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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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As we discussed two weeks ago, it would appear Germany’s lack of willingness to throw itself on the pyre of self-sacrifice and not adopt a global Fairness Doctrine – as engendered by the US Treasury’s (and IMF’s) bashing of the core European nation’s for maintaining its export strength and daring to keep Europe in tact and thus a periphery-damaging strong Euro – is gathering steam. None other thanEurope itself is now ‘probing’ Germany’s trade surplus, using enhanced powers over how euro nations manage their economies with the IMF urging German Chancellor Angela Merkel to curtail the trade surplus to an “appropriate rate” to help euro partners cut deficits.
As we previously noted, Jack Lew (and everyone else) appears surprised at the following chart all of a sudden…
It is also a complete shock to the US Treasury that the current layout of the Eurozone – the same Eurozone that the Fed has stepped in on numerous occasions to bailout, common currency and all – was simply to facilitate German exports to fellow European countries.
Which is probably why, after years of saying nothing, in its semi-annual currency report released yesterday and “employing unusually sharp language, the U.S. openly criticized Germany’s economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy.”
And now – it’s the Europeans jumping on the ‘Bash Germany’ bandwagon…
European Union regulators began a probe of Germany’s trade surplus, using enhanced powers over how euro nations manage their economies.
The decision to step up monitoring of imbalances in the German economy follows criticism that the country’s current-account surplus — which at 7 percent of gross domestic product is the second highest in the euro area — is limiting exports from other euro countries by adding to the strength of the single currency.
The opening of an in-depth review into the imbalances in Germany’s economy comes after the U.S. Treasury blamed German surpluses for draining European and global growth. The International Monetary Fund also reprimanded Germany for its surpluses, urging German Chancellor Angela Merkel to curtail the trade surplus to an “appropriate rate” to help euro partners cut deficits.
“Crucially, a rise in domestic demand in Germany should help to reduce upward pressure on the euro exchange rate, easing access to global markets for exporters in the periphery,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a blog post on Nov. 11. “Removing the bottlenecks to domestic demand would contribute to a reduction in Germany’s external trade surplus.”
Bloomberg may be in hot water for scuttling an article that “might anger China” as exposed over the weekend, but that was only after winning investigative prizes for its series of reports exposing the epic wealth of China top ruling families in 2012: a topic that has received prominence at a time when the forced wealth redistribution plans of developed and developing nations, usually originated by these same uber-wealthy families, is all the rage. Another country, whose oligarchic wealth had largely escaped press scrutiny, was Iran. At least until today, when in a six month investigation culminating in a three-part report on the assets of the Iranian Supreme Leader Ayatollah Ali Khamenei, Reuters exposed Setad, an Iranian company that manages and sells property on order from the Imam.
In a nutshell, the company has built up its wealth by seizing thousands of properties from Iranian citizens. According to the investigation, Setad’s assets are worth $95 billion – 40 percent more than Iran’s total 2012 oil exports. It is this confiscated “wealth” that has allowed the Iranian clergy, and especially the Ayatollah, to preserve their power over the years.
In a little more than a nutshell, Reuters explains just who Setad is:
Pari Vahdat-e-Hagh ultimately lost her property. It was taken by an organization that is controlled by the most powerful man in Iran: Supreme Leader Ayatollah Ali Khamenei. She now lives alone in a cramped, three-room apartment in Europe, thousands of miles from Tehran.
The Persian name of the organization that hounded her for years is “Setad Ejraiye Farmane Hazrate Emam” – Headquarters for Executing the Order of the Imam. The name refers to an edict signed by the Islamic Republic’s first leader, Ayatollah Ruhollah Khomeini, shortly before his death in 1989. His order spawned a new entity to manage and sell properties abandoned in the chaotic years after the 1979 Islamic Revolution.
Setad has become one of the most powerful organizations in Iran, though many Iranians, and the wider world, know very little about it. In the past six years, it has morphed into a business juggernaut that now holds stakes in nearly every sector of Iranian industry, including finance, oil, telecommunications, the production of birth-control pills and even ostrich farming.
The organization’s total worth is difficult to pinpoint because of the secrecy of its accounts.But Setad’s holdings of real estate, corporate stakes and other assets total about $95 billion, Reuters has calculated. That estimate is based on an analysis of statements by Setad officials, data from the Tehran Stock Exchange and company websites, and information from the U.S. Treasury Department.
Just one person controls that economic empire – Khamenei. As Iran’s top cleric, he has the final say on all governmental matters. His purview includes his nation’s controversial nuclear program, which was the subject of intense negotiations between Iranian and international diplomats in Geneva that ended Sunday without an agreement. It is Khamenei who will set Iran’s course in the nuclear talks and other recent efforts by the new president, Hassan Rouhani, to improve relations with Washington.
Unlike developed nations, where the first priority of the super rich is to flaunt their wealth, Iran’s supreme leader lives a spartan lifestyle and has not been found to abuse the massive monetary holdings of Setad. However, as Reuters points out, “Setad has empowered him. Through Setad, Khamenei has at his disposal financial resources whose value rivals the holdings of the shah, the Western-backed monarch who was overthrown in 1979.”
