It is perhaps a testament to the ability of the oligarchy (that 1% which owns some 50% of all US assets) to distract and distort newsflow from what really matters, that a century after the creation of the Federal Reserve, the vast majority of Americans are still unfamiliar with the most important institution in the history of the US – an institution that unlike the government is not accountable to the people (if only as prescribed on a piece of rapidly amortizing paper), but merely to a few banker stakeholders as Bernanke’s actions over the past five years have demonstrated beyond any doubt. It is for their benefit that Jim Bruce’s groundbreaking movie “Money for Nothing” is a must see, although we would urge everyone else, including those frequent Zero Hedge readers well-versed in the inner workings of the Fed, to take the two hours and recall just who the real enemy of the people truly is.
A quick note on producer, director and writer Jim Bruce. While Jim has been a student of financial markets for over a decade, and began writing a newsletter in 2006 warning about the oncoming financial crisis, what is perhaps most notable is that it was his short trades in 2007 and 2008 that helped finance a significant portion of Money For Nothing’s budget.
However, most impressive is Bruce’s ability to bring together such a broad and insightful cast which includes both current and former Fed members, as well as some of the most outspoken Fed critics, among which:
- Paul Volcker
- Janet Yellen
- Alice Rivlin
- Alan Blinder
- Richard Fisher
- Thomas Hoenig
- Jeffrey Lacker
- Jim Grant
- Allan Meltzer
- Raghuram Rajan
- Charles Plosser
- Tony Boeckh
- Jeremy Grantham
- Todd Harrison
… and many others.
From the film’s official website:
MONEY FOR NOTHING is a feature-length documentary about the Federal Reserve – made by a Team of AFI, Sundance, and Academy Award winners – that seeks to unveil America’s central bank and its impact on our economy and our society.
Current and former top economists, financial historians, and investors and traders provide unprecedented access and take viewers behind the curtain to debate the future of the world’s most powerful financial institution.
Digging beneath the surface of the 2008 crisis, Money For Nothing is the first film to ask why so many facets of our financial system seemed to self-destruct at the same time. For many economists and senior Fed officials, the answer is clear: the same Fed that put out 2008’s raging financial fire actually helped light the match years before.
As the global financial system continues to falter, the Federal Reserve finds itself at a crossroads. The choices it makes will greatly influence the kind of world our children and grandchildren inherit. How can the Federal Reserve steer our nation toward a more sustainable path? How can the American people – who the Fed was created to serve – influence an institution whose inner workings they may not understand?
The key tenet underlying Money For Nothing is our belief that a more fully and accurately informed public will promote greater accountability and more effective policies from our central bank – no matter the conclusions any individual draws from the film.
Sadly this is where we differ, for it is Zero Hedge’s opinion that not only is it now far too late to promote any type of change at the top, but the best policy is to urge the Fed on in its ludicrous policies, in order to lead to the catastrophic culmination of 100 years of disastrous wealth-transfer policies, which unfortunately is the only possible way a cleansing systemic reset – one that would finally eradicate the scourge of central-planning – can be unleashed upon a broken and malfunctioning system in its final throes of status quo existence.
Then again, perhaps there is a chance.
Finally, as an added bonus, here are some thoughts from the creator and that supreme beneficiary of the Fed’s wealth transfer protocols, billionaire David Tepper, on how Ben Bernanke managed to,temporarily, circumvent Darwin’s laws and how it is not the fittest but the fattest that survive.
InsideClimateNews.org — Jerry Skinner stands in his garden, looking into the distance at the edge of a forested mountain. Amid the lush shades of green, a muddy brown strip of earth stands out. It’s the telltale sign of a buried pipeline.
“The pipelines are all around this property,” Skinner said. “When I came here, the county had an allure that it doesn’t have anymore. I’m not sure I want to live here anymore.”
Skinner is the resident naturalist at the Woodbourne Forest and Wildlife Preserve, a 650-acre forestland that runs through parts of northeastern Pennsylvania that are experiencing intensive gas drilling because of a hotly contested method called hydraulic fracturing, or fracking. Around his house, in the town of Dimock, gas wells have sprung up and a vast network of interconnected pipelines transports the gas underground. Skinner worries that as drilling activity heads deeper into forests and pipelines chop up large blocks of land, rare species native to Pennsylvania will be driven out.
In recent years, Pennsylvania has become ground zero for fracking, along with neighboring states that sit atop a large shale reserve known as the Marcellus Formation. Pennsylvania has more than 6,000 active gas wells, and Marcellus-related production has soared to 12 billion cubic feet per day, six times the production rate in 2009.
Gas drilling has long raised concerns about water contamination and air pollution. But until recently, little public attention has been paid to the pipelines that must be built to carry the gas. In Pennsylvania, concerns about these pipelines are growing because many of them are being built in the state’s 16 million acres of forest, which include some of the largest contiguous blocks of forestland east of the Mississippi River. Of the 2.2 million acres the state oversees, nearly 700,000 acres already have been leased for drilling, allowing companies to cut paths through pristine stretches of trees, fragment forests, decrease biodiversity and introduce invasive species.
“In Pennsylvania, the gas companies are working in essentially the most ecologically sensitive area of the commonwealth,” said John Quigley, who served as secretary of the Pennsylvania Department of Conservation and Natural Resources for two years under former Democratic Gov. Ed Rendell. “The scale of this thing is off the charts. It’s unprecedented.”
Of particular concern are gathering lines, the pipes that carry gas from wells to long-distance transmission lines. Although they are often the same size as transmission lines and operate at the same pressure levels, about 90 percent of the nation’s gathering lines aren’t regulated by state or federal authorities.
In fact, regulators don’t even know where many gathering lines are located, even though they sometimes run close to homes and businesses.
Gathering lines are likely to generate even more controversy in the years ahead. The Interstate Natural Gas Association of America, an industry group, estimatedtwo years ago that more than 400,000 new miles of gathering lines will be installed by 2035.
Concerns about forest fragmentation due to industrial activity are not unique to Pennsylvania. In Alberta, Canada, for instance, recent oil and gas projects have reduced core forest area, including habitats for Woodland Caribou. As pipelines, roads and well pads slash across forests in Alberta, the Woodland Caribou, which tends to avoid forest edges, has been driven close to extinction.
Biologists and other forestry experts said curtailing or reversing the trend in Pennsylvania would be difficult because Pennsylvania’s land management system is so fragmented. The state does not own the mineral rights for about 15 percent of the forest it oversees, leaving those areas open to drilling.
The Nature Conservancy released a report three years ago projecting that under a medium-growth scenario, a minimum of 6,000 well pads with 60,000 wells will be drilled in Pennsylvania by 2030—and that two-thirds of them will be in forest areas.
In 2011, in testimony before the Maryland House Environmental Committee as an independent environmental consultant, Quigley warned that the cumulative effect of gas drilling “will dwarf all of Pennsylvania’s previous waves of resource extraction combined,” and that Maryland must avoid the mistakes that Pennsylvania has made.
