Negative Rates and Cash, possible futures.
There are several possible futures with negative rates and the “War on Cash”. Expectations that purchasing power would be contained within the financial system if Cash is eliminated is a folly. Any limit that is placed on deposit holders that prevents their use of their own resources leads to destruction of said purchasing power. Be it through a bail-in of depositor money into bank capital shortages or certain other ways. If said “War on Cash” ever succeeded it would lead to Chinese style mal-investments where funds would be stratified into non-liquid assets for the sake of controlling purchasing power in the future via natural claims. Ergo, you would buy a ton of copper even though you may not need it, because it would be more mobile if capital controls occurred, or if your bank decided to take a holiday and confiscate your savings.
All of this would not create inflation because every person and or business would go for assets that would have some intrinsic value or perceived value either for their business, liquidation, perceived liquidity, perceived transportability, and other attributes. In effect people would take higher discounts in the future through exchange of these ‘barter style’ funds in order to have more certainty in having something, rather than nothing. This would make the financial system not just insolvent if not on the brink of collapse but create a systemic market that shifts value and exchange outside of it. With banks losing the most and prevention of such a shift would be very unlikely.
Forcing capital and savings to eat negative rates long term will not be possible, even if most of this capital and savings is captured in the financial system and forced to not be convertible into physical cash. It will be shifted one way or another as discussed above.
Potential outcome of attempting to corral purchasing power as it is being amortized into non-performing loans will be to have no faith or backing in the system long term and every participant will be looking to get out as soon as their money clears and appear in their bank account. Ergo a perpetual bank run…
Negative rates will not trickle to end-users or corporations because they are a product of too much risk being in the system and too many losses taken on collateral. Margins for loans actually expand in a negative-rate environment, since banks have to ‘earn’ back their losses that they are not showing but carry on their loan books. The whole point of negative rates is to subsidize banks to earn enough capital to regain some measure of stability, so that they could perform the clearance mechanism in the financial system.
Be well dear reader, and fear not, for all things pass.
Lack of Global Liquidity making countries act more aggressive?
As we approach the liquidation phase of the debt paradigm. Perhaps the internal/external dynamic as it impacts economies via debt growth and constraint by the necessity to pay it back in the future, we may see this desperation seep into the global political establishment. Every bet becomes more dear since the resources spent to establish it are no longer available in the same dynamic as before. This is can be seen in Turkey, Russia, Saudi Arabia, Iran, Syria nexus. We can even notice how lack of ability to expand trade or clear out debt is forcing China to posture outward to give it an out, if need be to re-direct any possible discontent from gradual marginal decline in global demand.
Theoretically there would be a clearance mechanism other than war for aspect such as this one. Where some countries lose their “bet” and are cleared negatively while other win and cleared positively. Ramifications of these aspects would seep into the financial system since a lot of sovereign debt is denominated in foreign currency and along with that corporate, and other debt of those countries as well. In some sense since the world was ‘stagnant’ for so long with borders not being dynamic in the sense of exchange of goods and services, the pent up energy of disequilibrium was directed elsewhere into destructive ideologies or geopolitical plans to rectify prior aspects.
We have yet to see a full unraveling of something coming to a heed, where the global financial waves are uplifted and shoock for a bit for some of the conflicts happening in the world today. If one loocks back in history the impact from various crisis changes some sort of dynamic of our lives, be it asset prices in the form of real estate, or how people are treated, or perhaps how we see the world. Right now most of the crisis that occur are somewhat in a vacuum and are only beginning to impact the world at hand. Refugees coming to Europe and setting off a right-shift in ideological lean is part of this but to a degree this was coming for a while simply was an accelerating catalyst to an already shifting world view there. Imploding debt setting off the need for ‘guaranteed income’ to maintain asset prices is more where my thoughts are going.
Money Geopolitics, Europe sinking.
Negative rates in Europe are a result of leverage, and the necessity to steal, take, replenish, financial capital in the banking system. All the risk has been taken it did not work out, it was not liquidated and the assets are on the books, or what is left of them at least. This will not work and will end in depositary bail-ins but if Europe saves the banking system, it will effectively destroy any and all productive capital deployed to do that. Ergo, attempts to keep the distribution of the financial sector’s share in the economy as is, or rising is not possible, and de-leveraging the system by “poofing” savings in order to cover up capital destroyed already will have very long term consequences.
- Trust will take decades to build back-up nation by nation and between nations.
- Euro will essentially be a dead currency either long before this occurs or right after. No solvent business will pay into a system that robbed it of part of its’ capital. Attempts to force them will create a drive to get out of the system anywhere else.
- International claims, in regards to deposits for products that were to be delivered will most like be extremely large.
- Asset implosion spiral and deflationary pressure would be so high after such an event as to become an unpredictable black swan. With people in official positions claiming “we didn’t know this would happen” after segments of markets go outside the boundaries that were ingrained in the psyche of the population in regards to; ‘how things work’.
