Money and Inflation Are Still Related

/in , , /by
Estimated Reading Time: 4 minutes

There is perhaps no empirical regularity among economic phenomena that is based on so much evidence, for so wide a range of circumstances,” Milton Friedman observed in 1989, “as the connection between substantial changes in the quantity of money and in the level of prices.” And yet, despite the wide body of work alluded to by Friedman, most monetary policymakers and economists believe that there is no information to be gained by looking at monetary aggregates. This widespread belief has resulted in governments’ not estimating monetary aggregates, or else estimating them for a much narrower set of series than in prior years. Monetary aggregates make no appearance in many econometric models of the economy, and are rarely if ever brought up in the briefings for Federal Open Market Committee meetings.

This widespread belief that monetary aggregates are uninformative is incorrect.
Figure 1. Excess Money Growth and Inflation in 108 countries, 2008-2022.

Figure 1 shows the excess growth rate of money measured by M2 and the inflation rate across 108 countries for 2008 to 2022. M2 is a monetary aggregate that estimates the funds available to buy goods and services. It includes currency, checking accounts, and savings accounts that are close substitutes for currency and checking accounts. The excess growth rate of money is the growth rate of M2, less the growth rate of real income, as measured by GDP. The growth rate of income subtracts the non-inflationary growth of the goods and services available. If the growth rate of money and the growth rate of income were equal, then the inflation rate would be roughly zero. Growth of money in excess of income growth fuels inflation.

The positive relationship between the inflation rate and excess money growth over these 14 years is obvious. A linear relationship with a coefficient of one between inflation and excess money growth is an implication of some theories relating inflation and excess money growth. The correlation of inflation and excess money growth is 0.92. The slope of a line relating inflation and excess money growth is 0.95, when estimated by a regression of inflation on excess money growth.

While not one, 0.95 is not all that far from one. Figure 1 shows a line with the one-for-one relationship and another with the slope of 0.95. They are not all that far apart. Most of the countries in Figure 1 have lower inflation than implied by the excess money growth. This means that the demand for money in these countries increased even more than is implied by the growth rate of real income alone. It does not mean there is no relationship between money growth and inflation.
Figure 2. Excess Money Growth and Inflation in Countries with less than 30 Percent Inflation, 2008-2022.

An often remarked aspect of Figure 1 is that the correlation may just reflect the high-inflation countries and the relationship for the low-inflation countries is far less evident. Figure 2 shows the relationship between excess money growth and inflation for countries with average inflation less than 30 percentage points per year. The relation is not as clear, but the correlation between excess money growth and inflation is 0.75. While this correlation of 0.75 is less than a correlation of 0.92 for all the countries, it is hardly trivial.

The slope of the regression line has a larger difference. Comparing the two figures, it is clear that the regression line in Figure 2 deviates from the slope equal to one by more. The slope of the line is 0.85, which is farther from one than 0.95 but also far from zero. And zero is the number implied by an assertion that the information content of monetary aggregates is zero.

The data in Figure 2 are averaged over fourteen years of growth. The fourteen years is the result of data availability. But while the relationship between excess money growth and inflation is evident over longer periods of time, it is not particularly evident for short periods of time. For the data in Figure 1, the correlation of the annual growth rates of excess money and inflation is 0.69, quite a bit less than the 0.95 with the fourteen years of averaged data. For the countries with lower inflation in Figure 2, the correlation is 0.23, again quite a bit lower than the 0.85 with averaged data.

These correlations show two things:

The relationship is weaker for countries with lower inflation than higher inflation; and
The relationship is weaker over shorter time periods.

There is a common explanation for both of these observations. Over shorter periods of time and in countries with relatively low inflation, Mark Fisher and Gerald Dwyer have shown that inflation which is more persistent than money growth can explain both. Inflation is quite persistent as a general rule and money growth less so.

Is the information content of money growth zero? Unequivocally, the answer is no.

Why does this matter?

M2 in 2020 and 2021 increased by the largest percentages in the last 60 years. To the surprise of the Federal Reserve (although not everyone), inflation resulted. Not all countries have increased the money stock to the same extent. Japan and Switzerland have not had outsized increases in the money stock and have not had higher inflation. Monetary policymakers and economists in the United States and some other countries would have done better if they had not ignored money growth.

*****
This article was published by American Institute for Economic Research and is reproduced with permission.

Democrat Barney Frank Was Board Member at Collapsed Signature Bank

/in , , , , /by
Estimated Reading Time: 2 minutes

Democrat former Rep. Barney Frank (D-MA) was a member of the board at the collapsed Signature Bank.

As Slay News reported, New York-based Signature was shut down by regulators on Sunday [March 12] in the wake of the Silicon Valley Bank (SVB) collapse on Friday [March 10].

Now it has emerged that the former Democrat congressman, author of the 2010 Dodd-Frank bill, was a board member at the imploded bank.

In a joint statement on Sunday, the U.S. Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) announced the plan to manage the fallout of SVB’s collapse as well as the demise of Signature Bank.

“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” the joint statement read.

“This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”

“We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority,” it added.

“All depositors of this institution will be made whole.

“As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.”

SVB collapsed last Friday after depositors rushed to withdraw money in fear of its impending fall.

It was the 16th largest bank in the country its implosion marked the second-largest U.S. bank collapse in history.

According to Fox Business, Signature Bank became “popular among crypto companies” and provided “deposit services for its clients’ digital assets but did not make loans collateralized by them.”

Prior to the SVB collapse, Signature said it had been trying to limit such deposits.

The bank promised that it was in a “well-diversified financial position” and had “limited digital-asset related deposit balances in the wake of industry developments.”

“We want to make it clear again that Signature Bank is a well-diversified, full-service commercial bank with more than two decades of history and solid performance serving middle market businesses,” Joseph J. DePaolo, Signature Bank Co-founder and Chief Executive Officer said in a statement.