Logically, the next question is just how did Setad accumulate its vast asset holdings. The answer, just as logically, is simple:confiscation.
How Setad came into those assets also mirrors how the deposed monarchy obtained much of its fortune – by confiscating real estate. A six-month Reuters investigation has found that Setad built its empire on the systematic seizure of thousands of properties belonging to ordinary Iranians: members of religious minorities like Vahdat-e-Hagh, who is Baha’i, as well as Shi’ite Muslims, business people and Iranians living abroad.
Setad has amassed a giant portfolio of real estate by claiming in Iranian courts, sometimes falsely, that the properties are abandoned. The organization now holds a court-ordered monopoly on taking property in the name of the supreme leader, and regularly sells the seized properties at auction or seeks to extract payments from the original owners.
Just like in the US where the 1% effectively have molded the status quo into a wealth preservation mechanism, with profound control over not only the capital markets and the regulatory framework but over all three branches of government (simply note how many bankers have gone to prison for the systemic crash of 2008), so in Iran the Ayatollah has shaped society in a way that will ultimately benefit first and foremost him, as well as not only preserve his wealth but facilitate even greater accumulation of confiscated assets under any and all pretexts.
The supreme leader also oversaw the creation of a body of legal rulings and executive orders that enabled and safeguarded Setad’s asset acquisitions. “No supervisory organization can question its property,” said Naghi Mahmoudi, an Iranian lawyer who left Iran in 2010 and now lives in Germany.
Khamenei’s grip on Iran’s politics and its military forces has been apparent for years. The investigation into Setad shows that there is a third dimension to his power: economic might. The revenue stream generated by Setad helps explain why Khamenei has not only held on for 24 years but also in some ways has more control than even his revered predecessor. Setad gives him the financial means to operate independently of parliament and the national budget, insulating him from Iran’s messy factional infighting.
Like every usurpation of power and wealth, Setad’s beginnings were humble and, to an extent, noble.
When Khomeini, the first supreme leader, set in motion the creation of Setad, it was only supposed to manage and sell properties “without owners” and direct much of the proceeds to charity. Setad was to use the funds to assist war veterans, war widows “and the downtrodden.” According to one of its co-founders, Setad was to operate for no more than two years.
Setad has built schools, roads and health clinics, and provided electricity and water in rural and impoverished areas. It has assisted entrepreneurs in development projects. But philanthropy is just a small part of Setad’s overall operations.
One can probably imagine that the founders of the Fed also had noble intentions. Instead they created a dormant century-old monster, intervening in the economy to preserve the wealth of the American financial oligarchy, and whose wealth-transfer capacity has only emerged on the scene in the past five years. So it is not surprising that as absolute power corrupts absolutely, so it is in Iran as it is in the US:
Under Khamenei’s control, Setad began acquiring property for itself, and kept much of the funds rather than simply redistributing them. With those revenues, the organization also helps to fund the ultimate seat of power in Iran, the Beite Rahbar, or Leader’s House, according to a former Setad employee and other people familiar with the matter. The first supreme leader, Khomeini, had a small staff. To run the country today, Khamenei employs about 500 people in his administrative offices, many recruited from the military and security services.
The full Reuters article, the first of three, has much more detail on the asset holdings of the Setad, on its expropriation strategies, on the cover up to hide the full extent of the organization’s involvement in society, and much more, however the broad strokes will be largely familiar to those acquainted with the tactics of any and every oligarch – be they clergical, political or financial – when preservation of power through wealth and money (and confiscation thereof) is the only prerogative.
And while Iran’s wealth confiscation scheme may be extreme by Western standards, at least it is a honest daylight robbery, but what’s worse is that it pales in comparison to what goes on every month not in some enclave of despotic banana republicanism, but the US itself.
Because putting Setad’s $95 billion in estimated assets in context, these amount to just over 5 weeks of the Fed’s QE, which for those who are not worried about losing their “access journalistic” credentials and are willing to call a spade a spade, is merely asset confiscation and wealth transfer of the most insidious type: one where those whose assets are handed over to the wealthy, are oblivious of what has just happened and are in fact grateful for the privilege of having been robbed under the auspices of the “fairness doctrine” and for the pursuit of the “greater good.”
October 29, 2013
Sovereign Valley Farm, Chile
Do you remember the $700 billion bailout of the financial system in 2008?
It seems these days that most investors do not. People are partying like it’s 1929… as if all the issues and challenges that plagued the banking sector just a few years ago have miraculously vanished.
This thinking is absurd, and even a casual glance at the balance sheets of so many banks in the West shows objectively that the entire system is still precariously leveraged, undercapitalized, and illiquid.
In the wake of the bailout, Congress created a special position to oversee how the funds were spent. Like anything else in government, they used an unnecessarily long name followed by a catchy acronym–
Special Inspector General for the Troubled Asset Relief Program, or SIGTARP.