Globally this will be akin to someone throwing a meteorite into the sea, expecting only mild waves slowly rising and falling just a few inches higher than before, and instead getting a tsunami.
Trade flow disruption will be interesting. The worst effects of demand will not be in Europe but all the marginal demand Europe provided to countries near and far. The more elastic demand for goods the worse ramifications for that country’s trade in Europe afterwards.
If one steps back it is almost like shrinking a market in nominal and absolute terms internally so much, that the price competition from external actors simply would not be able to devalue hard enough to gain competitive adjustment. Imagine for a moment goods that were sold for 1 euro to be halved not just in price, but in cost-basis for the producer so that he could be profitable from the new levels long term. On the other hand, when too many factors are in play, and people think they have thought of everything, something generally goes so very wrong, as to remind and humble them quiet certainly. Looking on the bright side, after an event such as this the financial system will most likely be the least of everyone’s problems and its’ subsequent decline into utility function will be most precipitous.
First aspect of something like this, will create a severe psychological push on values in Europe. An individualistic, consumption oriented view will be severely dented and people will seek something to anchor their being to as they search for closure of some sort across. Second aspect is the availability heuristic as it relates to responsibility will detach what people demand in regards to outcomes, something like this will not have a rationalization that could be hi-jacked and re-directed elsewhere; there will be a clear ‘actor’ responsible. Third aspect and the least understood is behavior when everything has been lost and consequences cease to exist, at least in the mind of the body politic.
Then again whom knows it is all imaginary speculation.
Be well and keep on going, things are getting ‘interesting’.
A society of goals, anchoring, and the disillusioned psyche
If we look at things that we are told by society at large we are constantly presented with plans that we must make, ambitions we must have, wants we need, and hoops we have to jump through. By placing before you a set piece of information that gets into your perception of relative achievement in one or more areas of life you anchor to the relative position you are in, in regard to that information. What happens is you are driven forth by giving you relative discomfort to the lack of achievement in regards to “others” that are out there doing better than you and are far happier because of it. All of this is implied but the psyche plays its’ own games with us.
“Tversky and Kahneman (1974) introduced the concept of anchoring and adjustment. Specifically, when individuals need to reach some judgment–perhaps the price they are willing to pay to purchase a particular car or the number of jelly beans in a jar–they form an initial judgment from some simple feature and then adjust this estimate, called an anchor, to form a final judgment. The adjustment, however, is usually conservative, and hence the final judgment is usually biased towards the anchor.”
We have some sort of a conscious understanding of where we fit and how well we do. However, once relative anchors are set by society at large and it itself is molded in various verticals of happiness determinants all of which have median adjustments to unrealistic expectations we all end up sort of well below those marks. In some sense it is a pre-determined failure because you are setting your happiness relative to the global median of various vertical happy outcomes in various verticals that are conformed to various medians of societal manipulated “desirable” outcomes. None of these aspects create a better conscious happiness in any of us, but it does create a sense of ‘lacking’ and broken people are easier to manipulate. Easier to direct someone to ‘fix themselves’ over and over until they are completely broken down from their own internal compass. At that point their own path to happiness is so thoroughly trampled on what they think they should build, see, do, achieve, it becomes very hard to return to realistic positioning of what that person really needs for happy living. Being happy is relative to your own internal clock of desirable outcomes, setting those to the relative desires of society is generally a false paradigm. Especially today. Good thoughts on consciousness of one’s’ standing already permeates our being. How this is used is another matter.
If one goes back to my prior post about hedonic treadmill and our average median expectations are pushed in various directions on the curve of what we think would make us happy, after we come to grips and ‘adjust’ from the surrealism or false perception given by our surroundings we never adjust enough to get out of the loop, of the supposition made before. The whole premise is created on a false dichotomy. It is never about the anchor but the one whom is making the anchor, you. What you see around you, what you feel when you are exposed to various societal instructions, plans, goals, and so on is the goal. What you actually want without these things is another matter, far more interesting if one tries to get at it.
Real rebels, rebel against themselves first, define your own happiness.
Be well, and happy, as well as you can be.
Guaranteed Income Thoughts
Imagine a world where you are guaranteed an income stream. Not much just enough for basic necessities. It may theoretically be plausible, so far Finland , Switzerland , and France have thrown out feelers to see what public thinks in essence. Theoretically in order to eat through the mountains of imaginary debt that won’t be paid back inside Europe there would have to be some sort of inflationary starter that makes it possible. Workers are losing jobs left and right and the youth is unemployed since global growth is really negative, so it could to a degree be interesting way to go. Printing money to give to the population to stimulate some sort of multiplier effect and generally allaying the unrest, and so on.
The problem with schemes like this is the distribution of costs that a system like this would set in motion. If one reflects on things in U.S., food stamps and other things, a unifying guaranteed income which essentially replaces these things in Europe. Perhaps not be such a bad thing from a social point of view. It would solve certain problems in regards to people becoming desperate and driven to change the dynamic. However, certain problems would be created, entitlement problems and what is ‘fair’. As of right now this is the only way to distribute enough money to keep the system going from imploding under the weight of financial leverage and non-written-off bad loans that accumulated due to asset-bubble mania and encouragement by the financial system at large.