“We have built a strong reputation serving commercial clients through nine business lines and reached in excess of $100 billion in assets by continually executing our single-point-of-contact, relationship-based model where banking teams are capable of meeting all client needs,” he added.

Frank, who sat on Signature Bank’s board, strongly supported legislation in 2018 that curtailed some of the regulations that his own law Dodd-Frank put in place…..

*****

Continue reading this article at Slay News.

Is ‘Wokeism’ to Blame for Silicon Valley Bank’s Demise? No and Yes

/in , , , , /by
Estimated Reading Time: 5 minutes

Within days of Silicon Valley Bank’s swift and shocking collapse, a narrative formed that “wokeism” lay at the heart of the California bank’s sudden demise. It began with a Fox News appearance by Home Depot co-founder Bernie Marcus.

“I feel bad for all of these people that lost all their money in this woke bank,” Marcus told host Neil Cavuto. “You know, it was more distressing to hear that the bank officials sold off their stock before this happened.”

Similar criticism followed from rank-and-files members of the GOP, including House Oversight chairman James Comer, who decried SVB’s “ESG-type policy and investing.”

The charges prompted an avalanche of media responses attempting to debunk claims that “wokeness” had anything to do with the collapse of SVB or the distress of other financial institutions, such as Signature Bank.

“There’s no evidence that SVB’s sustainable investing or diversity initiatives contributed to its collapse,” Washington Post business and tech reporter Julian Mark wrote.

“No, diversity did not cause Silicon Valley Bank’s Collapse,” the New York Times assured readers in a headline.

What Is ‘Woke’?

Woke is a surprisingly tricky term to define—just ask Bethany Mandel who recently went viral when she froze on TV after being asked to define it—in part because it means different things to different people.

What’s clear is that “wokeness” is intertwined with the concept of Diversity, Equity, and Inclusion (DEI), an idea broadly defined as a “framework that seeks to promote the fair treatment and full participation of all people, especially in the workplace, including populations who have historically been under-represented or subject to discrimination.”

Treating all people fairly isn’t a particularly controversial or revolutionary idea, but critics of “wokeness” complain that DEI initiatives go beyond the fair and equal treatment of individuals, giving preferred treatment to historically marginalized groups. Moreover, there’s a concern that corporate DEI initiatives are emphasizing social causes over sound business practices and maximizing shareholder value.

For example, SVB famously pledged to provide at least $5 billion “in sustainable finance and carbon neutral operations to support a healthier planet.” The bank—which is currently in bankruptcy proceedings—also donated $73 million to Black Lives Matter and similar social justice causes.

Meanwhile, video has emerged of Signature Bank Chairman Scott Shay, whose bank was recently shut down by regulators, offering a lengthy tutorial on the proper usage of gender-neutral pronouns.

Even proponents of DEI initiatives would likely concede these are “woke” practices. But did the “woke” lectures and programs have anything to do with the collapse of SVB and Signature Bank, both of which unfairly (and dangerously) received bailouts from the federal government?

‘A Negligent Board of Directors’

Many astute financial experts brush off claims that “wokeism” caused the reckoning facing SVB, rightly pointing out that macroeconomic factors triggered financial chaos across the world. (The Swiss bank Credit Suisse also had to be rescued, and there’s little evidence its collapse was related to wokeism.)

In the United States, rising interest rates resulted in far less borrowing, particularly for tech startups, which are the primary clients of banks like SVB. Meanwhile, SVB had loaded up on (seemingly low risk) Treasury bonds, which saw their value plummet when the Federal Reserve began sharply raising interest rates to combat rampant inflation. Barron’s reports that more than half of SVB’s $211 billion in financial assets were composed of these struggling securities at the end of 2022.

Many contend that more oversight could have prevented the collapse of SVB and other banks. This claim might have some merit, but it also ignores that regulators themselves were asleep at the switch during SVB’s collapse.

“Traditional prudential regulation should have caught this,” said Sen. Mark Warner (D-Va.) during a recent Senate hearing. “Where were the regulators?”

It’s a fair question, and one members of both parties are asking. Banks are supposed to undergo stress tests and similar oversight to prevent the kind of exposure that wrecked SVB. Why that didn’t happen is a question we’ll likely hear answered during congressional hearings, but it might have something to do with the fact that SVB’s CEO also sat on the board of the San Francisco Federal Reserve Bank, which had regulatory oversight.

Regulatory failure, however, should not overshadow the bank’s own internal failures, which are obvious even to those without investment banking experience. Why was SVB’s portfolio not more diversified? Why did the bank expose itself to so much risk and hang on to its plummeting Treasury securities so long? Why were so many loans extended to subprime borrowers?

These are, frankly, rookie mistakes.

“The combination of a negligent board of directors @SVB with idiot management is the potent cocktail that led to a disastrous outcome,” investor and Shark Tank host Kevin O’Leary observed on Twitter in the wake of SVB’s collapse.

O’Leary is not wrong, but he didn’t point out why SVB’s board was negligent.

It turns out that SVB’s board of directors was rather thin on investment banking experience and heavy on political connections. (To be fair, there’s also a sound economic incentive to appoint board members with political clout.) One member of the board—Tom King, who joined the board in September 2022—had extensive experience in the industry, but others have relatively little or none.

This is one of the dangers of “wokeism” and social justice theory. These value systems are explicitly hostile to concepts like individual merit. Baked into the ideology is the temptation to hire people based on factors—race, gender, ideology, etc.—other than the value they can bring to an organization; to ignore profit and shareholders, and instead serve greater social causes.

