How The Deep State Squeezed America"s Wealth

Authored by Bill Bonner via InternationalMan.com,

Salvator Mundi, said to be by Leonardo da Vinci, is the world’s most expensive painting.

Last Wednesday, at auction, each square inch was valued at nearly $1 million – including the bummed-up, restored, and damaged parts.

The painting may not be da Vinci’s work. Or perhaps, since it has been so heavily doctored up, little remains of his work. And whoever’s work it was must have been having a bad day.

And yet, it sold for over $450 million (including auction-house charges) – a lot of money for such a depressing work of art.

Donald Trump as da Vinci’s Salvator Mundi

The question on the table: Why?

But since we don’t know the answer to that question, we’ll answer another one: How come so many people have so much money?

Made in the Middle

The latest GOP “tax reform” proposals raise questions, too.

Though billed as a “middle-class tax cut,” the middle class gets almost nothing from the proposed plan.

Instead, almost all the benefits go to: (1) business owners, and (2) the rich.

And since the feds are unwilling to cut spending, the middle class ends up with about $2.2 trillion of extra debt, which it will have to reckon with eventually.

We bring up the tax cut because we think it helps explain the painting. Not for nothing are Republicans and the modern Salvator Himself, Donald J. Trump, setting up the middle class for a huge bamboozle.

A train ride we took on Monday – the Acela Express from Baltimore to New York – was subsidized by taxpayers from all over the country.

The train runs from one end of today’s modern economy to the other. It goes from Washington, D.C. – the center of politics – to New York – the center of money.

In between is nothing but poverty and dereliction. There are factories that last made a product in the ’50s. There are workers’ houses almost unchanged in half a century. There are abandoned warehouses… wrecked cars… junk steel… and burly men in orange vests working with machines.

The middle is where real work was done and real things were made, shipped, and distributed; it shows few signs of growth or prosperity.

It is as though a sausage had been squeezed in the middle, driving the rich meat to the ends. In between is lean… and greasy.

How come?

Deep State’s Fingerprints

Every crime scene has many fingerprints on it.

Most are of the innocent.

An aging population, for example, is not exactly something you can do anything about. Technological innovations, too, are largely beyond public policy control.

But there’s one set of fingerprints on the tax cut flimflam… the relative poverty along the Northeast Corridor… and the $450 million painting: the Deep State’s.

The insiders use fake money – the post-1971 dollar – to transfer wealth and power from the people who earn it to themselves.

It is as though they loaded up the train in Newark and Trenton… and shipped everything to Washington.

You earn real money by making real things and providing real services. But fake money is different. You don’t earn it by adding to the world’s wealth.

You get it by subtracting from it… that is, by borrowing from future output.

Real money is not controlled by anyone.

It is earned – freely – in win-win exchanges. Back in the 1950s and 1960s, it ended up in places like East Baltimore and Trenton because they used to make things people wanted.

But fake money takes a different route. It is created by the insiders… and controlled by them. It goes where they want it to go.

No Stimulus

Money always bows to politics; often, it is completely beholden to it.

In Russia, the oligarchs took government-owned property and used it to build their fortunes. In China, state-owned enterprises and favored entrepreneurs get government-backed credit to build their apartments, factories, and shopping malls.

And in America, the fake money is directed to favored sectors by 73,000 pages of the Internal Revenue Code… and 81,000 pages of the Federal Register.

So, it is hardly a surprise that the latest tax proposals favor the Deep State at the expense of the middle class.

Readers may argue that the money “stimulates” the economy… and that it “trickles down” to the common people. If so, there is little evidence of it.

As a percentage of the working-age population, fewer people have jobs today than at any time since the 1970s. Back then, the typical man had to work 900 hours to earn enough to buy a new pickup truck. Today, he has to work 1,500 hours.

Central banks have increased the world’s monetary base (and their own balance sheets) by $20 trillion so far this century.

This money didn’t go to the fellow in the orange vest. Instead, it went to Russian tycoons… Chinese billionaires… art collectors… hedge fund managers… and rich people on both ends of the track.

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The Trump team reached out to Bill’s network for advice on the economy. Recently, Bill’s team sent them a field memo on a coming crisis… They’re now releasing it to the general public… (It’s not what you expect.) Click here to read more.

Hong Kong"s IPO Mania Goes White Hot, Drives Up Interbank Rates

IPO mania is gripping Hong Kong and if you’ve been looking for a warning sign that equity markets are close to a peak, just maybe this is it. It was a feature of the Hong Kong market in 2006-07, before the Great Financial Crisis, and in 2000, prior to the bursting of the Dot.com bubble. No surprises, the current mania is also focused on the technology sector. The focal point today is the China Literature Ltd IPO which began trading this morning. The stock price rose as high as HK$110 per share compared with the HK$55 IPO price. No wonder the company’s executives were looking smug.