I can see this being implemented. Ergo, 800 euro per person per month would be enough to create enough liquidity in order to promote some sort of wage-price-spiral. If Quebec and Canada at large move in this direction it is likely the U.S. may as well. Essentially a first-world self-liquidity loop to make sure the population has basic needs met. One begins to think about Huxley and the “Brave New World” in this context. The shift would be monumental, not just from an income-inequality stand point. If income is guaranteed then the printing press would essentially be ‘democratized’ a bit. The necessity of this action is apparent in the distraught implosion of demand for goods, services, and otherwise globally. Impact on capital, if one imagines 10-20 people pooling say 100 euro a month to fund themselves into a business and the dispersion of capital productivity into the economy would be interesting. Labor impact is far more cloudy. Any thoughts?
If we have about a billion people in this system and each gets $1,000 a month of guaranteed income the infusion of cash is $12 trillion a year. Considering that some people have money and jobs and that extra income will be taxed on that end and perhaps a third would actually be in need of the income right away, say students and elderly. The marginal spending would perhaps increase by half say $6 trillion a year. Amount of slack demand and trade boost this would provide would certainly fix a lot of problems.
There is a dark side to all of this. Government control and international government control would get a significant amount of leverage over vast populations. Political influence in certain areas would increase and allow Federal Gov’t or the EU beuracracy to cram down policy to the states and nation-states. Imagine the amount of control if your emission center is in Germany and Spain passes a law that deals with something “contrary to the spirit” of Eu constitution or laws and the emission of funds is suspended for the ‘guaranteed income’ in Spain? What do you think would happen? There would simply be hints of bureaucrats to national leaders to follow the policy of the central state and the funds to buy that power would be created out of nothing, backed by the populations of those same countries on the ground against their own self-determination in regards to laws and policy matters. This would create puppet states that are beholden to the central emission center from Foreign Policy to Family Planning and all for the price of guaranteed minimum income, printed out of thin air. Magnificent? is it not.
There are always strings, attached. Depends to whom and why, and how they are directed.
Be well dear reader.
Demand for Stuff and Positive Interest Rates
Watched Hugh Henry and he brought up certain things in regard to demand and China. Theoretically if we could globally push up wage rates for labor and overall labor force participation rates for a time, some suppressed demand would come back to drive the stagnation and perhaps push growth a bit. The problem is debt constraints globally will not allow asset price adjustment for the economy to clear. Liquidation in the words of Mellon
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people “
is what we need. Housing and overpriced capital asset equipment today simply does not clear the market, because banks would lose money if they were auctioned off. There is no urgency to reclaim capital since interest rates allow gradual amortization of unused property or sale at prices higher than it would otherwise claim.
Getting back to the wage rates and stimulation via pushing these up for the wage inflation spiral to take some sort of push to unwind that “suppressed” demand. Nobody wants to loose purchasing power, not the banks, not the public at large, not the government that gets to redistribute it. The only way this could occur is if a large enough ‘gulp’ of stagnation was on the horizon and fear of loosing control forced the issue at hand. Ergo essentially budget supported push to employ slack laborforce people, while similarly providing incentive for asset clearance at a faster rate from bank balance sheets.
Thus far the only thing I see is the increase of the Fed Funds rate to 1% or more. Simply to push through that inefficiently deployed capital will either clear at lower levels or be destroyed. Banks will have their margins pressed down or they liquidate and re-deploy capital into more productive assets. Whichever, they prefer while external capital is invited to participate in the process to magnify the pressure while smoothing over the system. I sense the biggest asset lenders which were the car wholesaling creditors are in the similar situation.
It is interesting that “guaranteed income schemes” from Switzerland to Finland are coming forward, yet how they would ever be funded? constant debasement of currency from those whom have to those whom have not? I don’t think that would work on a global scale. My sense it is far more likely for debts to essentially be ‘nullified’ both government and otherwise and budgets having work or financing works that keeps people busy while re-distributes more income into the system. Thus giving it some multiplier effect by pushing it through the system. Wondering how the nullification of said debt would work on a global scale.
Theoretically if the Eurozone breaks up a forced conversion of Euro denominated bonds could be a trigger for something like this. Imagine Italy going back to the lira, while issuing a law that demands all lira debt is 1-to-1 converted to the Euro, otherwise it is unenforceable under Italian law and within Italy. Similar things for France, Spain, Portugal, Greece, etc. All of these countries would instantly de-value most of their debt and currency at same time. Productive capacity would give their purchasing power more weight while the debt burden declines.