If you doubt this, consider this 2021 interview with SVB board member Elizabeth ‘Busy’ Burr. In the interview, Burr spurns focusing on “numbers.” The words value and shareholder don’t even appear. Her focus is equity, inclusion, and the “tide of racism and white supremacy” in America. Months after the interview, the Carrot CCO joined the SVB board. (Burr, unlike other board members, did actually spend several years in the investment banking space, working for Morgan Stanley and Credit Suisse First Boston, according to SVB.)

To be clear, no one denies that macroeconomic factors—particularly the Federal Reserve’s massive money pumping and interest rate schemes—played a central role in the demise of SVB. But don’t discount the impact corporate wokeism had in creating a culture that emphasized DEI initiatives and goals over creating value, earning profit, and providing proper oversight of a company managing billions of dollars.

We’re constantly being told that capitalism needs to be fixed. That it needs to be more responsible. That it must focus more on “environmental” and “social” concerns. That it must include more external “stakeholders.”

The collapse of SVB, which was preventable, shows that these efforts to “reform” capitalism may very well be what destroys it. (The fact that federal authorities quickly stepped in to protect parties from the consequences of their decisions shows that to some extent it already has.)

Moreover, basic economics offers yet another clue.

Resources, we know, are finite. Each comes with an “opportunity cost,” which means that every single service or resource—including time—comes at the expense of something else.

It’s worth pointing out that SVB had a DEI executive, but, astonishingly, it had no chief risk officer. This is a big deal.

Opportunity cost shows us the funds used to hire that diversity executive could have been used instead to hire a risk officer. Indeed, every single dollar the bank spent on diversity and inclusion and other “woke” programs and initiatives could have been spent on other resources, including risk officers and stress tests that could have helped SVB identify solvency problems and limit exposure to the macroeconomic factors that precipitated its collapse.

“Wokeism” may not have been the primary factor for SVB’s collapse, but basic economics shows it did play a role, big or small.

*****
This article was published by FEE, Foundation for Economic Education and is reproduced with permission.

Tucson Is Heading Down the Path of Other Failing Leftist Cities with Its Climate Action Plan

/in , , , , , /by
Estimated Reading Time: 3 minutes

In the midst of the COVID-19 pandemic in 2020, multiple government officials seized the opportunity to grab more power. Perhaps chief among them were the Tucson city council and Mayor Regina Romero, who exploited the moment by declaring a “climate emergency.” Now, the city of Tucson has finalized its plan to solve this “climate emergency”—to the tune of an estimated $326 million. But it’s not just the cost that should concern you.

Tucson’s Climate Action Plan, titled “Tucson Resilient Together,” is ripe with Green New Deal mandates that are aimed at forcing citizens out of their cars, controlling their lives, and destroying the community. By 2050, they plan to force 40% of all people living in Tucson to commute by walking, cycling, taking public transportation, or “rolling” (whatever that means). And that’s just the start.

They actually spell out as part of their strategy that around 25% of people will be walking as their form of transportation by 2050. This is Tucson, Arizona, right? Have these people lived here during any of our summers? Who in their right mind would want to walk (or even cycle or “roll”) as a regular form of transportation when it’s 110 degrees outside?

But maybe they think they can force this to happen with another one of their strategies: putting people on road diets (which, by the way, was recently approved in a Scottsdale City Council meeting). In case you’re not familiar with this approach, road diets reduce the number of travel lanes and the width of the road to make room for other modes of transportation like bike lanes. They have been used in failed leftist cities like Portland, which should tell you all you need to know. And as you probably guessed by now, they will only increase traffic congestion.

Ah…but don’t worry dear citizen. All of this is done with your health and wellbeing in mind. After all, according to Tucson’s plan, you’re just a fat slob who drives too much, which has been resulting in higher absenteeism and loss of productivity. So, your government overlords are going to take care of you by forcing you out of your car and making you walk 150 minutes per week.

But for those who don’t plan on walking, be sure to send Mayor Romero and the Tucson city council a thank you note because they haven’t forgotten about you. As you should probably know by now, no “climate change plan” is complete without investing even more in public transportation. And Tucson has really outdone themselves this time. The massive increase in public transit will include hiring 900 people EACH YEAR to drive all of the buses for a total of 27,000 new full-time transit employees.

Currently, Tucson has a total of 420 bus drivers for their entire system. This increase would make the Tucson Transit Department the largest employer in Pima County. Given the fact that recent public transit reports indicate a significant decline in ridership since the COVID pandemic, this an absolutely absurd investment. And as crazy as all of this seems, the impact can’t be understated: this is now the governing planning document for the 2nd largest city in Arizona, where city staff will be working around the clock to implement their dream of a 15-minute city where cars will be phased out and everything you need will supposedly be available by foot, bike, or public transit. It’s obvious that they hate where we live and how we get around, and this is their solution. But just like with so many of these climate policies, don’t expect politicians or government bureaucrats to be doing any of this. They just want to force it on all of us regular folks.

*****
This article was published by AZ Free and is reproduced with permission.

Is The Banking System Safe?

/in , , , /by
Estimated Reading Time: 7 minutes

Over the past few weeks, we have had the second and third-largest bank failures in our history. As this crisis unfolds, we are repeatedly told by officials that it is localized to these particular banks, that the banking system is sound, and there is not a systemic risk to those with money on deposit in banks.

One interesting commentary is from the journalist Kim Iverson, who suggests the failures are basically a raid to take down cryptocurrencies as if they needed any help in their demise.  See the video archives.

We have long felt government cannot tolerate crypto or anything else that threatens its monopoly on money.  However, we are skeptical of Iverson’s thesis because other explanations appear compelling and not so esoteric.  The Biden inflation, followed by the sharpest rise in rates in history, is damaging banks everywhere.  This includes the Federal Reserve itself, which may soon have negative equity.  This seems to us to satisfy the notion of “systemic.”