China Literature is an Amazon Kindle “look-alike”, being the Chinese mainland’s largest publisher of e-books. However, it is also growing its own network of contract writers and owns the rights to well-known Chinese online novels, such as the Grave Robbers’ Chronicles and Ghost Blows Out the Light series. The HK$8.3 billion IPO was more than 600 times oversubscribed with 5% of the city’s population applying for shares. According to Bloomberg.

Hong Kong demand for new share sales has hit fever pitch, with 417,000 people applying for lots in Tencent Holdings Ltd.’s online bookstore unit -- more than 5 percent of the city’s population. China Literature Ltd.’s retail offering was 625 times oversubscribed, according to the company. That locked up at least HK$520 billion ($67 billion), or a third of the city’s monetary base, the South China Morning Post reported. It’s easy to see why the clamor: China Literature’s shares surged as much as 100 percent on their Wednesday debut…"You can tell Hong Kong investors like tech stocks," said Daniel So, Hong Kong-based strategist with CMB International Securities Ltd. "If you’d managed to get the stock, you’d have made a lot of money.”

One signal of the scale of the current IPO mania is that the China Literature had a 200-basis point impact on Hong Kong’s interbank rate, as Bloomberg explains.

Interest in initial public offerings is so intense it’s affecting the city’s interbank rates. The overnight Hibor fixing jumped 2.1 percentage points on Oct. 31, the most in a decade, as investors placed orders for China Literature.

In contrast to some of the Dot.com era’s IPOs, at least China Literature is profitable and has a coherent strategy. It uses “big data” to drive revenues and aims to cross-sell content into other media.  As Bloomberg reports.

China Literature had profit of 213.5 million yuan ($32 million) in the first half of this year, compared with a 2.4 million yuan loss for the same period in 2016, according to its prospectus. The company -- created through the merger of Tencent’s online literature business with Carlyle Group LP-backed Cloudary Corp -- had 9.6 million works and 6.4 million writers as of June 30. Customers can pay for an entire book or buy a few chapters at a time to see if they want to keep reading.

 

“We can study our users’ social network and understand their preference and recommend to them what their friends like to read,” Co-Chief Executive Officer Wu Wenhui said in an interview. “We already have compiled a great amount of user data, which will enable us to study what they like.” The company also wants to leverage its content into other forms of entertainment, such as movies, TV series and anime, as Tencent aspires to create a Marvel-like empire. Shenzhen-based Tencent became China’s second-biggest technology company on the strength of its WeChat messaging app, which since has morphed into a portal for shopping, banking, gaming and consuming entertainment.

China Literature will select some content, and co-invest or co-produce movies or anime series, co-CEO Liang Xiaodong said. He added that his company is closely working with Tencent’s film and video units. “User demand for content is getting very strong, especially original material,” Liang said in an interview with Bloomberg Television. “Our content can easily be converted into movies and games to maximize coverage.”

The China Literature IPO came on the heels of HK’s largest ever fintech IPO, ZhongAn Online Property & Casualty Insurance. ZhongAn raised $1.5 billion and priced at the top end of its valuation range. As Bloomberg notes, there are more tech IPO’s in the pipeline with the focus now shifting to the gaming accessories sub-sector.

China Literature’s IPO follows ZhongAn Online P&C Insurance Co., which went public in September. The first major fintech listing in Hong Kong, and backed by Ant Financial, the owner of Alipay, the retail portion was almost 400 times oversubscribed. Focus will now shift to Razer Inc., a manufacturer of high-spec gaming accessories, which will begin trading in Hong Kong on Monday after raising $529 million.

The Razer Inc. IPO will make co-founder and CEO, Tan Min-Liang, a dollar billionaire. The global gaming market is “hot”, with growth expected to increase by 52% to $160 billion by 2021. Buyers of Razer shares will include Singapore’s sovereign wealth fund, GIC.

If we were to be strictly precise, the ZhongAn IPO was 391 times over-subscribed, while China Literature was 625 times over-subscribed. Consequently, the latter beat out ZhongAn to hold the record for a Hong Kong IPO. We look forward to seeing the metrics for Razer, but Hong Kong IPOs are obviously white hot.

Shouting on deaf ears no doubt, the FT reports that one analyst urged caution.

In recent years, a doubling in the share price on the first day of trading for a Hong Kong listing has been rare. The strong appetite for China Literature stock on Wednesday was driven by retail investors trying to get a piece of what many perceived could be the next Tencent, said Kevin Tam, an analyst at Core Pacific-Yamaichi in Hong Kong.“ They expect this to be Tencent number two,” he added. “Many retail investors missed out on the first Tencent IPO and the 10-times growth.” But Mr Tam cautioned that such expectations for China Literature were misguided. Much of Tencent’s value is locked in its userbase but China Literature has “just a very small slice of that”, he said.