Industry Dismisses Fears
On average, each well pad requires 8.8 acres to be cleared, according to The Nature Conservancy. About three of these acres are for the well pad itself, while the rest are needed for infrastructure such as roads, pipelines and water impoundments.
In total, the conservancy estimated that 61,000 forest acres in Pennsylvania will be cleared by 2030. The group believes this deforestation will affect an additional 91,000 to 220,000 acres of interior forestland near the developed areas.
The gas industry disagrees with conservationists about the impact of pipeline corridors on wildlife habitats. Right-of-ways with “widths typical of single natural gas pipeline facilities are not likely to present major problems,” said Catherine Landry, communications director for the Interstate Natural Gas Association of America.
John Stoody, director of governmental and public relations for the Association of Oil Pipe Lines, said: “Wildlife is invited to cross our rights-of-way happily and safely anytime they like.”
He also pointed out the tradeoff in using pipelines: When compared to trains and trucks, Stoody said, pipelines are a safer means of transportation with lower greenhouse-gas emissions.
The American Gas Association similarly denied that pipeline corridors cause forest fragmentation. A spokeswoman for the organization said they “can actually enhance habitat by serving to connect fragmented forest, allowing pathways for wildlife and creating forest edge meadowlands.” She cited alternate detrimental factors, contending that roadways, urbanization, agriculture and other human activities are the more likely culprits.
For decades now, ecologists and conservationists have been studying how human activities have disrupted forest ecosystems, including how far the impact extends from the actual site of a pipeline right-of-way. They have confirmed that the reverberations go deep into woodlands.
Recently, for example, researchers in Wyoming concluded that energy development in the state was leading to excessive habitat alteration and accelerating the decline of songbirds.
Scientists abroad have also examined the relationship between forest fragmentation and habitat loss.
Researchers in Australia analyzed several forest areas in India, South America and Indonesia and found that linear clearings like those linked to road and pipeline construction block the movement of some native animals and serve as pathways for invasive species.
“Pipelines are going in and dissecting forest habitats and creating corridors within (them),” saidMargaret Brittingham, an ecologist at Penn State University who has been studying the impact of gas drilling on forest habitats, concentrating on songbirds in Pennsylvania.
She and others have discovered that right-of-ways enable larger animals to move into parts of the interior forest they had not explored. As a result, interior species become exposed to new predators.
Brittingham and her colleagues predict that as more forest territory is chopped up into smaller pieces, habitat for specialists—species that require a specific set of conditions for survival—will decrease, which may in turn lead to their extinction. Those include the scarlet tanager, the blue-headed vireo and the hooded warbler.
In contrast, animals that tend to do well around people will likely increase in number. Raccoons, deer, crows and blue jays are among them.
“It’s a shift in the competitive advantages that you give species,” Brittingham said. “It’s biotic homogenization.”
Fighting for Rights
In their fight to preserve forests and biodiversity, conservationists and other wildlife advocates in Pennsylvania have confronted another adversary – the state’s property-rights system.
In Pennsylvania, surface and mineral rights are sold separately. That means while the stateDepartment of Conservation and Natural Resources oversees 2.2 million acres of forest, it owns only about 85 percent of the mineral rights in that area. The remaining 15 percent is still controlled by people who once owned parcels of the land—even though they have sold their parcels to the state. Those people can negotiate individual contracts for mineral-exploration leases, including fracking.
In a study of land-usage patterns in Pennsylvania’s interior forests, Brittingham and her colleagues found that development is greater on properties with private ownership of mineral rights. They said the split in private and public management of land will complicate the preservation efforts by agencies and nonprofit groups.
A major test case involves the Allegheny National Forest in Pennsylvania.
In 1923, the federal government purchased that forest, piece by piece, but landowners were given the option to sell surface rights or both surface and mineral rights. As a result, 93 percent of the mineral rights in the 510,000-acre forest are now held by a vast number of private owners.
Citing this surface-mineral rights bifurcation, the gas industry argues that the U.S. Forest Service cannot regulate drilling in the Allegheny because it does not own most of the mineral rights there. Environmental groups such as the Sierra Club and the Allegheny Defense Project insist the Forest Service has such authority as part of its overall mission to protect the forest.
In October, the Third Circuit Court of Appeals ruled in favor of the gas industry.
Meanwhile, Pennsylvania’s Department of Conservation and Natural Resources has logged a mixed record in its forestry-management efforts.
In 2010, the agency released a 48-page presentation on the state’s forestland, mapping ecologically sensitive regions, areas with gas leases and forest patches that had been severely fragmented. The department concluded that it could not lease out any more land for gas drilling without causing significant damage to forest habitats.
A few months before the study was released, the state issued two gas-drilling leases totaling more than 64,000 forest acres. The sale brought in $250 million and has led to approval for construction of 438 shale gas well pads.
After those leases were issued, the administration of Gov. Ed Rendell imposed a moratorium on the leasing of forestland. That measure remains in effect.
However, the current version of the 2010 presentation, which has been revised under the administration of Gov. Tom Corbett, a Republican who strongly supports the drilling industry, is only 12 pages long and no longer contains the strongly worded conclusion that any further leasing would be severely detrimental to forest ecosystems.
“Since the 2010 analysis, many things have changed—including our understanding of the development patterns and impacts, and technology related to horizontal drilling,” said Christina Novak, press secretary for the Department of Conservation and Natural Resources.
Novak also said the agency continues to maintain that the regions referenced in the 2010 presentation “are important areas to protect and consider if additional drilling is contemplated.”
Corbett once declared that he wanted to “make Pennsylvania the Texas of the natural gas boom.”
A month after taking office in 2011, he repealed a policy meant to minimize environmental damage to state parks. The architect of that repeal, Corbett’s former environmental protection commissioner, Michael Krancer, now works at a law firm with clients in the gas industry.
Last year, Corbett signed Act 13, which requires oil and gas companies to pay an impact fee for their projects. In 2012, the state distributed 60 percent of the more than $200 million it collected through that law to counties and municipalities. Themoney was spent on reducing taxes and repairing roads and stormwater drains.
The remaining 40 percent of the impact fee was divided among various state agencies, including the Department of Environmental Protection, Public Utility Commission and Marcellus Legacy Fund, which distributed funds for environmental and infrastructure projects.
Act 13 also requires the state to study the placement of natural gas gathering lines and investigate their environmental impact. The study, conducted last year, recommended that pipeline operators consult with experts to restore vegetation in right-of-ways and identify better ways to assess the environmental footprint of their activities.
The Business Case
Since activists and state regulators have little legal leverage over where gas wells are dug and pipelines laid in Pennsylvania, some environmental groups are looking for other strategies.
Working with the University of Tennessee, the Nature Conservancy has produced Development by Design, a software tool that allows pipeline companies to find routes that minimize ecological damage while also being cost-effective.
“Making the business case for these kinds of sustainability issues is absolutely key,” said Quigley, the former Pennsylvania environmental commissioner.
