by the farce of one-way "risk-weighted asset optimization"?

Artificial GDP Explained

By Jeffrey Snider, here.

A tax will have to be paid for it, sooner or later. There will be blood.