Is r > g Really the Reason for Recent Income Inequality

Meet Thomas Piketty the new poster child of socialists that supposedly proves the unfairness of capitalism with his book Capitalism in the 21st Century.

Beware Economists Bearing Multiple Reasons

"If you have more than one reason to do something (choose a doctor or veterinarian, hire a gardener or an employee, marry a person, go on a trip), just don't do it. It does not mean that one reason is better than two, just that by invoking more than one reason you are trying to convince yourself to do something. Obvious decisions (robust to error) require no more than a single reason."

― Nassim Nicholas Taleb, Antifragile: Things That Gain from Disorder

​

Not only do people use multiple reasons for doing something to convince themselves, but also to convince others. Recently Bloomberg borrowed my work (without citing) to discuss the Crypto-E-dollar. My piece was a warning, but Bloomberg portrayed the E Dollar as a viable solution strictly for economic reasons. Today they ran a new story on banning high denomination cash to aid law enforcement. They cited a paper done by a Harvard economist, Peter Sands, entitled Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes. Here is an abstract of the paper.

Yet Another Way Excessive Debt Hinders Capitalism (Oil Edition)

Early in the year we did a root cause analysis that determined that the initial drop in oil prices was caused by manipulation of interest rates resulting in malinvestment and overproduction. As we drilled down we found the root cause to be the debt based monetary system itself. Full post here.

Since that time oil prices have languished, taken another leg down, and again it appears to have some roots in our debt based monetary system, but for surprisingly different reasons. There is a second flaw in societies that is also causing related havoc in the oil market, socialism.

Past Rate Hike Cycles and Why We're Likely to Skip a Few Steps Before The Next Crisis

I was watching CNBC for the rate announcement this past week when I heard something that dropped my jaw, but all the talking heads seemed to smile and nod at. Bill Gross had said, and I'm paraphrasing, that the Fed would not be able to get the fed funds rate much above 2%. Another panelist said he agreed because at 3% Corporate America would have no free cash flow. I'm not surprised by this, because I know how dependent business have become on cheap money, but to hear it from the bobble heads on CNBC without the slightest reaction was shocking. It should have been a collective "wait...what!" moment.

It got me thinking about past fed interest rate cycles and how it would be good to provide some charts to illustrate to myself and others what has happened, and what is likely about to happen in the near future.

In the below chart I took some liberties. I attempted to determine an equivalent negative interest rate for the various QE programs based on the duration and size. It was done for continuity and is far from perfect, but it gets the point across.

Rate Hike?

My readers fully understand how the bull market in stocks have been the result of ultra easy monetary policy. During the entirety of the bull market of the last 7 years we have had interest rates stuck at zero, and thus Fed interest rate policy has been a constant. The variable has been the other monetary experiments, the four QE programs and operation twist. I divide up QE3 into two distinct programs, the main QE period and the Taper period. Below is a chart, not only showing the bull market, but its drivers, and I'm not talking about healthy economic expansion.

The Fed is Not Out of Ammo, but it Doesn't Matter if the Gun Blows Up In Thier Face

It is spouted all over main stream and alternative financial media, some variant of, the Federal Reserve is out of ammo. This is pure and utter nonsense and there is absolutely no evidence of the Fed being out of monetary tools.

The Fed could easily restart QE, ban cash, implement negative rates, institute helicopter money, or even the E-Dollar. There are plenty of options for the Fed to further loosen monetary policy. If these statements are made with the belief that the use of these policy tools will result in damage to the feds credibility or that there will be political pressure against such moves, watch a financial crisis to develop and see how easy it is for these tools to be deployed.

When the gun blows up in the feds face, aka market forces in the bond and currency markets dictate the feds direction, that's when the game is over and we are far from that point.

Here is an excerpt from the How They Got Us Into This Mess on how market forces can cause a policy tool misfire.

Predictable Government Windfall

With the ongoing equity market correction, and possibly the start of a bear market, it's time to revisit a concept we touched on in How They Got us Into This Mess. The government windfall that results from a credit created boom. This latest credit created boom is just another up leg of what, in reality, is a debt fueled bubble that has been going on for over 80 years and must eventually fail.

Much of the debt taken on recently has been by the government, but new, record amounts of debt is also adding to the burden of car buyers, corporations, students, and of course, traders and investors using margin debt to buy stock. The fed has even managed to prevent the real-estate mortgage market from contracting to a reasonable level with ultra low interest rates and direct intervention in the mortgage market through QE.