Wu Wenhui. co-chief executive of China Literature, stated that he wants to bring original Chinese literature to a global audience. He might eventually be successful in this but, right now, he"s bringing the melt-up stage in the Chinese bubble to a global audience.
 

How The Elite Dominate The World – Part 2: 99.9% Of The World Live In A Country With A Central Bank

Authored by Michael Snyder via The Economic Collapse blog,

Even though the nations of the world are very deeply divided on almost everything else, somehow virtually all of them have been convinced that central banking is the way to go. 

Today, less than 0.1% of the population of the world lives in a country that does not have a central bank.  Do you think that there is any possible way that this is a coincidence?  And it is also not a coincidence that we are now facing the greatest debt bubble in the history of the world. 

In Part I of this series, I discussed the fact that total global debt has reached 217 trillion dollars.  Once you understand that central banks are designed to create endless debt, and once you understand that 99.9% of the global population lives in a country that has a central bank, then it finally makes sense why we have accumulated so much debt.  The elite of the world use debt as a tool of enslavement, and central banking has allowed them to literally enslave the entire planet.

Some of you may not be familiar with how a “central bank” differs from a normal bank.  The following definition of a “central bank” comes from Wikipedia…

A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency,^[1] which usually serves as the state’s legal tender.

Over the past 100 years or so, we have seen central banks steadily be established all over the planet.  At this point, there are just 8 very small nations that still do not have a central bank…

• -Andorra


• -Monaco


• -Nauru


• -Kiribati


• -Tuvalu


• -Palau


• -Marshall Islands


• -Federated States of Micronesia

When you add the populations of those 8 nations together, it comes to much less than 0.1% of the global population.

But even though central banking is nearly universal, only a very small fraction of the global population can tell you how money is created.

Do you know where money comes from?

Here in the United States, most people just assume that the federal government creates money.  But that is not true at all.

Many are absolutely shocked when they discover that U.S. currency is actually borrowed into existence.  The federal government gives U.S. Treasury bonds (debt) to the Federal Reserve in exchange for money that the Federal Reserve creates out of thin air.  The Federal Reserve then auctions off those bonds to the highest bidder.

Since the federal government must pay interest on those bonds, the amount of debt that is created in these transactions is actually greater than the amount of money that is created.  But we are told that if we can just circulate the money throughout our economy fast enough and tax it at a high enough rate, then we can eventually pay off the debt.  Of course that never actually happens, and so the federal government always has to go back and borrow even more money.  This is called a debt spiral, and at this point we will never be able to escape it until we do away with this horrible system.

But why does our government (or any government for that matter) have to borrow money that is created by a central bank in the first place?

Why can’t governments just create money themselves?

Oops.  That is the big secret that nobody is supposed to talk about.

Theoretically, the U.S. government doesn’t actually have to borrow a single penny. Instead of borrowing money the Federal Reserve creates out of thin air, the federal government could just create money directly and spend it into circulation.

Yes, this could actually happen.  Back in 1963, President John F. Kennedy signed Executive Order 11110 which authorized the U.S. Treasury to issue debt-free “United States Notes” which were not created by the Federal Reserve.  These debt-free notes began to be issued, and you can still find them for sale on eBay today.  Unfortunately, President Kennedy was assassinated shortly after this executive order was issued, and the notes were not in production for long.

If we had ultimately fully adopted “United States Notes” and had phased out Federal Reserve notes, we would not be 20 trillion dollars in debt today.

The elite of the world love to get national governments deep into debt, because it enables them to enslave entire populations while making an obscene amount of money in the process.

Back in 1913, an insidious plan was rushed through Congress just before Christmas that was based on a blueprint that had been developed by very powerful Wall Street interests.  Author G. Edward Griffin did an extraordinary job of documenting how all of this happened in his book entitled “The Creature from Jekyll Island: A Second Look at the Federal Reserve”.  A central bank was established, and it was purposely designed to create a government debt spiral, and that is precisely what happened.

Since 1913, the size of the national debt has gotten more than 6,000 times larger, and the value of our dollar has declined by more than 98 percent.  Many conservatives are still under the illusion that we could get out of debt someday if we just grow the economy fast enough, but I have shown in another article that we have gotten to the point where this is mathematically impossible.

And most people are also operating under the false assumption that the Federal Reserve is part of the federal government.  But that is not accurate either.  The following comes from one of my previous articles…

There is often a lot of confusion about the Federal Reserve, because a lot of people think that it is simply an agency of the federal government. But of course that is not true at all. In fact, as Ron Paul likes to say, the Federal Reserve is about as “federal” as Federal Express is.