Others point to the systemic build-up of government debt at an unprecedented and unsustainable rate.

To be sure, inflation, high-interest rates, are all connected to excessive government spending and borrowing.  It is a wonder to us that we could go years with this kind of fiscal abuse without serious consequences.  Globalization, shrinking demographics, and other factors might simply have delayed the problem.  Whatever.  Now we must deal with the consequences.

For the investor, if one believes the problem is localized, there is no particular action to be taken. Odds are, your bank is safe. Or if it is not, it will be rescued.

If on the other hand, this is a systemic issue in the banking system, then there are some protective steps investors and depositors should consider. There is not enough money in the FDIC insurance fund to cover systemic risk in the banking system.

At the risk of cynicism, just because the same people making you comfortable with the banks are the same that told you that WMD existed in Iraq, that Covid came from a wet market, that Donald Trump was a Russian pawn, that Hunter’s laptop was Russian “disinformation”, that Covid vaccines work, that inflation was transitory and that men can have babies,(we could go on like this)…is not necessarily a reason they are wrong about the banks.

Then again, they could be lying again. Our government seems to do that rather frequently and thus has poor credibility and has not earned our trust. Besides, how could we know if they are lying before the fact? Moreover, the government as the ultimate guarantor of FDIC, has a vested interest in keeping us calm and our deposits in the banks, right?

Here are some reasons besides their past lying why you just might want to be suspicious.

The financial system is much like a chain. One bank has a claim on another. One financial institution has a claim on another. One institution’s asset is another institution’s liability. If you fail on the liability, you destroy someone else’s asset. In short, the system is only as strong as the weakest link in the chain. It is clear some of the links are breaking, because of this interlocking relationship, there is simply no way of knowing how far the rot has spread.

Localized stress should be just that…local. But we learn for example that the Swedish national pension system was a depositor in Silicon Valley Bank. Sweden? That does not sound very local, does it?

Nor does the failure of Credit Suisse and now the rumors swirling around Deutsche Bank sound localized. Why would giant Swiss and German banks be in trouble if a bank in California is having difficulty? Does that sound local to you?

It would appear that most banks, and many other types of financial institutions, have been victims of government policy in several ways. As such, everyone is affected.

Years of ultra-low interest rates created a “zeal for yield.” This zeal encouraged many to take excessive risks and use excessive financial leverage to try to get decent rates of return. Thus, ultra-low interest rates spread this desperation for return likely far and wide. Not just banks, but many businesses, grew used to almost zero cost for capital and zero costs to borrow. But now they must roll their debt forward to much higher rates and their business models may no longer be profitable.

The government supervises these institutions and once again, we find their supervision did not stop banks from failing. Sleeping at the switch seems to be a trite understatement. Didn’t we just have a financial crisis and they fixed things?

Excessive government spending and the Covid lockdown came after a long string of large deficits and have destabilized the economy. This was not a local issue either. Rather, it is systemic. It caused system-wide inflation, which in turn triggered system-wide sharp increases in interest rates to fight that inflation, which drove down the value of bank assets.

Moreover, the recent blowout budget proposed by the Biden Administration indicates they have no clue how excessive their spending has been, or they do understand and are proceeding anyway. Either way, you slice it they seem to have no plan to dampen excessive spending.

When government acts, it is by nature systemic. The government orders banks to invest in long-dated bonds and mortgages, and then by raising rates very quickly, it has caused the banks to lose a lot of money on what the government forced them to buy. Who escaped this conundrum? We suspect few did and most did not, hence it looks more like systemic risk.

While there is a modest amount of money in the FDIC, it is intended to support isolated banking failure. But the insurance fund is spread even thinner when the government extends deposit insurance beyond the $250,000 account size. Right now, the government is expanding the deposits to be covered without expanding the number of reserves to insure them.

Treasury Secretary Janet Yellen has purportedly insured more deposits in a gambit to calm depositors, but at the same time, by spreading a limited base of capital over far more deposits, she actually has weakened the system. Will her attempts at calming the situation work or did her haste to extend coverage signal there is a greater problem than what we currently appreciate? There is ambiguity about what is insured and what is not. As the Wall Street Journal recently pointed out, “the Administration’s mixed signals are becoming another threat to the financial system.”

It is a confidence game we would rather not play.

Because of all the unknowns and the lack of credibility in government officials, we suggest you treat the current crisis as a systemic risk, not a risk isolated to just a few banks. Assume more pain is to come and act proactively.  There is no risk to yield, credit quality, liquidity, or safety.  There might be some inconvenience but that seems like a small price to pay.

What steps can you take to protect yourself?

If you have money in a bank beyond the $250,000 limit, move the money around between banks and stay under the limit in any given institution.

Get extra cash out of the bank and store it safely at home. Yes, we mean physical bills. Even if FDIC can weather the storm, sometimes audits have to be conducted and other procedures might delay your access to cash. It is good to have some physical currency outside of the banking system.

Since FDIC can only be “saved” up by the government, you might as well own direct obligations of the US government, not indirect ones. Besides, the yields on US Treasury bills can be higher in yield than bank deposits. Move excess cash directly to treasuries.

If the Federal Reserve is forced to reverse on Quantitative Tightening (and there is evidence they are) or reverts to overt money printing to inject “liquidity “into the system, that will aggravate an already difficult inflation problem and possibly create an upward spiral in interest rates. Bank borrowing from the FED already exceeds that of the 2008 Financial Crisis. Where did all the money come from to lend to the banks? How is this substantially different than Quantitative Easing?

Image

Historically, if forced to choose between inflation and deflation, the government opts for inflation. Why?  Mostly because debtors are really punished by deflation. They have to pay back their debt with more valuable dollars than they borrowed.

Since the government itself is the biggest of all debtors, they would prefer inflation because they get to pay off their debt with dollars worth a lot less than the dollars they borrowed.