An even more interesting idea would be if the Eurozone breaks with every participant leaving. In the end the Euro would be a currency backed by nothing and the reverse could occur every country would translate depositors in their countries to the new currency 1 for 1 but the debt would remain in Euros that would eventually be manipulated into worthlessness. This is more ambitious but kind of interesting.
Be well dear reader and have good thoughts.
A glut of inventory.
A glut of assets that are really liabilities, in the form of deposits, real estate, and cars.
A glut of ideology that no longer works for most countries or people at hand.
A glut of thoughts that are thinking about same things.
A glut of migrating people seeking a glut of dreams
A glut of wars and proxy wars with unresolved issues
A glut of political ambition that provides no resolution to a glut of problems
A glut of choices and a glut of emptiness along with a glut of illusions and discontent
Strange everyone wants everything and yet all this everything is preventing something from fixing the stagnation all around us. It sort of seems a bits surrealistic like you’re in a painting where figures are painted upon one another until the painting juts out from the thickness of paint. All jumbled up into a carcass of thickness without any space for reflection or introspection.
Instant gratification syndrome a la concentrated tunnel vision for the mobs of seekers, everyone rushing forward like a lemming, yet no results or beneficial outcomes to resolve the restless idiocy that keeps building upward from all venues of society. Everyone wants to do something that yields nothing to feel better about their decisions. This drive that is directed at driving somewhere, somehow, with everyone else.
In some ephemeral sense the lack of resources or ideas, seems to be the fertile ground from which something can spring up to solve a problem. Here everyone can do their individual part to create a greater whole. But the whole coalescing of problems is no longer built from the ground up, but from a top down. You are presented with a complete painting of what someone somewhere pretended into being and are kaleidascoped into choice as part of a festive crowd that needs ACTION! and so you all choose to run around like little hamsters in a wheel, never attempting to stop one-self and think.
So for today just stop yourself and reflect. What would you want? Take nine seconds it is an awful long time if you stop the world for just that short period, if only in your own head.
Be well dear reader.
Sticky prices, negative interest rates, and a pyramid of fools
Strange how the most leveraged borrowers, banks that have leverage 10-30+ times are pushing for negative interest rates from which they could loan money at positive rates to non-leveraged borrowers the public and productive businesses.
Fascinating that destruction of savings for the sake of providing funding to banks in the form of permanent transfer of purchasing power at an ever-increasing rate is actually being promoted globally. The logical conclusion of negative rates is dissolution of monetary system completely. Stimulating demand by having people buy things they don’t need to escape destruction of their savings may work but the dis-intermediation it would cause would be one of the effects nobody may have considered.
All these struggles to prevent assets that are worthless from clearing at their natural prices that are lower than today. Curious if the public is forced to fund the financial system via negative rates what kind of shift would constitute wealth in the future? Everyone is ignoring the overarching costs of having overpriced assets with those whom have lower utility for their use.
The most dire consequences will be the most unforeseen. Why save if it is punished? Why keep deposits in a jurisdiction that taxes them by negative rates? What medium of exchange would become more desirable if the war on cash goes on? What sort of battles would we see in the war on cash? If people begin to choose inventory say boxes of wine they like that they could hypothetically barter exiting the financial system completely what would happen to money? If financing is predicated on deposits when those run at what point would those countries and banks start confiscating them to convert into equity? Precious metals and jewelry seem useful but utility of something is very subjective and perhaps the most obvious answer is usually wrong.
If we in the U.S. raise rates to 1% while, Europe and Japan go to -1% wouldn’t their marginal capital flow here and their financial systems implode? What is also completely ignored is the amount of inefficiency in having negative rates and the amount of systemic trash both in assets and how the money flows through the system clogs up how things are rationalized in the real economy. If everything is predicated on financing those things that can be financed are not just artificially bid up by having a ready currency bid for it but are set up to have the trend to do so via the underlying systemic preference in their favor. All that overhead to re-distribute capital into assets that are pushing into negative present value creates negative marginal returns in having underlying system when the velocity of its’ use drops. Returns on things that you can’t finance or can’t finance anymore becomes much harder and structural shifts in the economy become extremely painful.
Banks want to be both the credit and capital of the new system yet if history is any guide all that capital will be destroyed just like credit that was poured into things that went bust. Having the infinite ability to finance something does not imply you stopping when future returns are negative because all of these actors are guided by the present instead of the total return decades outward. Nobody pushing the negative interest rate mantra is thinking that once cash is pushed out, black and grey markets cease to exist. Demand for those markets will make certain to create an exchange medium one that is thoroughly outside the system. The problem will occur when the system is so weakened by restrictions and regulation it sets upon itself that there would be a partial switch into those exchange mediums by the real economy due to not being able to operate efficiently in the cashless society promoted.
Wage Hack for the Unemployed!
Are you in search of a good paying job? Perhaps as an engineer? Maybe in finance? Could you be looking to work in technology or software services? Maybe a government job? Well I am sorry to tell you but unless you can “Wage Hack” you are $h*t out of luck. What is “Wage Hacking” you ask. Simple!!!