The Fed is an independent central bank that has even argued in court that it is not an agency of the federal government. Yes, the president appoints the leadership of the Fed, but the Fed and other central banks around the world have always fiercely guarded their “independence”. On the official Fed website, it is admitted that the 12 regional Federal Reserve banks are organized “much like private corporations”, and they very much operate like private entities. They even issue shares of stock to the private banks that own them.

In case you were wondering, the federal government has zero shares.

According to the U.S. Constitution, a private central banking cartel should not be issuing our currency.  In Article I, Section 8 of our Constitution, Congress is solely given the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.

So why in the world has this authority been given to a central bank?

The truth is that we do not need a central bank.

From 1872 to 1913, there was no central bank and no income tax, and it turned out to be the greatest period of economic growth in all of U.S. history.

But since the Fed was established, there have been 18 different recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

Abolishing the Federal Reserve is one of the core issues of my platform, and I have been writing about these things for the last seven years.

As I discussed yesterday, the elite use debt to enslave all of the rest of us, and central banking allows them to literally dominate the entire planet.

Until we abolish this debt-based system and go to a currency that is debt-free, we are never going to permanently solve our very deep long-term economic and financial problems.

But because they are so immensely wealthy, the elite are able to wield extraordinary influence in our society.  They control the mainstream media, our politicians and even global institutions such as the United Nations.  Anyone that would dare to question the validity of the current system is marginalized, and for a long time very few politicians around the world were even willing to speak out against central banking.

However, that is starting to change.  A new generation of leaders is rising up, and they are absolutely determined to break the stranglehold that the elite have on our society.  It won’t be easy, but if we are able to wake enough people up, I believe that we will eventually be able to free ourselves from this insidious system.

Rates Continue To Defy "Wall Street Logic"

Authored by Lance Roberts via RealInvestmentAdvice.com,

The “Bond Bears” just can’t seem to catch a break. 

Beginning in mid-2013, there have been numerous calls the 30-year bond bull market was dead. The reasoning was simplistic enough – economic growth was set to return pushing inflation, and ultimately interest rates, higher. Unfortunately, as each year has come and gone, economic growth has failed to return with real economic growth averaging just 1.9% since the turn of the century.

  

As I have discussed many times in the past, interest rates are a function of three primary factors: economic growth, wage growth, and inflation. The relationship can be clearly seen in the chart below.

Okay…maybe not so clearly. Let me clean this up by combining inflation, wages, and economic growth into a single composite for comparison purposes to the level of the 10-year Treasury rate.

As you can see, the level of interest rates is directly tied to the strength of economic growth, wages and inflation. With roughly 70% of economic growth derived from consumption, the trend of wage growth should not be readily dismissed.

Ed Harrison at Credit Writedowns noted:

“What I can say is that the credit markets have been right all along the way. At important points in time when the Fed signaled policy changes, credit markets have correctly interpreted how likely those changes were going to be. The perfect example is the initial rate hike path set out in December 2015. This was totally wrong and the credit markets were telling us so, right from the start.”

He is absolutely correct.

It was the analysis of the credit markets that has kept me on the right side of the interest rate argument in repeated posts since 2013.

However, Ed nails what Wall Street continues to deny in one sentence:

“What credit markets are saying right now screams secular stagnation.”

Since 2009, asset prices have been lofted higher by artificially suppressed interest rates, ongoing liquidity injections, wage and employment suppression, productivity-enhanced operating margins, and continued share buybacks have expanded operating earnings well beyond revenue growth.

The Fed has mistakenly believed the artificially supported backdrop they created was actually the reality of a bright economic future. Unfortunately, the Fed and Wall Street still have not recognized the symptoms of the current liquidity trap where short-term interest rates remain near zero and fluctuations in the monetary base fail to translate into higher inflation. 

Combine that with an aging demographic, which will further strain the financial system, increasing levels of indebtedness, and lack of fiscal policy, it is unlikely the Fed will be successful in sparking economic growth in excess of 2%. However, by mistakenly hiking interest rates and tightening monetary policy at a very late stage of the current economic cycle, they will likely be successful at creating the next bust in financial assets. 

Furthermore, as Ed noted:

“And if this share price actually did indicate higher economic growth, not just higher profits, then US government bond yields would be rising due to future rate hike expectations as nominal GDP would be boosted by full employment and increased inflation. But that’s not what’s happening at all.

Instead, the US 10-year bond is pretty close to 2% and the yield curve is flattening. So, what I see the bond markets saying is that future rate hikes by the Fed will be limited due to low nominal GDP growth aka secular stagnation.”

The problem with most of the forecasts for the end of the bond bubble is the assumption that we are only talking about the isolated case of a shifting of asset classes between stocks and bonds.

However, the issue of rising borrowing costs spreads through the entire financial ecosystem like a virus. The rise and fall of stock prices have very little to do with the average American and their participation in the domestic economy. Interest rates are an entirely different matter.