Sometimes, however, deflation gets out of control regardless of government desires and during that condition, there is a widespread failure among borrowers of all kinds, including sovereign government default.

We suggest that investors own at least a modest hedge position in gold bullion coins.  Check out our long-term advertiser American Precious Metals which specializes in the physical delivery of gold coins.  For security purposes, not for speculation, these coins should be in your possession. A home safe or private depository is likely better than a safety deposit box.

While there are many flavors of “paper gold” from Exchange Traded Funds that hold bullion to gold mining shares, the entire reason for owning gold and having it in your possession is not to take further “promises” from the banking system or the government. Paper gold might be fine for speculation but not for basic safety against bank runs.

Others suggest you own some cryptocurrencies as well. We have been critics of cryptocurrencies from the beginning and remain unconvinced. Candidly, we don’t understand them and thus prefer not to invest in things we don’t thoroughly understand. Moreover, we have long felt government will not give up its monopoly to issue money to private parties and hence will come after cryptocurrencies.

As for the stock market, as we have mentioned before, we don’t think the bear market in equities is yet over. While we have been impressed by the way the market shook off the last rate hike and the news of banking problems, the trend still remains downward. Remember whatever you buy and presently own, will likely feel the gravitational pull downward of the bear market in stocks and if we go into recession later this year. Our view still is that if our fate is a recession, the first beneficiary will be the bond market, not the stock market.

Banking problems may make banks both reluctant or unable to extend credit.  Tighter credit conditions on top or rising rates simply raise the odds of a recession in our opinion.  That remains a substantial negative for the stock market.

Certainly, you may own stocks but we would keep the risk down by limiting exposure of the portfolio to below-normal levels for your age and risk tolerance. Hold extra cash in the form of T-bills or short-term Treasury bonds.  See the video on the subject of how to buy them or talk to your broker/financial advisor if you have one.

You may also wish to revisit our “barbell strategy.”

Notice we have stayed away from mentioning amounts or percentages. More specific advice requires much greater detail into a reader’s financial condition, something we simply can’t do.

Consult a qualified financial advisor and be sure you do your own due diligence.

What we are suggesting is that you take a few concrete moves to protect yourself in the event things get uglier than they already are.

As stated before, there simply is no way to know for sure, but given the excesses of the recent era, we would er on the side of safety. Now is one of those times when the return OF your money is more important than the return ON your money.

 

 

Powell Explains the Fed’s New Regime: Rate Hikes & QT to Fight Inflation while Offering Liquidity to Banks to Keep them from Toppling

/in , , , /by
Estimated Reading Time: 2 minutes

An enormously important new regime gets engraved into central-bank handbooks. The ECB and Bank of England are also on board.

 

It makes sense in this era of high inflation, QT, rising policy interest rates, and high financial fragility in the banking system, after years of money printing and interest rate repression.

The new regime was already tested successfully by the Bank of England last fall: Tightening through rate hikes and QT while simultaneously providing liquidity to the financial sector for a brief period to douse a crisis.

Today, the Fed confirmed the new regime: It hiked by 25 basis points, bringing the top of the range to 5.0%, and QT continues as before, while it is also providing liquidity support to the banks.

Some people call this principle stepping on the brake with one foot (QT and rate hikes) while stepping on the gas with the other foot (“QE”).

But liquidity support of this type is not QE, and doesn’t have the effect of QE, Fed Chair Powell explained today at the post-meeting press conference.

It’s more like stepping on the brake with one foot while putting an arm around the baby to keep her from hitting the dashboard – that’s how I’ve been explaining it, to stick with the foot-on-the-brake analogy.

Powell on the new regime:

“Recent liquidity provision increased the size of our balance sheet. The intent and effects of it are very different from when we expand our balance sheet through purchases of longer-term securities,” he said.

“Large-scale purchases of long-term securities [QT] is really meant to alter the stance of policy by pushing up the price and down longer-term rates, which supports demand through channels we understand fairly well,” he said.

“The [current] balance sheet expansion is really temporary lending to banks to meet those special liquidity demands created by the recent tensions. It’s not intended to directly alter the stance of monetary policy,” he said.

“We do believe it’s working. It’s having its intended effect of bolstering confidence in the banking system and thereby forestalling what might otherwise have been an abrupt and outsized tightening in financial conditions. So that’s working,” he said.

“We think that our program of allowing our balance sheet to run off predictably and passively is [also] working,” he said.

Fighting inflation while keeping banks from toppling.

Powell split the fight against inflation and the liquidity turmoil at the banks into two separate issues, to be dealt with by using two different sets of tools.

  • Tools to fight inflation: Interest rate policy and QT.
  • Tools to provide liquidity to the banks: The “Discount Window” (short-term loans against collateral at 5% from now on) and the new Bank Term Funding Program (loans for up to one year against collateral at a fixed rate near to 5%)

But banking sector turmoil may help the fight against inflation.

As a result of the turmoil in the banking sector, “financial conditions” have tightened and may tighten further. Tightening of financial conditions is precisely what the Fed wants to accomplish, how monetary policy is transmitted to the economy and ultimately inflation, by making loans harder to get and more expensive, and by making businesses and consumers more reluctant to borrow, and therefore putting downward pressure on credit-financed demand from businesses and consumers, which would theoretically take off pressure from inflation…..

*****

Continue reading this article at Wolf Street.

Beware of Governments Bearing Gifts

/in , , , , , , /by
Estimated Reading Time: 4 minutes

The title is a “turn of phrase” from when the Greeks provided the Trojans with the gift of a giant wooden horse. Similarly, whenever a government — in this case Biden’s government – appears to give private industry money for a directed purpose, there is a laundry list of caveats. In this case, we are referring to the $280 billion Chips Act.