If you can believe it, the government balance sheet has been one of the biggest beneficiaries of this ramp up in total credit market debt. As employers believe that good times are here again and here to stay, they start to hire more employees, granted this "recovery" has seen pretty anemic growth, but some jobs are being created. They tax the income from this increased employment. Corporate earnings have also seen a bump, which is also taxed. Finally the income from the sale of stocks is also taxed. All of this helps the government's finances even if the deficit was at very frightening levels at the beginning of this "recovery". And the reason I put recovery in quotes is because if the recovery can't be sustained it is merely an illusion, and as Von Mises said "There is no means to avoiding the final collapse of a boom brought on by credit expansion."

Critical Mass Default

Critical Mass-Definition #1. An amount of material (such as plutonium) that is large enough to allow a nuclear reaction to occur.

Definition #2: The size, number, or amount of something that is needed to cause a particular result.

Critical Mass Default (Full)

Critical Mass-Definition #1. An amount of material (such as plutonium) that is large enough to allow a nuclear reaction to occur.

Definition #2: The size, number, or amount of something that is needed to cause a particular result.

China's Crash In Context

This is a follow-up to a post I made a few months ago, US Strength in the Upcoming Monetary Shift. In that previous post, I challenged the notion that the United States would be entering future negotiations for a new monetary system from a position of weakness. It outlined some of the weaknesses of other world powers and some of the strengths of the United States. It was not to say that the US would sit at the head of the table, though I certainly don’t rule that out, only that it would not be absent, left in a pile of rubble. The US will likely have substantial influence. Many in the alternative financial media take it for granted that the US is going to become a third world nation due to its financial, monetary, and fiscal profligacy, with the Russians and Chinese teaching the Yanks a lesson. The reckless actions of the US will have repercussions, but they will be market driven from simple economic laws, not at the hands of other nations. I believe picking foreign powers as the ‘good guys’ is related to a need for retribution for what is perceived, with good reason, as arrogant and atrocious stewardship as a world power. While understandable I think that is more a gut reaction than proper research and analysis. The remainder of this post with focus on China.

Oil Price Drop Root Cause Analysis

The crash in oil prices over the past year is yet another clear-cut example of misallocation of resources caused by low-interest rates imposed by central banks, but to determine the solution to these misallocations we must determine, not just the cause, but the root cause.

As with tech companies in the ‘90’s, and housing in the 2000’s, oil exploration and production deserves investment. It is the markets job to take in all available information and signals to determine the level of that investment. When rates are artificially held too low these signals are distorted and the market cannot properly allocate capital. Investors who might normally invest in a safer asset with a reasonable rate of return are forced to look to alternatives when the Federal Reserve holds rates down with ZIRP and or QE. Those alternative investments may be a questionable tech company, condo’s in Las Vegas, or bonds in a fly by night shale drilling company.

Financial Repression Can't Work This Time

Financial Repression is defined by Lexicon.com as measures sometimes used by governments to boost their coffers and/or reduce debt. These measures include the deliberate attempt to hold down interest rates to below inflation, representing a tax on savers and a transfer of benefits from lenders to borrowers.

Obviously, this is an insidious way of reducing a nation's debt load and is simply a shift in the debt load from the public to private sector. Like the use of military force its use should certainly be done with great discretion if at all.

The use of military force often uses the ‘just war doctrine’ to determine IF it can be used. Some of the criteria that must be met under the just war doctrine are all other means of putting an end to the evil must have been shown to be impractical or ineffective and the use of arms must not produce evils and disorders graver than the evil to be eliminated. Both of these conditions could be slightly altered and applied to financial repression but we will focus on another just war doctrine criteria, there must be serious prospects of success. We will attempt to determine if there is a reasonable prospect of success of reducing the national debt load through financial repression.

I Bought What?!

There are several nations that charge investors for the privilege of loaning money to them. Denmark yields are negative past a year, German yields are negative out to the 5 year bond, Switzerland bond yields are negative past 7 years, and even Austria sports negative yields on short term debt.

Now why would any investment entity allow a borrower to take their money, tie it up for several years eliminating the ability to use it, finally ending up with less than they started? Any rational investor would keep the cash and maintain the flexibility to use it if an opportunity or emergency arises. The reason yields have drifted negative is due to out of control monetary policy such as negative overnight rates in Switzerland, Sweden and Denmark, as well as the ECB’s introduction of QE. This coupled with regulations forcing pension funds and insurance companies to buy only “safe” sovereign bonds as their investment have caused this financial abomination. I wish I could force someone, anyone, to buy debt I have taken on where they would pay me interest for their trouble but I guess that privilege is reserved for governments.