Since interest rates affect “payments,” increases in rates quickly have negative impacts on consumption, housing, and investment which ultimately deters economic growth. 

Given the current demographic, debt, pension and valuation headwinds, the future rates of growth are going to be low over the next couple of decades – approaching ZERO.

While there is little left for interest rates to fall in the current environment, there is also not a tremendous amount of room for increases. Therefore, bond investors are going to have to adopt a “trading” strategy in portfolios as rates start to go flat-line over the next decade.

Of course, you don’t have to look much further than Japan for a clear example of what I mean.

But, for now, Wall Street continues to ignore the giant “secular stagnation” sign staring them in the face.

S&P Downgrades Qatar To AA-, Credit Risk Spikes To 2017 Highs

Citing expectations of notable slowing in economic growth andconcerns about fiscal and current account deficits widening, S&P has downgraded Qatar from AA to AA- as credit risk premia hit 2017 highs.

Qatar credit risk is at 2017 highs (but remains well below Jan 2016 recent highs...

Full Statement from S&P...

• On June 5, 2017, a group of governments including Saudi Arabia, United Arab Emirates, Bahrain, Egypt, Libya, and Yemen moved to cut diplomatic ties, as well as trade and transport links with Qatar.


• We believe this will exacerbate Qatar"s external vulnerabilities and could put pressure on economic growth and fiscal metrics.


• We are therefore lowering our long-term rating on Qatar to "AA-" from "AA" and placing it on CreditWatch with negative implications.


• The negative CreditWatch encompasses numerous downside risks to the rating as a consequence of recent events, reflecting that we could lower the ratings if domestic political risks were to substantially increase or if government indebtedness increases materially quicker than we currently expect. We could also lower the ratings if our assessment of contingent liabilities from the banking system or the government"s related entities were to increase, or if Qatar"s external financing lines were withdrawn.

RATING ACTION

On June 7, 2017, S&P Global Ratings lowered its long-term rating on the State of Qatar to "AA-" from "AA" and placed the rating on CreditWatch with negative implications. The "A-1+" short-term rating was affirmed. The Transfer & Convertibility assessment is "AA".

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the State of Qatar are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2017 EMEA Sovereign, Regional, And Local Government Rating Publication Dates published Dec. 16, 2016, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is a significant geopolitical development impacting creditworthiness. The next scheduled rating publication on the sovereign rating on the State of Qatar will be on Aug. 25, 2017.

RATIONALE

On June 5, 2017, a group of states including Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt, Libya, and Yemen moved to cut diplomatic ties, as well as trade and transport links, with Qatar. The measures imposed include  a blockade of land, sea, and air access and the expulsion of Qatari officials, residents, and visitors from the group of states. We believe this will exacerbate Qatar"s external vulnerabilities and could put pressure on its economic growth and fiscal metrics. The negative CreditWatch encompasses numerous downside risks to the ratings as a consequence of recent events. At this stage, we note that there are numerous uncertainties regarding Qatar"s response, the extent to which these measures will be imposed, and their longevity. We expect to review this and the potential impact on our projections as further details emerge and by our next scheduled review, on Aug. 25, 2017.

We understand these moves to be motivated by Qatar"s apparently more conciliatory stance toward Iran amid allegations that Qatar is financing terrorist activity. We note that Qatari authorities vigorously  deny these allegations, and that Qatar"s exact policy response is uncertain at the moment.

Supporting the ratings, Qatar holds the third-largest proven natural gas reserves in the world, and is the largest exporter of liquid natural gas (LNG). We expect Qatar"s reserves to provide many decades of  production at the current levels. GDP per capita is among the highest of rated sovereigns, estimated at US$62,500 in 2017. The hydrocarbon sector contributes about 50% of Qatar"s GDP, 90% of government revenues (oil and gas taxes and royalties, plus dividends from Qatar Petroleum), and 85% of exports.

Nonresident deposits in Qatar"s banking system increased over 2016 by 17% of GDP, which has weakened Qatar"s external liquidity position as related external short-term obligations have increased (see our ratio of gross external financing needs); the average maturity of these deposits is under one year. Over the same period, bank credit directly to the government increased by a similar amount, and the funds were generally used to finance Qatar"s ongoing significant infrastructure program. This dynamic has therefore increased pressure on our external stock metric (narrow net external debt), as the increase in external liabilities was not matched by external liquid assets. While we no longer expect the continued accumulation of these external liabilities, in our opinion recent events have the potential to destabilize these nonresident deposits and provoke an outflow.