“Given a 16-hour deadline, unlimited energy drinks and of course, lots of munchies, Broadcom invited the current class of northern California-based engineering interns”
And when that round of interns drops dead you can go on to the next HAHAHAHA #wagehack
You start a company just like Broadcom, Intel, Google, Goldman Sachs, or anything else and apply for your share of the H1-B, H-2B, L-1, or something similar.
Once you get your quota of visas after you “campaign contribute” *wink* *wink* you can proceed
“Negotiate” a contract with a company, a federal agency, a municipality, a state, or some other entity for a ‘staffing’ or ‘technology’ or ‘service’ contract where you need specialized skills. Perhaps you need a water specialist like those cities that are poisoning their populations with lead and other impurities due to skipping doing any actual work.
Once you got the contract in hand and received your deposit, you are SET! All you need now is wage slaves, I mean interns, or better yet, “foreign technology specialists”. F#ck yeah! Just ship a container full of workers, pay them in skittles while they live twelve to a room that you book as a ‘pay package’ for each one. Once you have the cows I mean “specialists” making you money, you too may buy yourself a mansion, heck buy two and an airplane.
“A federal government study concluded that 20% of the H-1B applications are fraudulent in some respect. An entire cottage industry of firms that obtain H-1B workers and then “loan” them to another employer has cropped up. One such firm has been convicted of repeated violations of the program, was fined and excluded for a year.”
CONGRATULATIONS AMERICA ‘Wage Hack’ COMPLETED!!!
You may think I am kidding…
But the problem is not the H-1B model but that it essentially got copied, and spread to regular economy.
Now you get staffed by a local company at $15 an hour while it gets $50 an hour for you, and the whole model is simply onshore filters of siphoning money from the labor force. Congratulations on reaching indentured servitude just like in the old days just with shorter time frames and easier application.
Ah good ole government:
“On January 20, 2016, the U.S. Department of Labor’s Wage and Hour Division issued Administrator’s Interpretation 2016-1: Joint Employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act, which identifies common scenarios in which two or more employers jointly employ an employee and are thus jointly liable for compliance.”
(Notice the scenario is a Staffing Co. and a Hotel so the applicability is not for Agricultural workers but probably all workers)
Thank you GOOGLE, BROADCOM, etc., ALL Cities, States, AND Federal government agencies that use 3rd party companies to staff yourselves silly, so that you and your “Friends” could get the difference, bless you each and every one, now we know what to do! [sarcasm with a heavy dose of satirical enthusiasm is contiguously present]
Cool video on fake hiring ads.
gov’t contracting out government functions video
Best of luck dear reader and enjoy the show.
follow on @lushfun
Cited links are below:
end of citing
Belief and Popular Fantasy
Has anyone noticed how popular fantasy is shaping our view here, there, and everywhere. Slow seepage of ruthlessness and segmentation of some being “chosen” with special magical powers or selective prowess of some kind being naturally above the common folk. Every person begins to fantasize about the phantasmagorical view of the world and how it interlays with our current reality. Slowly but surely we gain a little solidarity with others whom see those shows, read those books, have those exaggerated fantasy perspectives. Alas, it all creates a sense of relativity of a bubble mentality in a social setting where you are disassociated from realistic perceptions of social reality.
What have we seen lately, just to list a few things that are normalized in book, film, cultural perception, regulations, normative treatment in schools, etc.
1) The change of traditional roles but anchoring of traditional responsibilities.
2) Indulgence of might of collective belief in respect to private rights of what is fair
3) Fairness is individualized based on your social standing
4) Weakness is trampled and degraded as a natural aspect of society
5) Power is above all else, with all responsibility tied to it, erased
From the “game of thrones”, “supernatural”, “house of cards”, “Versailles”, “shades of grey”, mutants of various kind, and so on and so forth.
Sometimes the characters and whatnot say the words that make pretense of virtue as it was, but act with exception. Thus they are always exceptional and only the common folk or the rest of us have to cope with reality by implication. But we all are made to be the ‘viewer’ the ‘chosen’ the ‘exceptional’ through the backward induction of seeing things from above we feel power where we have none, if only for an instant just to get a glimpse of what is taken from our grasp by the simple and resolute social reality of today. It seems kind of funny if one simply thinks about it. You are given a narrative with powerful imagery and a sense of awe and control, but in the end all of this was simply a commercial to get back into the malaise of everyday. Someday, someday soon you too will be a super hero, in your head first but then everything will happen *sarcasm*. Yet, this is simply a conditional response to the bells and whistles, now you can get back in line and not feel so small nor work against it in normal fashion. You don’t have to work hard to improve your knowledge or abilities, you don’t have to hustle to establish social networks that can payoff someday in the future, you don’t have to strain yourself through sports or some other way to establish that sense of strenuous accomplishment, no longer just wait and watch a movie, read a book, indulge your senses and slowly sink in the ocean of social disassociation and a bubble of redress that doesn’t quiet fix things.