The Act was passed with bipartisan support and much fanfare. The idea behind the Act is to bring semiconductor manufacturing back to this country’s mainland. Semiconductors are essential to our lives as they are used in a multitude of devices. They are also essential to our defense industry. It was deemed high time that we took control of this essential product even though 90 percent of our chips come from Taiwan, a very friendly country. American companies design many of these chips so why should we not manufacture them? In theory, we just need to supply the capital to companies to build the chips in America. Right?

Reality set in once the bill was passed. Six months after signing the legislation, the Biden Administration rolled out a litany of requirements for any company receiving the funding from $50 billion allocated for direct funding, federal loans, and loan guarantees. These rules were not outlined in the bill. They were left to the career bureaucrats to define.

The rules were announced by Commerce Secretary Gina Raimondo, the one person in the Administration who has actually worked in the private sector. She was not shy about the role the bureaucracy was playing. She told the New York Times “If Congress wasn’t going to do what they should have done, we’re going to do it in implementation” referring to the subsidies. She certainly does not lack hubris.

Here are some of the requirements laid out by Raimondo:

1. The applicants will have to comply with the Administration’s “Good Jobs Principles” guaranteeing “all workers receive family-sustaining benefits that promote economic security and mobility.” Somewhat cosmic, but it includes “paid leave and caregiving supports.”

2. They must review their project with labor unions, schools, and workforce education programs. Partiality will be given to “projects that benefit communities and workers,” as judged by Raimondo and her team of bureaucrats.

3. Companies must refrain from stock buybacks which the government believes just enriches shareholders and officers.

4. Applicants must define their “wraparound services to support individuals in underserved and economically disadvantaged communities.” These services are stated, “as adult care, transportation assistance or housing assistance.” They will probably have to pay for parks, stoplights, and other projects deemed essential by the awards committee.

5. Applicants must pay construction workers prevailing wages set by unions. They will be “strongly encouraged” to use project labor agreements (PLAs) handing over to unions the determination of pay, benefits, and work rules for all workers.

6. Companies must guarantee affordable, high-quality childcare not only for workers but for construction workers. This could consist of building company childcare centers, paying local care providers to expand capacity, or directly subsidizing workers’ care costs.

For the honor of meeting these requirements, the Biden Administration will provide only 5 to 15 percent of a project’s capital expenditures. They may go as high as 35 percent. The companies will be required to “share a portion of any unanticipated profits” with the government. The definition of “unanticipated profits” is unclear.

There will no doubt be unintended consequences with the litany of preconditions. There is already a significant shortage nationally of childcare workers. Anybody within the local area will take a position at the applicant’s center since the company will be mandated to pay above market rates. That leaves anybody not working at the plant either with no access to childcare or childcare at a largely increased cost.

The U.S. produces about 10% of our current chip supply. It already costs 40% more than the Taiwanese semiconductors that deliver to the other 90% of the market. These requirements will make the ones produced here costlier than the ones American companies currently produce.

Once again, the Biden Administration — representing the current thinking of the Democrats — decides to throw money at a problem. But it is so invasive that it will not be economically advantageous to take their money.

As you noticed, only $50 billion of the $280 billion authorized through this bill is provided to encourage semiconductor production. The law authorizes, but does not specifically appropriate, $174 billion over five years to various federal “science” agencies to invest in STEM, workforce development, and R&D. $80 billion is earmarked for the National Science Foundation, more than doubling its annual budget which just separately increased 18.7%. We are talking serious boondoggle here.

As an aside, the four major chip manufacturers — TSMC, Samsung, Micron, and Intel — are already busily expanding in various locales across the nation. TSMC is building a plant in Arizona and tells us that construction costs are four to five times higher than in Taiwan. Do you think they will be enticed by all these requirements laid on, including developing a childcare program?

The people who have never worked in private industry are determined to direct our future through the government. Congress went along with this monstrosity. Bureaucrats will be doling out money, under their terms, to companies who will have to grovel to meet their terms. And who is to say they will not change the rules along the way? We can be sure Lucy will be pulling the ball out from Charlie Brown’s foot on many occasions here.

No wonder we have $32 trillion in debt.

*****

This article was published by FlashReport and is reproduced with permission from the author.

The Ultimate Cancel Culture and Equality

/in , , , , , , /by
Estimated Reading Time: 5 minutes

A review of Mao’s Great Famine:  The History of China’s Most Devastating Catastrophe, 1958-1962, by Frank Dikotter (Bloomberg Publishing, Hardback Edition, 2010; Paperback Edition, 2017, 420 pages).

It is seen as gauche, hateful, and unenlightened on college campuses and like-minded places to quote Winston Churchill because he was an imperialist and colonialist. Okay, so go ahead and cancel me.

Churchill said that democracy is the worst form of government except for all others. He could’ve added that capitalism is the worst economic system except for all others.

My personal library has plenty of books that detail the abuses that have occurred under both systems. Many of them expound on the failings of the United States, including slavery, genocide against Native Americans, and experiments with mercantilism and imperialism.

Judging by the mindset on college campuses and the entrenched beliefs that many college graduates carry with them after graduation, college libraries and curricula consist of only this genre.

Plenty of other books in my library have an opposite theme. They detail the benefits of both systems, the positives of the United States, and the unequivocal, inherent evils of communism and other forms of totalitarianism and collectivism. Mao’s Great Famine joins these books.

The book is a masterpiece of research into archival documents of the Chinese Communist Party and correspondence between high-level party apparatchiks.

If I were a billionaire, I’d gift a large supply of the book to universities to make them free for the taking to students, with the condition that they be displayed in the school’s food court, next to the cornucopia of foods of just about every cuisine, where the problem is too many calories at relatively little cost or the polar opposite of the problem under Mao. The abundance of food is so widespread in the U.S. that using the word “fat” is considered body shaming and thus banned because the majority of Americans are . . . well, they’re overweight.