The conservancy is testing a beta version with four companies. Currently the software can analyze habitat fragmentation, provide information to minimize sediment loss and help evaluate the effect of pipeline crossings on rivers.
“Some companies seem to be very interested, others less so,” said Nels Johnson, the conservancy’s deputy state director for Pennsylvania. “The real question is whether [the companies will] use it in a way that fundamentally changes the way they do planning.”
For residents of Pennsylvania, the software will likely come too late.
One of those residents, Emily Krafjack, is president of the grassroots groupConnection for Oil, Gas & Environment in the Northern Tier. Since 2010, she has been providing property owners with information about pipelines in an effort to balance gas-industry exploration with safeguarding landowners’ rights, the environment and the region’s traditional way of life.
She said the rampant development—the rumbling of construction trucks, the ever-greater intrusion into forests—has caused Pennsylvania to lose its charm.
On a recent drive around some of the forestlands, Krafjack pointed to the pipeline right-of-ways that periodically sliced through the forest. She said she sometimes struggles to recognize her hometown. “I’m over 50 now,” Krafjack said, “and I just can’t catch my breath.”
What is the fundamental difference between the SS pumping “liquidity” into the British economy via black markets in the 1940′s and the Federal Reserve pumping “liquidity” into the US economy today?
During the Second Word War, Germany devised a secret plan to undermine the British economy by flooding the country with counterfeit Bank of England notes.
Codenamed Operation Bernhard, in recognition of its mastermind, SS Major Bernhard Krüger, the plan involved a team of 142 counterfeiters, drawn primarily from the inmate populations at Sachsenhausan and Auschwitz concentration camps. Beginning in 1942, the dragooned engravers and artists worked feverishly, forging huge quantities of £5, £10, £20, and £50 notes. By the time of Germany’s surrender in May of 1945, the operation had produced 8,965,080 banknotes worth a total value of £134,610,810, an amount exceeding all the reserves in the Bank of England’s vaults.
The original plan called for the dropping of the forged notes from aircraft flying over Great Britain in the expectation that they would be picked up and eagerly circulated but that part of the scheme was never put into effect. By 1943, the Luftwaffe lacked the capacity to deliver the “economic weapon” in sufficient quantities and the operation was taken over by SS foreign intelligence agents who laundered the counterfeit currency, using it to finance their own espionage activities and pay for strategic imports.
Although Operation Bernhard failed to meet its primary objective (the collapse of the British wartime economy), it was successful in flooding the European black markets with counterfeit pounds, thus undermining confidence in Britain’s currency abroad, and causing its value to plummet.
The Nazi plot may have been the most ambitious counterfeiting racket in history but it pales in comparison to the recent exploits of the world’s central banks, especially those of the Federal Reserve.
The Fed is currently creating, ex nihlio, more than a trillion dollars a year and using the funny money to buy U.S. government debt and mortgage-backed securities and then taking them out of circulation. These purchases have propped up the bond market and kept banks solvent. But they have also caused the Fed’s balance sheet to quadruple, growing from just under $1 trillion in 2008 to nearly $4 trillion today.
And there appears to be no end in sight to the reckless money creation. Janet Yellen, a “monetary policy dove” by all accounts, is about to be confirmed by the U.S. Senate as the next head of the Federal Reserve. Were Messrs. Bernanke and Greenspan “monetary policy hawks?”
Now if a Nazi plot to flood Great Britain with counterfeit currency was a considered a serious threat to that nation’s economy, what are we to make of our own central bank’s policies? What is the fundamental difference between the SS pumping “liquidity” into the British economy via black markets in the 1940′s and the Federal Reserve pumping “liquidity” into the US economy today?
The answer, of course, is there really is no difference. Economic law applies regardless of political circumstances. If you print money faster than the rate of production, you will have more money chasing fewer goods and sooner or later you will have price inflation. It really is just that simple.
An important distinction, however, between the Nazi counterfeiting scheme and the Fed’s current monetary policy is that the US dollar is still the dominant international reserve currency. This “exorbitant privilege” enables US monetary authorities to engage in periodic devaluations without being immediately confronted with a balance of payments crisis or domestic price inflation.
Right now the Fed’s inflationary policies have yet to show up in the Consumer Price Index though there are those who claim the rate of price inflation has been purposely understated by the US government. And indeed consumer prices have gone up in the last five years.
It should also be taken into consideration that the consequences of currency devaluation can manifest themselves in ways other than overt sticker shock. For instance, producers anticipating consumer resistance to price inflation can reduce the quality or quantity of their goods rather than raise prices. This is happening today as many products are now being packaged in smaller amounts yet are being sold at the same price.
Moreover, when you’re measuring price inflation, your baseline is crucial to your analysis. Absent intervention by the US government and the Fed, the Crash of 2008 would have precipitated widespread deflation. This did not happen as the US Treasury and central bank pumped in trillions of new dollars to arrest the panic. The new money has created relative “price stability” in the past few years but this itself is evidence of inflation because otherwise prices would have fallen.
And we can look at bond prices as evidence of inflation. The bond market is an enormous bubble that has been intentionally created by the Fed in order to forestall the inevitable reckoning for decades of overspending by the Congress.
That said, the dreaded hyperinflation that many predicted would happen has yet to occur. Why?
It appears the inflationary deluge is being held back by the Fed’s policy of paying banks not to lend money. Boston University economist Laurence Kotlikoff elaborated on this very point in Forbes last September. He wrote:
But why haven’t prices started rising already if there is so much money floating around? This year’s inflation rate is running at just 1.5 percent. There are three answers.
First, three quarters of the newly created money hasn’t made its way into the blood stream of the economy – into M1 – the money supply held by the public. Instead, the Fed is paying the banks interest not to lend out the money, but to hold it within the Fed in what are called excess reserves.
Since 2007, the Monetary Base – the amount of money the Fed’s printed – has risen by $2.7 trillion and excess reserves have risen by $2.1 trillion. Normally excess reserves would be close to zero. Hence, the banks are sitting on $2.1 trillion they can lend to the private sector at a moment’s notice. i.e., we’re looking at an gi-normous reservoir filling up with trillions of dollars whose dam can break at any time. Once interest rates rise, these excess reserves will be lent out.
But, and this is point two, other things aren’t equal. As interest rates and prices take off, money will become a hot potato. i.e., its velocity will rise. Having money move more rapidly through the economy – having faster money – is like having more money. Today, money has the slows; its velocity – the ratio GDP to M1 — is 6.6. Everybody’s happy to hold it because they aren’t losing much or any interest. But back in 2007, M1 was a warm potato with a velocity of 10.4.
If banks fully lend out their reserves and the velocity of money returns to 10.4, we’ll have enough M1, measured in effective units (adjusted for speed of circulation), to support a nominal GDP that’s 3.5 times larger than is now the case. I.e., we’ll have the wherewithal for almost a quadrupling of prices. But were prices to start moving rapidly higher, M1 would switch from being a warm to a hot potato. i.e., velocity would rise above 10.4, leading to yet faster money and higher inflation.