Bend reality with your mind, push it with your deeds, there is only this world, for today you are HUMAN!!!
be well and take care
China will float the RMB, and rates will confirm if they succeed.
As our Fed Funds rate begins to incrementally adjust upwards the pressure on China and RMB will increase exponentially. They ran out of time, which is obvious to all market participants and another decade or even a few years to off-shift from U.S. dollar dependency via creation of RMB demand from without will not occur. Flexibility is gone, there simply is not enough trade balances accreting to create a mechanism for clearance for the RMB at the adequate level to reset the financial system without having shocks. You cannot print money without demand in order to have backing for the financial system that does not clear asset prices and keeps ever larger segments of the economy in stasis for hope of price improvement.
The rate push by the Fed is forcing the separation. China cannot have a dichotomy of interest rates implicit in their exchange rate and explicitly set internally for financing. Rates have to move, but they cannot because of refinancing becoming net-present-value destructive. Theoretically if a massive cleanup effort were to occur the amount of trust generated would be sufficient to overcome the belief that any new demand would end up in mal-investments and non-productive, the problem is this had to have happened years ago. As of right now the Yuan simply has to adjust lower while the asset losses accelerate on the financial balance sheets to reflect the increased damage that occurred through holding the line in re-distribution of savings via corporate refinancing in China.
Nothing here is political. It is simply a reflection of capital that was saved being plowed into assets that are not just worthless but carry a negative cost to both society and other capital by promoting the mis-alignment of interests. Rationalization of savings in the form of loans was corrupted, thus destruction of capital was inevitable. How much capital is destroyed is only going to be decided by how quickly salvageable assets can pass to market participants that can make them productive. This does not mean that those assets will get the best and highest bids by speculators on the way down to realize the margin but by those whom are end-users and would be able to gain the maximum utility of these assets. Ergo the added-value from rationalization would salvage whatever capital was left instead of wiping it out altogether.
Where there is a will there is a way, but there is always a price. Sometimes the price is far higher than one was willing to pay at the beginning. Holding an artificial price for a good be it a currency, oil, or a dozen eggs can only happen for as long as there is sufficient supply of those things produced or provided at those prices. Every transaction that happens at artificial prices sets a signal to the underlying industry how to adjust that will have to change with the amount of future change occurs in regards to those prices. If you try to sustain something artificial long enough the marginal cost of doing so becomes so heavy and so burdensome that the adjustment that is unleashed systemically undermines not just what you attempted to achieve but the structure of how you went about doing it.
Million dollar question of course is what will the RMB interest rate will be when it becomes floating?
Then again perhaps I am wrong and everything will be fine*sarcsm*.
Somewhat inspired by:
Be well and have good thoughts.
Why I think the rate hikes will continue until 1%.
Right now we are having a very severe shift in the global paradigm as it relates to money. For too long the eased monetary policy created a perception that access to credit globally for business and anyone else was a given. Asset prices began to trade not on what you could get from them but how you could finance them. Having equity in a sense became secondary to having access to credit. It does not matter if you can pay 30 grand cash for a car if everyone competing with you can either get a loan or have it leased by the company for a payment, your advantage is nil.
Going from essentially 0% on the “safest” parking of cash to 1% is essentially a change of infinity. Ergo the value that permeates society that should be placed on cash will have to drastically change. Perhaps not right away but slowly and surely since there will have to be placed some utility on it in regards to a more limited access to credit and credit’s higher price in the form of marginal difference vis a vis the interest rate.
A lot of pressure in this dynamic is essentially placed on everyone whom is already thoroughly borrowed out to their max as their interest rates rise and the re-financing to anything lower or similar is not available. Some of these relationships will implode since they were predicated on the credit being refinanced by some other fool later on, unfortunately that access is gone and you’re the fool holding it today.
Asset prices gyrations have already began. Real Estate is going to have a gulp moment when the properties that close on margins begin to drag down the prices for the rest. They could ignore them but what will clear the market will force aggregate revaluations bringing back a lot of pressure on whom buys, at what price, where, when, and most importantly in relation to what kind of inventory available. Basically inventory will matter once again since time and costs in regard to what is available will no longer be shifted to those whom buy as they are now. If anyone noticed how prices keep getting jacked up slowly every few months but the property keeps being unsold it is simply updates in relation to what is around by both the greed and mendacity in regard to inventory.
But we shall see.
Coming Week Geopolitcal and Economic events.
These will probably be a failure like the ones before that, and the ones before that. Kurds will not be represented it seems. Opposition wants concessions from a position of weakness and is backed by Saudi Arabia, Qatar, and Turkey. This is Geneva 3 just to keep up on how many there were before. There were already consultations on January 13th between Russia-US-UN.
January 26th is the Case-Shiller home price index publish date.
I am quiet negative on it but my only reasoning is the sea of red(for sale) dots on zillow. Prices may be sticky and you can ask for anything you wish, but clearing them through sales and closings is another matter.