If students were to read the horrors described in the book, campus safe zones and student counseling centers would soon be overflowing with sobbing fragile students.

Dying of starvation is a terrible way to die. Even more terrible during Mao’s famine was the horror of parents watching their children die of starvation before they did, and their emaciated corpses left in fields and roadsides, along with the corpses of neighbors, because no one had the energy to bury them.

Equally horrible was the rendering of bodies to make fertilizer. This came after farmers had torn down their own homes to spread any organic material contained therein on fields as fertilizer.  This desperate and futile effort left them exposed to the elements without shelter.

The book claims that more property was destroyed during the Great Leap Forward than by all the bombing campaigns of the Second World War. “Up to 40 percent of all housing was turned into rubble, as homes were pulled down to create fertilizer, to build canteens, to relocate villagers, to straighten roads, to make room for a better future or simply to punish their occupants.”

One becomes numb reading the horror stories in the book, and one wants to spit on Mao’s large mausoleum in Tiananmen Square upon learning what led to the starvation of tens of millions.

The primary cause was Mao establishing the ultimate in cancel culture. Anyone who brought him bad information about his Great Leap Forward was called a reactionary, a rightist, a conservative rightist, or a capitalist, and was canceled from the Party or worse. Some party officials saved themselves by groveling and admitting their disloyalty in public shaming sessions. Almost all of them learned to keep the truth from Mao, to produce reports full of bogus statistics, and to demand the same loyalty and lies from their subordinates.

In that sense, Mao was parroting the leadership methods of Stalin, who, decades earlier, had starved tens of millions of kulaks while punishing party members who told him the truth. Also like Stalin, Mao, and his cadres eventually resorted to reeducation camps, forced-labor camps, and torture.

Women, children, the elderly, and the infirm were particularly vulnerable, as survival of the fittest became the norm.

In total, an estimated 45 million people died from starvation or related causes under the Great Leap Forward. The communist goal of perfect equality of results was achieved in the grave, where everyone ended up equal.

The Great Leap Forward was Mao’s egomaniacal fantasy of surpassing in short order the West in agricultural production, steel production, and industrial development. Farms were collectivized, the collectives were given impossible agricultural production goals, and villages were required to build small furnaces to make steel, typically by melting household items and farm implements, which in turn lowered agricultural output from what it had been prior to the Great Leap Forward.

At the same time, millions of people were conscripted to work with little food, shelter, or rest in building huge dams and other irrigation projects, primarily using shovels. Ignoring the advice of engineers, many of the projects were built incorrectly and in the wrong location, resulting in silting, salination, and massive leaks. Combined with poor workmanship and materials, this led to scores of projects being abandoned.

As people were dying in the hinterlands, Mao and his top cadres were living a life of privilege in Beijing—not the comparatively benign kind of privilege bemoaned by class and race warriors in America today, but the privilege that comes from having the absolute power of life and death over the masses. In a monument to themselves and the Party, and to snooker the outside world into believing that the Chinese version of communism was a success, historic buildings were torn down to expand Tiananmen Square and turn the vicinity into a Potemkin-like showcase.

Conditions were made worse by the fatal flaw of communism (and socialism): the replacement of the profit motive and market forces with central planning and pricing. Grain rotted in silos because trucks weren’t available to transport it; trucks weren’t available because truck parts weren’t available or were shoddy; too much of unneeded items were produced and not enough of needed items were produced, because central plans were way off and because prices were set at the wrong level; pilfering and loafing were endemic, due to everyone theoretically owning everything but no one actually owning anything; and mines and factories were dangerous hellholes where workers were worked to death or died in droves from chemical exposure or industrial accidents.

The book ends with party officials beginning to blame Mao for the tragedies of the Great Leap Forward. Author Frank Dikotter says that in order to continue to hide the truth and to keep history from seeing him as a monster, Mao would go on to unleash the Cultural Revolution and its young cadres on the people he saw as counterrevolutionaries. Another award-winning book by Dikotter details the horrors of that revolution: The Cultural Revolution: A People’s History, 1962-1976.

The parallel between this and the whitewashing on American college campuses is striking.  Those who see themselves as “progressive”—one of the most misleading terms in history—attack and silence anyone with the temerity to factually point out where progressives have done great harm, such as their leadership of the eugenics movement, their embrace of President Woodrow Wilson’s arrest of reporters and others under sedition and espionage acts, their stereotyping of Eastern and Southern Europeans as inferior, their support of the 1924 Immigration Act to restrict the immigration of those inferiors, their adoption of social-welfare policies and programs that created dependency and made fathers unnecessary in the raising of children, and, most recently, their worsening of race relations with diversity and inclusion initiatives that are actually the opposite of what they are purported to be.

Oh, and don’t forget their portrayal of Churchill as being worse than Mao.

6 Charts Show Crucial Facts About Spending, Taxes, Deficits Missing From Biden’s Budget

/in , , , , /by
Estimated Reading Time: 3 minutes

The Biden administration on Thursday released an outline for its fiscal year 2024 budget. As expected, it promotes the same swampy, big-government agenda as last year, which the country desperately needs to avoid.

Beneath the administration’s spin, the ultimate message is that it thinks the federal government doesn’t have enough power and control over our families and businesses.

These charts, based on updated information from the nonpartisan Congressional Budget Office, show just how off-base Biden’s narrative is and why America needs exactly the opposite from its leaders.

For more than 50 years prior to the COVID-19 pandemic, federal spending averaged a whisker over 20% of the economy. That temporarily spiked above 30% in 2020 and 2021 due to the immense (and extremely wasteful) spending spree by Congress.