Although we do not expect this potential outflow to pose immediate and significant issues for Qatar"s banks (see "A Sharp Rise In External Debt Leaves Qatari Banks More Vulnerable," published May 8, 2017), it could mean that government support would be needed in some form to offset any potential major outflow, including the potential use of QIA (Qatar Investment Authority, the sovereign wealth fund) assets, in addition to the central bank"s contingency reserves. Moreover, we now consider risks to external financing lines to the whole economy, including foreign direct investment, portfolio flows and to the financial sector to be elevated, and this could lead to pressure on Qatar"s pegged monetary arrangement. We subtract Qatar"s monetary base from usable reserves, which we view as consistent with maintaining confidence in a pegged currency. We estimate government liquid external assets to be worth 170% of GDP, which remains a key rating support.

Qatar"s fiscal and current account deficits could widen as related revenues from regional trade diminish. In 2016, 10% of Qatar"s exports was to the group of states that have blocked trade. We believe this figure includes gas exports through the Dolphin pipeline, the position of which under the embargo is currently unclear. The same group of states provides 15% of Qatar"s imports, potentially causing substantial shortages of key materials, including those used for construction projects, and food. Furthermore, the imposition of air travel restrictions could have significant implications for Qatar Airways" profitability. We note that debt of government-related entities (GREs) accounts for approximately 85% of GDP. There is currently no indication that Qatar"s main trade partners (Japan, South Korea, China, and India), who purchase the bulk of Qatar"s LNG production, will reconsider their existing trade arrangements. These four countries account for 55% of Qatar"s total exports.

Although still very strong, the government"s net asset position (net general government assets are 120% of GDP) could weaken as a result of deploying these assets to support revenue shortfalls and  because the potential for debt financing at similar prices to recent issues appears unlikely. Additionally, government support to the banking system (as was the case during the financial crisis) and to its GREs, which also require external financing, could place an additional burden on government assets. These developments could weigh on our external analysis to the extent that they act as a drain on liquid external assets and reduce coverage of external debt. At the moment, we expect that Qatar will continue with its substantial infrastructure development, the bulk of which is not related to the 2022 World Cup, but rather developing road and sewerage networks, schools, and public transportation networks.

As a result of these factors, we expect that economic growth will slow, not just through reduced regional trade, but as corporate profitability is damaged because regional demand is cut off, investment is hampered, and investment confidence wanes.

The policy response of Qatari authorities to falling oil prices since 2015 has been very visible and is illustrated by reigning in current expenditures, merging line ministries, and implementing numerous cost-saving initiatives within its core GREs. In comparison with regional peers, fiscal deficits have been modest as a result and their financing strategy clear. In our opinion, the government has been clear with its stated ambitions on economic diversification and its supporting infrastructure development plan. We do not expect that the aims of the authorities will deviate as a result of the embargo, but that achieving them while maintaining the current level of creditworthiness will now require additional fiscal effort, which therefore raises some uncertainty on the exact policy response. We expect details to emerge in the next few weeks. We do not consider the recent lifting of the moratorium on Qatar"s North Field in our assessment because the potential related revenues fall outside of our rating horizon. Less certain still, in our opinion, is Qatar"s policy response to the apparent demands of the group of states and Qatar"s position in the Gulf Cooperation Council. We view these factors as damaging to overall policy predictability.

We believe the fixed exchange rate of the Qatari riyal to the U.S. dollar leads to limited monetary flexibility, and we expect the currency peg to be maintained. Qatar"s real effective exchange rate has appreciated by 14% since early 2014. In our view, this represents a deterioration in international competitiveness of the country"s modest tradeables sector and a dampening of nonhydrocarbon GDP growth, absent any offsetting factors such as improved efficiency or technological capacity.

*  *  *

Interestingly S&P expects the currency peg to be maintained - something the market strongly disagrees with...

The Questionable State & Abusive Use Of Economics – Part 1

Via Benjamin Masters of RealInvestmentAdvice.com,

As lackluster results from rather experimental central bank policies continue to emerge, it’s time to readdress the seemingly endless nature of the perpetual-motion machine known as central bank stimulus — to stop and be still for moment and question whether the endlessly spinning wheels should be spinning at all, to question whether the maze is leading us back to the beginning. It’s often difficult to do — to question a lifetime’s worth of custom — but it’s so very important, as even the most advanced civilizations have drifted off course at some point in history.

A brief look at the charts below can give us a sense of the misalignment that is occurring:

1. The experimental monetary policies (Large Scale Asset Purchases / Quantitative Easing) that have been used to expand the monetary base have not met the goal of dramatically affecting the money supply.

2. A misallocation of capital has occurred shifting assets away from the broader economy, and toward a portion of the economy — tradable securities. Since the 1980s, the prices of many tradable securities, including stocks, have seen a significant rise, yet the economy as a whole has been unable to reach previously-attainable levels of growth.