January 27th is the Investor Summit on Climate Risk held by UN in New York. The goal as always to create a global tax that creates monopolies which re-distribute power within various industries, as well as, hands out subsidies for others. Essentially a permanent hurdle for the rest of us. But hey I am just translating from bullshiteese.
“In order to limit global warming to 2°C and avoid the worst effects of climate change, the world needs to invest an additional $44 trillion in clean energy—more than $1 trillion per year for the next 36 years.” (from http://www.ceres.org/issues/clean-trillion)
Most of this money if this ever happens will be channeled through the sponsors via subsidies, incentives, and general flow diversions.
“Clean Trillion” a year no less, sounds like a great movie theme for a robbery.
Be thankful dear reader for “Free Speech”, thankfully it still exists
Have to mention Richard Lintzen story about him in link 4) below. http://www.clmatedepot.com is a great site good link with summary of data below.
China and why “Winter is Coming”
There are several problems in establishing a currency regime that can be stable. It has to be able to establish an environment that can sustain long term capital deployment without fear of rapid devaluations to solve government problems. It has to be convertible into other currencies rather freely to facilitate external trade. Furthermore there has to be stability in the internal financial system that can provide clearing for goods, services, and other aspects.
China and the problem it created for itself. In order to develop rapidly and create an environment of trust vis a vis business and external partners China established a peg to the dollar. It was a very rational policy and provided a static margin that ensured the business community of profitability. The problem today is that as the dollar gained relative strength so the margin versus global currencies became lower and eventually negative since purchasing power became more and more vested in the currency pair of Dollar=Yuan since they are linked. Ergo products that would cost 5 Yuan in currency X, Y, or Z, went to 10 Yuan and it became unprofitable to import them.
Longer term financing that was used to establish production capabilities and the ideology of how those businesses were set up put forth an environment where dollarized financing was used via various methods. One of the major problems when creating something like this and using a major market like the U.S. as a springboard is that your dependence hampers your profitability and you need very large volumes. Companies in China, not all but quiet many are financed to the brink to establish those high volumes, however any variability in demand hampers profitability severely. Notice the possibility of weakness in variability of exchange rate was moved to variability in demand. Problem for the financial system as a whole is that it is strained to meet a certain threashold of capacity to satisfy that demand irrespective of its’ existence. Basically variability of demand has direct impact on financial system in the form of company solvency. Which we are now monitoring.
The solution thus far that is approaching is devalution of the peg that was done slowly, foretold in advance and gave the ability for businesses to adapt. It does not however unwind the financial links established by companies to operate, transition their capital structure function into Yuan, or defray the cost of capital re-deployment to make it possible to technologically upgrade and meet the challenge of variable demand.
When a country tries to springboard itself from a different country’s currency without establishing adequate attractiveness for participants to maintain their working capital and operating budgets in home currency it gets a capital shortage and the trade flows re-orient elsewhere.
Imagine you have a business, which makes something. You have deployed 10 million dollars into plant, salaries, commodities, shipping contracts, capital goods, and so on. The most liquid part of that money is deployed constantly, as soon as, you notice that going through the production chain is becoming a negative sum game, you may stop. Working capital deployed in inventory sold abroad, commodities bought abroad, deposits for shipping and insurance partly abroad, and some savings held abroad for upgrades to capital equipment will not transition back. At this point the most valuable thing this business has are the contracts to satisfy demand in the exporting market. Granted it may have some demand internally as well but you could split the internal from external businesses or evaluate if it that part could be sold or remain autonomous.
The hardest problem from a financial system perspective is to have enough trust from the people whom operate these companies that you will not transfer/re-distribute/steal purchasing power from them to others in that system. Think loosing purchasing power and someone getting loans below the rate of inflation to expand firms that are oriented internally in the country. Essentially at that point you would be forfeited for someone else and since you cannot be profitable in this new environment you may lose everything.
Urgency arises at the point of declining marginal demand. Right now as global demand for goods of all sorts declines and factory utilization drops while profit margins decline or go negative, the need to re-orient for internal demand would require massive funds that shift the structure of the economy and production in general. These funds cannot be created out of thin air. They can be financed into existence based on possible demand in the future but for that you need markets, and participants. The “New Silk Route” is attempting to bring both onboard.
New questions but old problems arise. How does one separate the peg while keeping the flow of capital in the system constant if those that export can see the paint on the wall? If liquidity is low due to working capital escaping and insolvent enterprise loans maturing essentially destroying Yuan capital while shifting into Dollar capital, how does one keep the monetary system robust for the transition?
Imagine a world where China succeeds, the rate of Yuan to the dollar is 7 or 8 it is moderately free floating and you could buy contracts to get it on an exchange or pay for goods in Yuan to export them elsewhere. Where would those exports go if market share is lost to higher margin producers that are located locally and can sustain more variable demand and competition?