So, if commercial banks began lending at a rate resembling the historical norm, we would soon be experiencing hyperinflation. That is hardly a comforting thought. I suppose the only saving grace at that point would be in an economy already laden with massive debt, there might be very little demand for more credit and thus the money multiplier effect may not kick-in, at least not with the vengeance foreseen by Mr. Kotlikoff.
The Fed’s massive intervention into the market has been defended by the usual Keynesian suspects as a necessary measure to spur economic recovery. And yes, the Fed’s overheated printing presses have fueled a stock market boom. Unfortunately, this latest bubble has not lifted the real economy which remains in the doldrums. Private sector investment remains low and unemployment high.
The problem with this situation is the moment the Fed takes away the easy money, the market will collapse. Indeed, we have reached a point where just the suggestion of the Fed “tapering off” sends financial markets into a panic.
So the Fed has painted itself, and the entire U.S economy, into a corner. There is no way the Fed can stop creating money and liquidate its bloated balance sheet without reaping a deflationary whirlwind. And with an economy addicted to perennial trillion-dollar budget deficits and consumer debt, the political will to stomach such a painful yet necessary correction is not likely to be manifested anytime soon.
Vladimir Lenin is reported to have said, “the best way to destroy the capitalist system is to debauch the currency.” He was right. So why is the Fed following the advice of a deceased communist revolutionary?
No, I don’t think it is because the Federal Reserve Board has been infiltrated by communist moles, or Nazi agents for that matter. Although it is difficult to imagine commie saboteurs doing more damage to the U.S. economy than the monetary commissars now in charge at the Eccles building.
Perhaps the famed economist and alleged Fabian socialist John Maynard Keynes provided the answer when he wrote:
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
That ratio has probably improved somewhat lately. A greater portion of the public appears to be catching on to the Fed’s monetary sleights of hand. The increasing demand for physical gold and silver as well as the various state initiatives to re-monetize those precious metals are auspicious signs of such an awakening.
US lawmakers reached a budget deal this week that will avert the sequester cuts and shutdowns. These fiscal “roadblocks” supposedly damaged investor confidence in 2013, although clearly no one told equity investors who’ve chased the S&P 500 up 26 percent this year. But even so the budget deal is seen by inflationists as only half the battle won, because it doesn’t deal with the pesky debt ceiling. Unsurprisingly, the old calls for a scrapping of the debt ceiling are being heard afresh.
Last week, The Week ran an opinion piece by John Aziz which argues that America (and all other nations for that matter) should keep borrowing until investors no longer want to lend to it. To this end, it is argued, the US should scrap its debt ceiling because the only debt ceiling it needs is the one imposed by the market. When the market doesn’t want to lend to you anymore, bond yields will rise to such an extent that you can no longer afford to borrow any more money. You will reach yournatural, market-determined debt ceiling. According to this line of reasoning, American bond yields are incredibly low, meaning there is no shortage of people willing to lend to Uncle Sam. So Washington should take advantage of these fantastically easy loans and leverage up.
Here’s part of the key paragraph from Aziz:
Right now interest rates are very low by historical standards, even after adjusting for inflation. This means that the government is not producing sufficient debt to satisfy the market demand. The main reason for that is the debt ceiling.
What this fails to appreciate is that interest rates are a heavily controlled price in all of today’s major economies. This is particularly true in the case of America, where the Federal Reserve controls short-term interest rates using open market operations (i.e., loaning newly printed money to banks) and manipulates long-term interest rates using quantitative easing. By injecting vast amounts of liquidity into the economy, the Fed makes it appear as though there is more savings than there really is. But US bond yields are currently no more a reflection of the market’s demand for US debt than a price ceiling on gasoline is a reflection of its booming supply. Contra the view expressed in The Week, low rates brought about by contrived zero-bound policy rates and trillions of dollars in QE can mislead the federal government into borrowing more while at the same time pushing savers and investors out of US bond markets and into riskier assets like corporate bonds, equities, exotic derivatives, emerging markets, and so on.
Greece once thought that the market was giving it the green light to “produce” more debt. Low borrowing rates for Greece were not a sign of fiscal health, however, but really just layer upon layer of false and contrived signals arising from easy ECB money, allowing Greece to hide behind Germany’s credit status. As it turned out, a legislative debt ceiling in Greece (one that was actually adhered to) would have been a far better idea than pretending this manipulated market was a fair reflection of reality. Investors were happy to absorb Greece’s debt until suddenly they weren’t.
This is the nature of sovereign debt accumulation driven by easy money and credit bubbles. It’s all going swimmingly until it’s not. And there is little reason to think this time the US is different. Except that America might be worse. The very fact of the Fed buying Treasuries with newly printed money proves Washington is producing too much debt. China even stated recently that it saw no more utility accumulating any more dollar debt assets. If the whole point of QE is to monetize impaired assets, then the Fed likely sees Treasury bonds as facing considerable impairment risk. Theory and history are clear about the reasons for and consequences of large-scale and persistent debt monetization.
Finally, it is wrong to assert that the debt ceiling is the main reason for America’s fiscal deficit reduction. The ceiling has never provided a meaningful barrier to America’s borrowing ambitions, hence the dozens of upward adjustments to the ceiling whenever it threatens to crimp the whims of Washington’s profligate classes. America’s rate of new borrowing is falling because all the money it has printed washed into the economic system and found its way back into tax revenues. Corporate profits are soaring to all-time highs on dirt cheap trade financing. Corporate high-grade debt issuance has set a new record in 2013. Companies are rolling their short-term debts, now super-cheap thanks to Bernanke’s money machine, and issuing long, into a bubbly IPO and corporate bond market. The last time corporate profits surged like they’re doing now was during the credit and housing bubble that preceded the unraveling and inevitable bust in 2008/09.
These are money and credit cycle effects. The debt ceiling has had precious little to do with it. Moreover, US debt is neither crimped nor the US Treasury Department austere. Instead, the national debt is soaring, $60,000 higher for every US family since Obama took office and rising. Add to this the fact that the US Treasury’s bond issuance schedule is actually set to rise in 2014 due to huge amounts of maturing debt needing to be rolled over next year, and the fiscal significance of the debt ceiling fades even further.
The singular brilliance of the debt ceiling however, is that it keeps reminding everyone that there is a growing national debt that never seems to shrink. That is a tremendous service to American citizens who live in the dark regarding the borrowing machinations of their political overlords. Yes, politicians keep raising the debt ceiling, but nowadays they have to bend themselves into ever twisty pretzels trying to explain why to their justifiably skeptical and cynical constituents. Most people don’t understand bond yields, quantitative easing, and Keynesian pump-a-thons too well, but they sure understand a debt ceiling.
