US Strength in the Upcoming Monetary Shift

Kyle Bass, in my opinion will be one of the best money managers of the next 40 years.  His ideas often mirror my own, and when he speaks I always make it a point to listen.  A Bloomberg interview recently done with Kyle, shown below, prompted me to republish a piece I did a couple years ago.

Below was initially published in March 27th 2015

There is one thing that the current Austrian economic minded Libertarian community seems to pride themselves on and that is challenging the mainstream narrative. I count myself among them. I would like to turn some of that skepticism back on some of the standard trains of thought that are often touted as self evident by many among us in a series of posts.

Socialism is a Kneejerk Reaction to Rising Income Inequality but Does Nothing to Address the Root Cause

Recently I stumbled across an LA Times story entitled: America's Explosion of Income Inequality, in One Amazing Animated Chart. The chart shows what many of us know, there is rising income inequality, but beyond a huge picture of Bernie Sanders to start off the story, does little to identify a solution. I actually appreciate very little meaningful commentary; the data point is quite enough as long as you're willing to do your own research. And while the Sanders pic was a thinly veiled hat tip to the author's solution, Socialism, he did nothing to address the root cause. Luckily I had done my own research, and feel confident that I know the cause and thus I should be much more equipped than the author to determine the best solution. Instead of making a snarky comment I took the opportunity to reach out to the author with the email and questions below.

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."

Why Governments Love Pensions

While growing up, my parents, like most parents, tried to give me as much information about different career paths as they could to help guide me in my life choices. I remember my mother telling me about how the benefits, particularly retirement, were often better for most government jobs though the pay usually lacked. She would say: “If you want to go into the military, go in as an officer. Stay in for 20 years and you will secure a great retirement in your early 40’s.”

At the time, I wasn’t all that concerned about retirement, but I listened and remembered those words. Now I remember those words, not in choosing a career path but when seeing stories of how various government pension funds are underfunded and likely doomed.

Never Let a Good Crisis Go to Waste

“Never let a good Crisis go to waste when it’s an opportunity to do things you had never considered or you didn't think were possible.” – Rahm Emanuel, Chicago Mayor, former Congressman and the Obama Administration Chief of Staff

If Rahm is willing to admit such things in public, how much of a stretch is it that he would not try to prevent a looming crisis, or even willfully cause one, if it allowed the opportunity to implement policies he has always believed in, but thought were impossible. Mr. Emanuel is not unique in his thoughts surrounding crisis, he was just the one who allowed the truth to slip out. The above quote was actually a clarification for a previous comment, “You never want a serious crisis to go to waste”, which he is often credited with. His clarification brings no comfort.

What is a Conspiracy Theory?

In our society the term Conspiracy Theory brings out strong negative reaction in most. Visions of nutcases dance across most people's mind, and several years ago I had the same reaction. That was until, feeling that there was something off in the economy, I started to do my own research. What I found was there were countless undisputed examples throughout American history that if brought up before and even for years after the fact would have been considered what we now call conspiracy theories. Here are a few examples that stuck out to me:

Prior to the United States entering World War One Great Briton's supply line from the US were being devastated by German submarines, U-boats. The Germans attempted to only attack ships that were carrying munitions. There was a passenger liner, the Lusitania, which was supposed to set sail for the UK from New York. The German embassy fearing the passenger liner would steam into danger attempted to warn the American public away from traveling on the Lusitania by putting a notice in news papers. Many papers would not run the warning, though many did.

Alan Greenspan, Angel or Demon

Alan Greenspan is a man derided as the nemesis of Austrian economics and free market capitalismfor good reason. The long standing chairman of the Federal Reserve implemented policies that exacerbated the boom and bust cycle of recent decades. For those paying attention this could end in nothing but failure of the financial system as we know it. To the casual observer he and his apparent strategy was the enemy of sound money, but looking at all of the information available, there are major inconsistencies in this thought process. This post is the second in my challenge series. I will challenge the commonly held belief in the alternative financial media that Alan Greenspan’s motive and end game is to maintain Keynesian economic dominance which his actions seem to support.

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.

Debt Taken On By Fools

NEVER A ZERO SUM GAME

It is often touted that total debt carried by a government, or total debt in general, does not matter because debt is one person’s liability and another's asset thus a zero-sum game. This is plugged most loudly by Paul Krugman in an attempt to explain why the enormous debts of nations such as the United States and Japan do not matter. Nothing could be further from the truth.

For example consider a productive farmer and an adjacent town full of people. The townspeople accept the farmers’ food but do not repay the farmer using money earned by providing production and services; they pay him back with IOU’s also known as debt.