And although the results can be damaging (to be addressed in this multi-part series), the outcome should not be surprising:

When faced with near-zero interest rates, it’s not surprising if banks decide against pursing their low-return commercial banking side, and instead favor leveraged asset speculation via their proprietary trading desks. If the trade-off from low-risk/guaranteed-low-return to high-risk/potential-for-return takes place, it may actually deprive the economy of funds while banks temporarily improve earnings through risk-taking — a point that would be consistent with Robert Hall’s comment at the Jackson Hole Monetary Conference in 2013: “An expansion of reserves contracts the economy”. And in a similar fashion, when savings rates are near-zero, there may be an irresistible temptation for companies and investors to take on unsustainable, speculative, investment risk (in an attempt to try to meet performance and savings goals).

Questions then arise: Why is this form of economics being pursued? Are there other options available? Is economics and central bank policy worthless?

A Starting Point

Although economics is typically addressed without a qualifier to distinguish one version from another, it may be worthwhile to begin the custom as there are many schools of economics — each with strongly opposing views of the world. And if there are many schools of economics (see the video Economics is for Everyone), why should we assume that the choice made by many of the world’s economies — which is to eschew all but one version — is the proper decision? Given that the world is constantly changing, and that each version of economics has its own built in assumptions, it may be naïve to assume that economics in its existing state has reached peak perfection; and based on the charts above, the current form of economics may not even be desirable.

The Questionable State — and Abusive Use — of Economics

A necessary and constant desire to explore alternative viewpoints — as a way to broaden the scope of understanding — has brought me to Henry Hazlitt’s Economics in One Lesson. It aligns with the important recognition that an idea, profession, concept, axiom, or story, should not be seen as a static topic to be memorized and repeated, but as one to be challenged in a constantly evolving process of reeducation, to merge established ideas with novel ones; it should constantly be influenced, adjusted, and questioned. Only then, is the fallibility of any one particular idea realized — its transitory nature recognized.

And this brings us to our current economic environment, where one predominant ethos has been perpetuated, saturating the economic landscape — arguably because its benefits are lucid and ramifications clandestine. That idea is a bizarre version of keynesian economics — not even in its originally intended form — a version that pursues debt-based spending to temporarily boost growth, a version that disregards the quality of debt being taken on and the long-term affects on all other parties; this is the version of economics used by central banks and governments throughout the world. It’s a stagnant policy that has favored the short term over the long term, while creating an illusory environment based on inflation, the results of which are a misallocation of wealth, and social disruptions.

In moving away from the study of classical economics — which also suffers its own drawbacks, showing a certain callousness toward the groups immediately hurt by its attempt to focus on the long term — modern economic policies have reversed course so drastically that they have merely unbalanced the ship to the other side.

“There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: ‘In the long run we are all dead.’ And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed.

From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

– Henry Hazlitt (H.H.)

And the oversight suggested in the last line is the reason that economics and central bank policy are becoming questionable endeavors — not because they are worthless but because they have been abused. The immediate effects of a policy are visible, the affects on one (or a few) particular groups are seen, yet the implications for all remaining groups are overlooked; the chain of events that is set into motion — each causing its own further effects — is forgotten.

“Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.” – H.H.

One may stop to ponder on why the immediate is preferred to the future (An innate survival instinct? Merely due to a lack-of-awareness of consequence?), but one point is clear and immovable in our current environment: it is easier to choose the “here and now”.

The Fallacy of Deficit Spending

The fallacy in the concept that a country can borrow money to boost growth (i.e. deficit spending) in an economic downturn is that it assumes that politicians will counter the process in the recovery period to actually slow growth down.

When an individual takes a loan they are able to boost their current spending, yet at the same time they’re also reducing their future spending (future payments toward the loan are reducing their income and ability to spend at that time). Just as an individual can only spend from income, a country can only spend from taxes, so a country that uses deficit spending to boost the economy during a downturn will be forced to slow the economy while the loan is being paid back through increased taxes.

Deficit spending is easy to agree to, but its other side is so very difficult to complete — especially when it’s likely that a different politician will be the one that will need to complete the process. Although it’s possible, what politician would campaign to slow the growth of the country? — yet that’s what is necessitated by deficit spending.

Although deficit spending can be used to boost growth in a deflationary / recessionary / depression-type environment, by doing so the country is pulling growth forward — borrowing from future taxes — and if it occurs over a long enough period of time, the taxes will be placed on a different generation; this is the concept of “generational warfare” — the consequences of a spendthrift generation are passed to another.

…stay tuned for Part II

David Rosenberg Calls For A Multi-Trillion, "Helicopter Money" Stimulus Package

With the inherent weakness in US GDP and the rising probability of a recession (two weeks ago Bank of America modeled that the next recession would likely start roughly one year from now), Gluskin Sheff"s David Rosenberg thinks that with monetary options exhausted it will take a fiscal boost in the trillions of dollars to kickstart the economy. These issues were discussed in an extended interview with Real Vision TV, where the chief economist and strategist at Gluskin Sheff proposed some radical policies to engineer the growth needed in nominal income. 