Those who adhere to the don’t-stop-til-you-get-enough theory of sovereign borrowing, and by extension argue for a scrapping of the debt ceiling, couldn’t be more misguided. In free markets with no Fed money market distortion, interest rates can be a useful guide of the amount of real savings being made available to borrowers. When borrowers want to borrow more, real interest rates will rise, and at some point this crimps the marginal demand for borrowing, acting as a natural “debt ceiling.” But when markets are heavily distorted by central bank money printing and contrived zero-bound rates, interest rates utterly cease to serve this purpose for prolonged periods of time. What takes over is the false signals of the unsustainable business cycle which fools people into thinking there is more savings than there really is. Greece provides a recent real-world case study of this very phenomenon in action. In these cases we are likely to see low rates sustained during the increase in government borrowing, only for them to quickly reset higher and plunge a country into a debt trap which may force default or extreme money printing.
Debt monetization has a proven track record of ending badly. It is after all the implicit admission that no one but your monopoly money printer is willing to lend to you at the margin. The realization that this is unsustainable can take a while to sink in, but when it does, all it takes is an inevitable fat-tail event or crescendo of panic to topple the house of cards. If the market realizes it’s been duped into having too much before the government decides it’s had enough, a debt crisis won’t be far away.
Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
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Russell Lamberti is head strategist at ETM Analytics, in charge of global and South African macroeconomic, financial market, and policy strategy within the ETM group. Follow him on Twitter. See Russell Lamberti’s article archives.
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Events in the East China Sea since 2009 have thrust to the forefront the following frightening question: will China and Japan imminently go to war? Conventional answers in the affirmative point to the deep level of historical mistrust and a certain level of “unfinished business” in East Asian international politics, stemming from the heyday of Showa Japan’s imperialism across Asia. Those on the negative often point to the astronomical economic costs that would follow from a war that pinned the world’s first and third largest economies against its second in a fight over a few measly islands, undersea hydrocarbon reserves be damned.
I can’t pretend to arbitrate between these two camps but I find that far too many observers sympathize with the second camp based on rational impulse. Of course China and Japan wouldn’t fight a war! That’d ruin their economies! I sympathize with the Clausewtizean notion of war being a continuation of politics “by other means,” and the problems caused by information asymmetries (effectively handicapping rational decision-making), but the situation over the Senkaku/Diaoyu islands can result in war even if the top leaders in Tokyo and Beijing are eminently rational.
Political scientist James D. Fearon’s path-breaking article “Rationalist Explanations for War” provides a still-relevant schema that’s wonderfully applicable to the contemporary situation between China and Japan in the East China Sea. Fearon’s paper was initially relevant because it challenged the overly simplistic rationalist’s dogma: if war is so costly, then there has to be some sort of diplomatic solution that is preferable to all parties involved — barring information asymmetries and communication deficits, such an agreement should and will be signed.
Of course, this doesn’t correspond to reality where we know that many incredibly costly wars have been fought (from the first World War to the Iran-Iraq War). So, if wars are costly — as one over the Senkaku/Diaoyu islands is likely to be — why do they still occur? Well, the answer isn’t Japanese imperialism or because states just sometimes irrationally dislike each other (as the affirmative camp would argue). It’s more subtle.
Fearon’s “bargaining model” assumes a few dictums about state knowledge, behavior and expectations ex ante. I’ll cast the remainder of the model in terms of Japan and China since they’re our subjects of interest (and to avoid floating off into academic abstractions).
First, China and Japan both know that there is an actual probability distribution of the likely outcomes of the war. They don’t know what the actual distribution is, but they can estimate what is likely in terms of the costs and outcomes of going to war. For example, Japan can predict that it would suffer relatively low naval losses and would strengthen its administrative control of the islands; China could predict the same outcome, or it could interpret things in its favor. In essence, they acknowledge that war is predictable in its unpredictability.
Second, China and Japan want to limit risk or are neutral to risk, but definitely do not crave risk. War is fundamentally risky so this is tantamount to an acknowledgement that war is costlier than maintaining peace or negotiating an ex ante diplomatic solution.
The third assumption is a little dressed up in academic jargon: there can be no “issue indivisibility.” In plain English, this essentially means that whatever the states are fighting over (usually territory, but it could be a pot of gold) can be divided between them in an infinite number of ways on a line going from zero to one.Imagine that zero is Japan’s ideal preference (total Japanese control of the Senkakus and acknowledgement as such by China) and one is China’s ideal preference (total Chinese control of Diaoyu and acknowledgement by Japan). Fearon’s assumption requires that there exist points like 0.23 and 0.83 (and so forth) which set up some sort sharing between the warring parties. Even solutions, such as one proposed by Zheng Wang here at The Diplomat to establish a “peace zone,” could sit on this line.
If the third assumption sounds the shakiest to you that’s probably because it is. “Issue indivisibility” is a nasty problem and a subject of quite some research. It usually is at the heart of wars that seek to decide which state should control a territory such as a Holy City (the intractability of the Arab-Israeli conflict is said to be plagued by indivisible issues).
So, is the dispute over the Senkaku/Diaoyu fundamentally indivisible? Probably in the sense of splitting sovereignty over the islands, but probably not in the sense of some ex ante bargain similar to what Zheng proposed. Even if the set of solutions isn’t infinitely divisible, whatever finite solutions exist might not fall within whatever range of solutions either Japan or China is willing to tolerate — leading to war.
Fearon actually doesn’t buy the indivisibility-leading-to-war theory himself. He reasons that generally almost every issue is complex enough to be divisible to a degree acceptable by each party (undermining the infinite divisibility requirement), and that states can link issues and offer payments to offset any asymmetrical outcome. In the Senkaku/Diaoyu case, this would mean a solution could hinge upon Japan making a broader apology for its aggression against China in the 20th century or China taking a harsher stance on North Korea (both unlikely).
Relevant to the Air Defense Identification Zone is Fearon’s description of war arising between rational states due to incentives to misrepresent capabilities. China and Japan’s leaders know more about their country’s actual willingness to go to war than anyone else, and it benefits to signal strong resolve on the issue to extract more concessions in any potential deal.Japan announcing its willingness to shoot down Chinese drones earlier this year and its most recent defense plans are example of this, and China’s ADIZ is probably the archetype of such a signal. Instead of extracting a good deal, what such declarations can do is force rational hands to war over the Senkaku/Diaoyu islands.
Fearon’s final explanation — regarding commitment problems leading to war — is slightly ancillary to the core discussion about the Senkaku/Diaoyu islands given Japan’s constitutional restraints on the use of force (rendering preemptive, preventative, and offensive wars largely irrelevant in the Japanese case). Regardless, the point remains that even if the Senkaku/Diaoyu islands might seem like a terribly silly thing for the world’s second and third largest economies to go to war over, war can still be likely.
As I observe events in the East China Sea, I mostly recall Fearon’s warnings on certain types of signals leading to brinksmanship (the divisibility issue is far murkier). Both Japan and China don’t seem to be relenting on these sorts of deleterious signals. Additionally, given that Chinese and Japanese diplomats haven’t had high-level contact in fourteen months, even the more primitive rationalist’s explanation, that war occurs because a lack of communication leads to rational miscalculations, becomes plausible.