Belief in Yuan being tied to the Dollar is bolstered by the trillions in dollar reserves by China. However, if everyone knows and trusts that it has to go down in value, everyone will short or sell the Yuan or Yuan denominated assets to capture the gain by participating in the decline. This is some of the reason why China equities went down since capital controls in a way prevent direct shorting of the Yuan. But again to reiterate the point I made above, the biggest and most dire danger is the exit of capital and re-orientation of trade flows. Something like that would render a large segment of the economy without ability to survive and have fairly dire social consequences. Attempts to create demand for the Yuan by going global to attempt to compensate the exiting capital with foreign holdings that would allow the monetary system to re-finance the structure may succeed in certain areas. But on the whole it will probably fail due to access of financing being limited to those connected, subsidy of companies for social reasons, aggregate impediments of ability to deploy that capital into ownership that can be defended by external actors, and government interference at various levels. On a different level one can say that the problem is not China but the system it is trying to compete within and spring forth from. It simply cannot escape the gravity of global demand contraction by attempting to expand market share into markets that have no or low purchasing power, unless how profit comes into existence changes. Perhaps manifesting monetary currency out of thin air can create demand that is sorely lacking, but fitting a finite world into an infinite monetary universe will end very badly.
Some food for thought
Money – Pink Floyd HD
Currency Clash towards Crash Emerging markets and beyond
If anyone noticed foreign currencies are imploding.
Over the last year from January 2015 to January 2016
Brazil went from around 2.6 to 4.1 vs the dollar or losing around -37%
India went from around 61.5 to 68 vs the dollar or losing around -10%
Mexico went from around 14.6 to 18.6 vs the dollar or losing around -22%
Russia went from around 64 to 84 vs the dollar or losing around -24%
Euro went from around 1.13 to 1.09 vs the dollar or a loss of around -4%
Poland went from around 3.75 to 4.12 vs the dollar or a loss of around -9%
China went from around 6.19 to 6.58 vs the dollar or a loss of around -6%
Turkey went from 2.32 to 3.04 vs the dollar or a loss of around -24%
Why does any of this matter? There are several reasons that may apply to various countries mentioned above. Some of these reasons are straight forward others not so much.
Mortgage debt denominated in dollars while their earnings are in home currency.
Sovereign debt denominated in dollars while their earnings are heavily tied to trade.
Currency peg that is slowly weakened to modify the impact on financial system.
Remitances falling from population working abroad.
The problem with these and many others is not that there is a tie to the dollar. But the psychological behavior functions that formed that tied relative well being to dollar exchange. Purchasing power is in a sense becomes represented by how well the currency holds up to the dollar but generally that is secondary. What becomes primary is the striving idiocy for keeping YOUR share of revenue vis a vis the dollar larger in spite of the improbability of doing so. Ergo imagine a person whom bought an apartment in Warsaw say one year ago for $100,000 in Polish currency and that went lost 9% value not only is the anchoring to historical cost persist but every actor attached to that value is tied the same paradigm. The gov’t that collected higher taxes, the real estate agents that denominated vis a vis purchasing power derived from dollars, the wage given by companies employing people derived partly from possible rent, the bank valuing their loan book and reserves against it, and so on. Now consider for a moment the competition on the way up as people bid up assets and assume that bidding down people will be just as ruthless with those same assets they were bidding up. This is apparent in real estate markets in Moscow which already took severe punishment and will continue to do so for the foreseeable future.
Let us shift towards a certain reflection of where in the economy of said country these aspects will lead to the most damage. When one thinks about this and comes to a conclusion that the real economy people buying food, traveling, producing pipes and various goods, would most likely be the worst place for something like this to occur. So we see a heavy dose of inflation in all these goods in spite of weakening currencies because survival is paramount for millions if not billions of jobs and well being of nations.
The problem arises when there is a structural attachment via corporate debt or term loans that are essentially tied to trade balances via tourism or import/export and tied to the dollar. Here when a company bought inventory and that inventory devalued over a day or few weeks since the purchasing power of the population will not be able to deliver the amount of cash either in allotted time or by being unable to bid for products at all creates a severe strain on these companies and those whom financed them, as well as, the government in question. This is more or less what is occurring in Turkey. Timeline of maturities for various corporate and sovereign maturities is coming closer while the ability to refinance or pay them off is stretching out or becoming highly unlikely. Brazil is in a similar situation, although perhaps not as dire, yet.
Anchoring by government in these situations is the most destructive underlying force. Turkey can probably adjust easier since its’ problems are more obvious and the necessity to do something to fix them to adjust industry and salvage capital into productive use is paramount. Brazil on the other hand can have numerous impediments that marginally could bring on just as devastating results as multiple stake-holders from unions to taxation authority, to industry operations vie for whatever control they could impose and whatever capital they could grab onto, irrespective if it brings improvement longer term to the situation at large they all may be facing. It is harder to go against the structure where it seems to be simply a question of re-distribution rather than survival.
There are other aspects that I will revisit in the future in regards to this topic but for now that is all.