(The first SIGTARP was a former federal prosecutor who had previously indicted 50 leaders of the Revolutionary Armed Forces of Colombia… just the right man to keep a watchful eye on bankers.)
SIGTARP just released its quarterly report to Congress… and it’s scatching, suggesting that “the toxic corporate culture that led up to the crisis and TARP has not sufficiently changed.”
There are some real zingers in the 518 page report, including:
- “[F]raudulent bankers. . . sought TARP bailout dollars to have taxpayers fill in the holes on their fraud-riddled books.”
- “Some bankers cultivated a culture of self dealing, criminally concealing that the bank was funding their luxury lifestyles, believing they were entitled to the finest money could buy. . .”
- “They were trusted to exercise good judgment and make sound decisions. However, they abused that trust. Many times they abused that trust for their own personal benefit.”
Moreover, the report calls into question the Treasury Department’s administration of the bailout.
For example, many banks have been delinquent in making TARP payments, or payments to one of TARP’s sub-programs.
Yet while many banks are delinquent by 1-2 quarters, according to the report, roughly 3% of the banks who received funds under the Community Development Capital Initiative are more than –two years– behind in their payments.
Yet the Treasury Department has done nothing to enforce terms on behalf of taxpayers.
Most alarmingly, though, the report throws a giant red flag on the Treasury Department’s deceit.
In 2011, the report states, 137 banks took in billions of dollars of funding from the Treasury under the Small Business Lending Fund (SBLF). They then used those funds to repay their TARP loans.
In other words, they repaid taxpayer money with more taxpayer money.
But the Treasury Department still reported that TARP was being repaid, suggesting in a May 2013 press release: “Taxpayers have already earned a significant profit from TARP’s bank programs.”
Total BS, says the report.
SIGTARP writes that “Treasury should not. . . call these funds “repayments” or “recoveries”. Treasury owes taxpayers fundamental, clear, and accurate transparency and reporting on monies actually repaid.”
Something tells me this woman isn’t going to have a particularly long career in government.
And given the Obama’s administration’s track record against whistleblowers, SIGTARP had better start booking her flight to Moscow. Or better yet, marry a Brazilian.
- ‘Toxic’ corporate culture remains unchanged 5 years after U.S. financial meltdown (lunaticoutpost.com)
- Watchdog: Five Years After Wall Street Meltdown, ‘Toxic Culture of Greed and Risk’ Remains (commondreams.org)
If Congress doesn’t raise the debt ceiling soon, the U.S. government won’t be able to pay its debts. Here’s NPR’s simple (and complete) illustration to who the government owes money to — all the holders of U.S. Treasury debt, broken down by category and by how much government debt they hold. It would appear the government’s ponzi self-financing may be exposed for all to see… (and is it anywonder the Chinese are complaining?)
- U.S. Government Shutdown and Debt Limit (shakemyheadhollow.wordpress.com)
- Is America A Bubble? (washingtonpost.com)
- Solution to the âShutdownâ: The Fed Could Simply Cancel $2 Trillion of Government Debt (rinf.com)
- 12 Very Ominous Warnings About What A U.S. Debt Default Would Mean For The Global Economy (thesurvivalplaceblog.com)
Just a few weeks ago, the Icelandic government started threatening to use the European ‘template’ of removing guarantees on large deposits (though maintaining its capital controls) indirectly pressuring the wealthy to spend (for fear of haircuts). However, the capital controls have backfired as Bloomberg notes, Iceland’s private sector is running out of cash to repay its foreign currency debt, according to the nation’s central bank. The Prime Minister has said that the FX shortfall – exacerbated by his own policy restricting the selling of Krona – is “a matter of huge concern.” The government’s biggest challenge is to allow capital to flow freely without triggering a krona sell-off that would cause Iceland’s foreign debt to spike and undermine the nation’s economic recovery.
The yield on Iceland’s 5.875 percent dollar $1 billion bond due May 2022 has soared this year to as high as 5.71 percent last month from a low in May of 3.81 percent. Its spread to the U.S. Treasury curve widened to around 280 basis points yesterday from a May 28 low of around 180 basis points…
- Icelanders Run Out of Cash to Repay Foreign Debts: Nordic Credit – Bloomberg (bloomberg.com)
- Iceland’s private sector running out of cash to repay debts (irishtimes.com)
- Iceland Continues To Rise Above Rothschild NWO Banking Scheme: Hungary & Russia Continues Shutdown On Rothschild! (politicalvelcraft.org)
- ZeroHedge: Shorting Stocks On These POMO Days Will Be Frowned Upon By The Fed (silveristhenew.com)
- No Tapering Any Time Soon As Fed Announces $45 Billion Of July POMO Days (financialsurvivalnetwork.com)
- Fed Tapering Assured As Treasury Projects 30% Slide In Annual Funding (And Monetization) Needs (financialsurvivalnetwork.com)
- The Strangest of All Things Pomo – the Resurrection! (theotherjournal.com)