A reflection on the possible rational reasons for China and Japan to go to war over the Senkaku/Diaoyu islands highlights the seriousness of the ongoing brinksmanship in the East China Sea. If a war is fought over these long-contested islands, it will have an eminently rational explanation underlying all the historical mistrust and nationalism on the surface. War in the East China Sea is possible, despite the economic costs.
Say what you will about Keynesian superstar Paul Krugman, he doesn’t mince words. In a recent interview with Business Insider’s Joe Weisenthal, Krugman gave his opinion that Bitcoin was in a bubble because it wasn’t backed by a tangible asset.
Perhaps sensing that this may have undercut the case for Krugman’s preferred monetary system, Krugman was quick to add thatgovernment-issued fiat money was “backed by men with guns.” (See the video for yourself.) Thus, Krugman thought that government currencies were not in a bubble, even if they weren’t backed by tangible assets, because people needed to obtain the currency in order to pay taxes.
Krugman’s analysis provides a good opportunity to explore the subtlety of Ludwig von Mises’ monetary economics. On the one hand, Mises was a “hard money” man who was a fierce opponent of government fiat money. It is also true that Mises was a classical liberal who would have opposed government coercion in the form of legal tender laws, capital gains taxes on gold and silver, and other ways that governments currently use their “guns” to solidify the present system where most people on Earth use government-issued notes as their primary form of money.
However, even though a libertarian and proponent of Misesian economics might object to government-issued fiat money because of the coercion–”men with guns”–involved, strictly speaking Mises would not agree that a currency can be backed by guns, in the way Krugman describes. To speak in this manner is a complete surrender in the face of the economist’s task of explaining money.
Mises’ grand work in this area is his The Theory of Money and Credit, for which my free study guide is available. As Mises conceived it, the central theoretical task when it comes to money is to explain why money has a particular purchasing power. Why should it be that people give up valuable goods and services for a particular item–the money commodity–according to definite exchange ratios?
Mises’ answer is that people form expectations about the future purchasing power of money, and that is what gives it purchasing power today. These expectations in turn are based on their observations of the money’s purchasing power in the past. Thus lays the groundwork for Mises’ famous “regression theorem,” in which people’s subjective valuations of money necessarily involves a historical component (unlike their subjective valuation of, say, pizza). Gold, silver, and other forms of commodity money could ultimately be traced back to the days of barter, in which they had definite exchange ratios with other goods because of their usefulness as regular commodities.
In the case of government-issued fiat currencies, Mises explained their purchasing power using the same theoretical apparatus. The only difference is that at some point in the past, the currencies (such as the dollar, pound, franc, etc.) had been explicitly linked to the precious metals, and that’s what grounded everyone’s valuations of them.
Thus, Krugman’s glib assertion that today’s government fiat monies derive their value from guns completely dodges the problem for the economist: to explain the magnitude of that value. Even if we conceded that the government could force everyone to use something–let’s say a particular type of sea shell–as money, by insisting on payment of taxes in the form of sea shells, that policy wouldn’t explain why an hour of labor should trade for 10 shells, rather than 100 or 1,000. This is especially true when we reflect that most government taxes are expressed in terms of percentages, rather than an absolute amount.
Furthermore, it’s obvious that Krugman’s “explanation” would have no way of accounting for changes in either variable. For example, in the 1970s in the United States, price inflation took off dramatically, meaning the purchasing power of the dollar fell sharply. Was this because of a reduction in taxes? Of course not. And in the 1920s, there were sharp cuts in marginal income tax rates at the federal level. Did this lead to severe price inflation, as people now didn’t need as many dollars to pay Uncle Sam? On the contrary, consumer prices were fairly stable in this period.
As these observations should demonstrate, Krugman really hasn’t offered a viable explanation for the purchasing power of money. One might be tempted to say that at best, governments can use their taxing power to dictate what the monetary unit is, even though they would still have little control over its purchasing power.
Yet even this concedes too much. Strictly speaking, if the only policy we are considering is that the government says every year, “Citizens must turn in such-and-such number of sea shells as tax payment,” that alone won’t even be sufficient to conclude that the sea shells will be the money in this society. People could still use some other commodity as the money, and then use the actual money to buy the sufficient number of sea shells each year right before paying their taxes.
UPDATE: After originally posting this, I realized there was a problem with one of my examples: In the 1920s amidst the marginal income tax rate cuts designed by Treasury Secretary Mellon, the U.S. was still on the gold standard. Thus this period is not a good refutation of Krugman’s explanation for fiat money’s exchange value. (Of course, we can simply look at other examples of governments that engaged in large-scale tax cuts even while using a fiat currency, and we don’t typically see a sharp rise in price inflation accompanying them.)
Robert P. Murphy is the author of The Politically Incorrect Guide to Capitalism, and has written for Mises.org, LewRockwell.com, and EconLib. He has taught at Hillsdale College and is currently a Senior Economist for the Institute for Energy Research. He lives in Nashville.
The bankers have written the most integral rule that would reform their business practices and President Obama is showing his support.
Obama has released a written statement supporting the new Volcker Rule that will make “sure big banks can’t make risky bets with their customer’s deposits.”
Obama said: “Our financial system will be safer and the American people are more secure because we fought to include this protection in the law.”
Speaking about the crash of 2008, Obama admonished the banks for “fueling a punishing recession on Main Street that ultimately cost millions of jobs and hurt families across the country.”
As part of the economic repair of our country, the president said that financial “rules that reward sound financial practices allow honest innovation and strengthen the financial system’s ability to support job creation and durable economic growth.”
Obama said that the Volcker Rule will make “it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firm’s practices.”
This new rule will ensure that ‘our financial system will be safer.”
Experts say that the new Volcker Rule glosses over the fact that it was “trading mishaps” that were the “root cause of the financial crisis.”
Because of this, “the rule doesn’t go far enough . . . prohibition [will] draw a line, making it clear that banks’ business is about lending not investing.”
The Volcker Rule, within the Dodd-Frank law, is now being used by the president as a public relations ploy to give Americans a semblance ofgovernment oversight and the reining in of “risk taking after the financial crisis.”
The new Volcker Rule was created by the banks and is “the rule that the banks wanted.”
The 2011 draft of the Volcker Rule was leaked by the American Banker Association (ABA).
Rob Tooney, associate general counsel at the Financial Securities Industry and Financial Markets Association (FSIFMA) said : “Our concern is that whatever the final rule is that it doesn’t harm the markets’ overall liquidity. The short answer is we don’t know yet.”
The new rule was reported “far more restrictive than previously expected” and now that the banks have taken over the writing of the document, they feel more comfortable in supporting its passage.
Ben Bernanke, chairman of the Federal Reserve Bank (FRB) said at a central bank meeting this week: “Getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments.”