His ideas, some of which can be seen here in a clip of the interview, include helicopter money attached to a $2 trillion perpetual bond, massive infrastructure spending and measures to tackle the $1 trillion student debt load that has seriously hamstrung the economy.

Here are some of the interview highlights:

Doing the Same Thing Over Again and Expecting a Different Outcome

Whether the US will in fact experience the technical definition of a recession is a matter of fervent debate, with the odds something like 20%-30%, according to Rosenberg (60% according to Deutsche Bank), but with growth averaging around 1%, there is no doubt the economy is weak.

“There are some people saying a recession is here right now,” Rosenberg says, “I don"t think that we meet those conditions yet. But people say, well, look. Twelve months in a row of negative year on year industrial production, that"s never happened outside recession, check. We"ve had now going into six quarters of profit contraction, year over year. That"s only happened in the context of a recession, check. I mean, all that is true, but so much of this has been related to the oil shock that we had.”

Rosenberg’s problem with monetary policy, now in its 7th year of unorthodox experimentation, is that it has become a weak antidote to structural problems in the economy (even if it is still quite potent at boosting financial asets). Fiscal policy on the other hand, if constructed right, could be the answer due to its very powerful multiplier impact. “I can"t say that I know for sure, but it"s the old Einstein adage about the definition of insanity,” Rosenberg said. “And we"re finding that we"re really-- if we"re not hitting the wall on monetary policy, we"re certainly seeing classic economics 101 of the law of diminishing returns.”

In terms of infrastructure spending, he said that one lesson from recent history and the Great Recession is that you"ve got to have the credibility to convince people that this is going to be permanent and not temporary, in terms of the impact on the economy. “So it can"t be transitory. It"s got to be very big. With interest rates as low as they are, there"s certainly the capacity. I mean, you"ve got a lot of governments around the world issuing 50 or 100-year bonds. So this is a once in a lifetime opportunity to borrow money.”

A Couple of Trillion Dollars of Helicopter Money

While companies have been taking advantage of these conditions to borrow money, the funds have not been invested in the real economy. Share buybacks have become more popular, while personal savings rates have increased amid the economic uncertainty. This all boils down to a big case for government spending, with monetary policy joining forces with fiscal policy in the form of helicopter money.

“What you do with helicopter money is you finance it off the central bank"s balance sheet because we"re talking doing something very dramatic to reflate the economy,” Rosenberg said. “It"s not a few hundred billion dollars. It"s a couple of trillion...I know I"ll get accused of bailing out the sinners, but, my lord, we"ve already done that. I mean, nobody went to jail.”

One of the things holding the economy back is the $1 trillion student debt load, which he said has left 35% of males aged 18 to 34 living with mom and dad, not getting jobs and not becoming first time home buyers. Employment growth for the 65s and over is 7%, meanwhile, as the aging boomers have to work longer because they didn’t save enough for retirement. 

“Helicopter money is QE plus where, say, the treasury issues a perpetual-- call it, like, a century bond, a $2 trillion bond on the Fed"s balance sheet. And so when that bond matures, it"s, like, we"re all dead in the long run at that point. And then the Treasury can use that money to stimulate growth. "

The beauty of this idea, according to Rosenberg is that you don’t have to go through Congress, with such difficulty in achieving corporate or personal tax reform.  “It would lead to a permanent increase in the monetary base. Inflation expectations would go up, which means that real interest rates would go negative. And the theory is that that would provide a bigger thrust towards getting what we all want, which is sustainable and accelerating nominal income growth.“

Real Risk of Fed Mistakes or Trump Trade War

Sustainable and accelerating nominal GDP is certainly what’s required while the risk persists that we could be shocked into recession, or the Fed could make a mistake in raising interest rates too aggressively.

“That"s what happened in December of last year. They raised rates 25 basis points, but the overall financial tightening, in terms of what it meant for the dollar or in credit spreads and the stock market, it was really, like, 75 basis points of tightening. And the next thing you know, the economy slows to stall speed."

Another concern for investors is the prospect of a Trump presidency, bringing with it the potential start of a trade war. That could provide the sort of exogenous shock to cause the economy to go into recession, Rosenberg stated, noting that historically all the recessions in the post war period have been created by the Fed.

“The problem is that when you have the economy running on average 1% growth, or 1% plus, which is not a big cushion. And so, you know, it"s a complicated question to try and handicap a recession on us right now. There"s a lot of people out there that are convinced that a recession is coming.”

To watch the full interview with David Rosenberg, visit Real Vision TV.  You can access this and many more interviews with a free trial. 

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Oh, if Rosenberg"s idea gets traction - and execution -  which it will eventually, as we have said since our first days in 2009, buy lots and lots of gold.