In 2010, Alan Blinder, economist of Princeton stated of the burgeoning Dodd-Frank law in an op-ed piece : “It is devilishly difficult to draw bright lines between proprietary trading and trading, hedging, and market-making on behalf of clients.”
Paul Volcker said he was “disappointed with how the rule was turning out” and that he “didn’t expect the proposal to be diluted so much, said a person with knowledge of his views. He’s content with language that bans banks from trading with their own capital, the person said.”
The Dodd-Frank Law was signed that same year.
Volcker contended that the rule should have “clear concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators as they implement and enforce this law.”
In 2011, Senator Carl Levin co-sponsored the Volcker Rule and spoke toCongress about the importance of the regulation: “The Volcker Rule is essential to protect taxpayers from banks’ excessive financial risk-taking, conflicts of interest, and from the resulting billion-dollar bailouts. I look forward to reviewing the proposed rule and hope the regulators reject efforts to weaken the law.”
In early 2012, Jamie Dimon, chief executive of JP Morgan Chase & Co, brazenly told media : “If you want to be trading, you have to have a lawyer and a psychiatrist sitting next to you determining what was your intent every time you did something.”
In another interview, Dimon said of Volcker: “Paul Volcker, by his own admission, has said he doesn’t understand capital markets. Honestly, he has proven that to me.”
Lawrence Fink, chief executive of BlackRock commented : “We are not in support of it. We sent the letter as a firm. It’s very hard for me to understand how to navigate the Volcker Rule. What is proprietary trading? What is flow trading? It’s going to be very definitional.”
Volcker responded to critics, saying: “A lot of the criticism is over the complexity of the thing and, essentially it’s down to a lot of details. But the basic rule, of course, is incorporated in the law. And I think when you get all finished with this Sturm und Drang in the Congress now, I think you’re going to have a reasonable interpretation of a law and an interpretation that can be reasonably followed by the banks and enforced by the regulators.”
This past summer, Jacob Lew, secretary of the US Treasury, warned of a year’s end deadline on the Volcker Rule.
Lew said: “I want to mention that the Volcker Rule is particularly important, and I will continue to push for swift completion of a rule that keeps faith with the intent of the statute and the president’s vision.”
This article was written by Daisy Luther and originally published at The Organic Prepper
How prepared are you to survive a few days in the frozen wilderness with only the supplies you have in your vehicle?
A family of 6 discovered that they have what it takes when their Jeep flipped over in the middle of the Seven Troughs mountain range in north-central Nevada last week.
Miraculously, the two adults and four children managed to escape the ordeal relatively unscathed, without even suffering frostbite. The family members included James Glanton, 34, Christina McIntee, 25, Shelby Schlag-Fitzpatrick, 10, Tate McIntee, 4, Evan Glanton, 5, and Chloe Glanton, 3.
James Glanton, a mine worker and hunter, showed true resourcefulness, and as one rescuer stated, “did one heck of job keeping those kids safe.” He immediately took charge of the situation and used his survival mentality to prevent his family from becoming victims. Headapted to the situation at hand by using what was available, and because of his decisive actions, succeeded in surviving in an event during which many would have perished.
All of the rescue workers were volunteers, who searched relentlessly for days for the family, with no state emergency funds forthcoming. Some volunteers covered more than 700 miles looking for the missing family.
This real-life story is a perfect example of how disaster can strike when you least expect it. As preppers and survivalists, what can we learn from James Glanton? There were several items that I felt it necessary to add to my own vehicle kit after reading this story.
Identify your priorities
During any winter survival scenario, your priorities are:
- Shelter (including a means of staying warm)
Glanton said that immediately after the accident occurred, his first concern was to keep the family from freezing to death in the negative temperatures. He told reporters that he ”knew that they had to stay warm, and the first thing he did was build a fire and he was able to keep that fire going the entire time while they were out.”
Glanton then put large stones into the fire and heated them up. He brought them into the vehicle and allowed the radiant heat to keep the family warm. (You can learn more about this techniqueHERE.)
Fortunately they had a supply of food and water in the vehicle because they had intended on spending a full day playing in the snow.
Decide whether to go for help or stay put and wait for rescue
Rescuers agreed that in this particular situation, the family’s survival hinged upon their decision to hunker down in the vehicle instead of setting off on foot to search for help. With small children in tow, a storm brewing, and the remoteness of their location, a trek would have very likely been ill-fated. They were 25 miles from the nearest town, so walking for help was really out of the question.
They were fortunate on several counts:
- People knew where they were going and when they were expected home. When they did not arrive home as planned, search and rescue was alerted that they were missing.
- Rescuers were able to triangulate an approximate location from cellphone signals, even though the family was out of range at the accident site. This helped to narrow down the search area.
The take-away from this? Always make sure someone knows where to look for you. Also, invest in some signalling devices to help searchers locate you. (This is something that Glanton did not have.) Consider adding flares to your survival kit, or make something large out of found objects to place on top of the snow to catch the attention of planes searching the area.
The family was located when a sharp-eyed searcher saw their Jeep upside down in the snow.
The right supplies are vital
Without the supplies that the family had on hand, their chances of survival would have diminished greatly.
- Glanton had a magnesium fire-starter and hacksaw in the vehicle – this allowed him to make a fire with the damp wood they found in the area.
- They had food and water, which they carefully rationed.
- The family was clothed for a day playing outside in freezing temperatures, so they had the right clothing for the environment.
The ingenuity of how they survived
Making the best of a terrifying situation, James Glanton used resourcefulness and ingenuity to keep his family safe and warm. Because the accident took place in a canyon housing an old mining site and they were able to use some items from the site to help them survive.
The artifacts left behind Wednesday — a burned tire, rocks and snow-packed footprints — told the great Nevada survival story.
The small canyon houses ghosts of an old mining camp with bedspring wiring, a rusty stove, pipes and what appeared to be steel roofing. A bent piece of steel was used to reflect heat for the fire where the vehicle flipped, said Charles Sparke, Pershing County emergency management director.
Officials say the family was prepared for a day in the snow. Glanton even brought a magnesium fire starter, which can turn wet twigs into ready-to-light kindling, Sparke said Wednesday.
He also had a hacksaw, which he used to cut kindling, and a spare tire to burn.
The Jeep was removed from the scene Wednesday. Inside the vehicle remained an old lighter and burned doors. Officials said Glanton burned rocks and put them inside the Jeep to keep the family warm. (source)
Are you ready?
If such an accident occurred, how would you and your family survive? Do you have all of the necessary supplies to hunker down for a few days in frigid temperatures?
Here are the minimum supplies you should have in your vehicle at all times:
Fully loaded backpacks with the basics of survival should always be handy in the even that you do have to hike away from the scene of an accident. Additionally, have cash in small denominations for other types of emergencies.
Food and Water
You should always have some non-perishable foods in the vehicle, and water filtration equipment as well as water, in the event that your emergency lasts for an extended period of time.
- Peanut butter
- Canned stew or chili
- Canned baked beans
- Canned fruit
- Granola Bars
- 10 gallons of water
- Berkey-to-go for each family member (or other portable filtration device)
Vehicle Emergency Kit
This should always remain in the vehicle:
- Sleeping bags
- Lighter, flint, waterproof matches
- Lighter fluid (this can help start a fire even in damp conditions)
- Hunting Knife
- Pocket Survival book
- Signal flares
- Space blankets
- Extra batteries
- Mirrors for signalling
- Whistles for making noise to help rescuers find you
First Aid Kit
Your kit should contain all of the basic items:
- Pain relief pills
- Antibiotic cream
- Allergy medication and an Epi-pen (My daughter has a food allergy)
- Alcohol wipes
- Anti-diarrheal medication
A variety of tools should be on hand in the vehicle:
- Basic automotive repair tools
- Assorted screwdrivers
- Hunting Knife
Extra clothing and footwear
Always keep spare clothing and footwear in the vehicle. Particularly in cold temperatures, dampness is the enemy. If your clothing or socks get wet, this greatly increases the risk of succumbing to exposure.
- Snow pants
- Long underwear
- Sturdy, comfortable walking boots
If you were in the same situation as the family who survived in the Nevada wilderness, how would you fare? What items do you keep in your vehicle that would help you to survive?
By Louise Egan
OTTAWA (Reuters) – Soaring consumer debt and a robust housing market pose an “elevated” risk to Canada’s financial stability, but the overall level of danger has fallen from six months ago, the Bank of Canada said on Tuesday.
“In Canada, the high level of household debt and imbalances in the housing sector are the most significant domestic vulnerabilities to address,” the central bank said in its semi-annual Financial System Review.
These risks could make Canadians vulnerable to an adverse macroeconomic shock and a sharp correction in the housing market, it said.
The bank cut its overall level of risk to the country’s financial system to “elevated” from “high”, citing among other factors continuing stabilization in the euro zone and the start of a modest recovery in that region. Despite the brighter outlook for Europe, it remains the biggest threat to Canada, the bank said.
Tuesday’s report marked the first time the bank has eased its overall risk level since it began classifying risk in this way in December 2011.
The overall level of risk could fall further with continued progress on banking sector reform and other reforms in the euro area. That said, the level could increase if the current low interest rate environment in advanced economies persists longer than anticipated, it added.
The bank listed risky financial investments in a prolonged period of low interest rates as a “moderate” risk and added financial vulnerabilities in emerging markets as another moderate threat.
Canada’s housing market has been a source of concern for policymakers and economists since a property boom helped fuel the economy’s rebound from the 2008-09 recession.
After four government interventions to tighten mortgage rules, the market cooled in late 2012 only to regain momentum through the spring and summer of this year.
The bank, the finance ministry and the banking regulator monitor the market closely. The bank noted an oversupply of multiple-unit dwellings in some areas, and cited an elevated number of high-rise condos under construction in Toronto.
“If the upcoming supply of units is not absorbed by demand as units are completed over the next few years, there is a risk of a correction in prices and construction activity,” it said.
Such a correction could spread to other parts of the market and hit the overall economy, it added.
The bank said simple indicators suggest there is overvaluation in the housing market overall and it said any sharp downturn in a large city could spread, ultimately affecting sentiment, lending conditions as well as jobs and income.
While the latest data suggest some stabilization in the market, there is still much debate among economists over whether housing is poised to crash and damage the economy, or have a so-called “soft landing”.
Bank of Canada Governor Stephen Poloz has placed himself in the latter camp, saying he expects record-high household debt to ease gradually as the housing market softens.
The report on Tuesday supported that view.
“The overall moderating trend is expected to resume in due course,” it said. “As long term interest rates normalize with the strengthening global economy, the risk will diminish over time.”
The ratio of household debt to income in Canada hit a record high in the second quarter of 163.4 percent, although the pace of credit growth has been slowing.
Statistics Canada will release third-quarter data on household debt on Friday.
(Reporting by Louise Egan; editing by David Ljunggren; and Peter Galloway)
Chinese President Xi Jinping must have felt pretty pleased with himself earlier this year, after he dispatched rival and former Politburo member Bo Xilai in a dramatic, humiliating show trial. When it comes to staging purges, though, North Korea’s brash young leader Kim Jong Un has him beat.
Kim didn’t just arrest his uncle, Jang Song Thaek, the second-most powerful man in the country. The boy-dictator appears to have had Jang brought out of seclusion in order to arrest him again at a televised leadership meeting, then tried and executed on the grounds of being “an anti-party, counter-revolutionary factional element and despicable political careerist and trickster,” according to the judgment of a secret military tribunal. No doubt.
Jang’s fall may have sent an equally loud message to Xi in Beijing. Until recently, Jang had been the North Korean official most closely linked to China — a mature diplomatic go-between, and the man responsible for forging deals with Chinese mining and other companies looking to exploit North Korea’s natural resources and cheap labor. By eliminating his uncle, young Kim seemed to be warning Xi and the Beijing leadership not to presume to work through anyone but him. The fate of North Korea’s special economic zones and other Chinese-style economic innovations now hangs in doubt.
Optimists might hope that the purge will finally convince China of its ally’s unreliability. In fact, though Beijing’s tolerance for Kim’s provocations has been tested, it has never snapped. China still values regime stability over all else: The last thing Beijing wants to see is a reunified Korean Peninsula, governed from Seoul, and allied to the U.S. Jang’s downfall doesn’t change that calculus.
The purge could well end up pushing China and its errant vassal closer together. After Jang’s execution, Japan’s hawkish Defense Minister Itsunori Onodera warned, “North Korea might become a more radical place in the future.” Next Tuesday the Japanese government is expected to approve a more assertive defense policy, one that is justified by the North’s nuclear and ballistic missile programs but that clearly has China in mind as well.
The U.S., too, has cited the North Korean threat to justify stationing ballistic missle defense systems on Guam next year. And this week Japan and South Korea — whose relations have soured recently over questions about Japan’s attitude toward its war record — went ahead with a previously scheduled, joint naval exercise in the East China Sea.
Xi and others in China may also not be as perturbed by Jang’s ouster as some commentators seem to think. The late No. 2’s influence had been declining for almost a year; in May 2013, Kim dispatched a Jang rival as a special envoy to Beijing. It’s also not clear that the purge will necessarily derail some of the economic reforms Jang had championed. On Monday, the day after his public humiliation, the North signed a contract to develop yet another special economic zone along the Chinese border.
Jang’s purge, though, is hardly reassuring to China. Among other things, the Politburo charged Jang with “throwing the state financial management system into confusion and committing such acts of treachery as selling off precious resources of the country at cheap prices” — in other words, cutting deals that were too generous to the Chinese.
No doubt the youngest Kim had many reasons for ousting his uncle — not least, to send a message to an older generation of North Korean officials not to dare challenge the Dear Leader’s authority. To Xi and China, the message seems to be slightly different: it’s time to pay up.