The country is on course to return to that excessive level of spending without war, recession, or a pandemic as the underlying cause. Merely maintaining the status quo of allowing benefit and cronyistic programs to grow faster than the economy will make “emergency” levels of spending the new normal.

A relatively short exposure to firehose-style spending helped drive inflation through the roof. We can only imagine what would happen if that’s allowed to become permanent reality.

Incredibly, the Biden budget would increase spending above the baseline by $1.85 trillion over the next decade, making the problem even worse. It envisions a mindboggling $10 trillion in spending by 2033.

The raw numbers involved with federal budgeting are impossible to fully comprehend, which makes charts such as these so important.

In fiscal year 2022, the federal deficit was the equivalent of nearly $20,000 for a middle-class family. To carry the analogy further, this family would already be more than $447,000 in debt, but with no new assets to show for it.

Any family with such an unbalanced budget would be bankrupt in no time flat. We shouldn’t assume that the nation can avoid a similar fate for much longer.

It has been incredibly reckless for Washington insiders to assume low interest rates would be around forever. With interest rates rising, the country is faced with the prospect of dedicating more than $1 trillion dollars per year to interest payments by the end of the decade, and trillions more per year not too long after that.

Servicing the federal debt will soon be an anchor dragging on the economy, steadily eroding the growth and prosperity that we take for granted. Any attempt to artificially push interest rates down would threaten to make inflation worse, squeezing families from both sides.

Federal spending is projected to grow much faster than the economy. Of that incredible growth, a full 79% would arise from net interest payments, Social Security, and Medicare.

Too many politicians want to either ignore this reality, or—like Biden—pretend that the solution is to raise taxes while refusing to take any meaningful action to reform key benefit programs with long-term stability in mind.

Incredibly, Biden is proposing a whopping $4.7 trillion tax increase in the budget plan, or more than $35,000 per household.

Biden and his staffers love to brag about the 2022 deficit being lower than it was in 2020. This talking point is, frankly, misinformation. Biden’s decisions have consistently made things worse.

Further, the 2022 deficit was still well above the historical average. Unless something changes, deficits will be twice the historical average by 2029 and keep climbing from there.

Biden and the Left have spent decades claiming that high-income households don’t pay their “fair share” of taxes. The Biden budget’s signature policy is a tax hike based on that assertion.

Once again, reality says otherwise. The top 1% of households pay more income tax than the bottom 90% combined and pay roughly twice as much in taxes relative to their share of income.

The Left never defines what “fair share” means, other than “more,” and they typically want to use that “more” to cover spending increases.

It’s crucial for Americans to understand that raising taxes on businesses and entrepreneurs would not only damage economic growth and private investment, but it would also utterly fail to generate enough revenue to satisfy the Left’s agenda.

The harsh reality is that a European-style government with cradle-to-grave benefits would require European-style taxes, and that would mean hammering the middle class with tax hikes.

A proper solution to federal finances, such as that of The Heritage Foundation’s Budget Blueprint, would focus on shrinking bloated bureaucracies and reforming programs such as Medicare in a way that treats both older and younger Americans fairly.

In contrast, Biden’s budget would leave future generations with crushing burdens of debt and taxation. More than merely rejecting this bleak vision for the country, Congress must go in the opposite direction if we are to have any hope.

*****
This article was published by The Daily Signal and is reproduced with permission.

Biden Touts New Budget With Tax Hikes, Critics Push Back

/in , , , , /by
Estimated Reading Time: 3 minutes

President Joe Biden released his 2024 budget Thursday [3/9] that includes a trove of tax hikes, quickly sparking pushback from critics.

The White House said the budget will cut deficits by nearly $3 trillion over the next decade. Critics argued that despite those cuts, the national debt is still soaring, projected to surpass $50 trillion in the next decade.

“The President’s budget would borrow $19 trillion through 2033 and increase the debt-to-GDP ratio from 98 percent at the end of 2023 to 110 percent by 2033, past the record set in this nation just after WWII,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “It would spend $10.2 trillion on interest payments on the national debt alone – more than it will spend on defense or Medicaid over the same time period.”

MacGuineas said Biden deserves “real credit” for the cuts he did make but said more is needed.

“Most of this massive borrowing is the result of policies put in place years ago by Democratic and Republican administrations and Congresses alike, but it will require presidential leadership to enact real changes, and this budget does not go nearly far enough to make reining in our dangerous debt levels a top national priority,” she said.

Presidents release these budgets annually as guideposts to set the priorities for their agenda since there is little hope the budget will be accepted wholesale.

“It’s built on four key values: lowering costs for families, protecting and strengthening Social Security and Medicare, investing in America, and reducing the deficit by ensuring that the wealthiest in this country and big corporations begin to pay their fair share, and cutting wasteful spending on Big Pharma, Big Oil, and other special interests,” Office of Management and Budget Director Shalanda Young told reporters on a press call.

The budget includes several proposed tax increases, including a minimum 25% tax on anyone with more than $100 million, an increase of the top marginal income tax rate to 39.6%, a hike of the corporate tax rate from 21% to 28%, a billionaire’s tax, and more.

Small businesses raised the alarm about the higher tax rates.

“President Biden’s tax increases will hit small to mid-size businesses,” Karen Kerrigan, SBE Council president and CEO, said. “The sizable increases take aim at many struggling firms as they work to recover, compete, and operate during an unstable and inflationary period.”

The White House has emphasized since Biden took office that any tax increases would only hit the wealthiest Americans. Kerrigan took issue with this claim as well.

“According to reports,” she said. “President Biden’s budget would – among other harmful proposals aimed at business and investors – raise taxes on individuals making $400,000 or more, ‘the wealthy,’ and corporations (again, many small businesses fall within the President’s targeted group of taxpayers) by hiking the top marginal income tax rate from 37 percent to 39.6 percent; increasing the corporate tax rate from 21 percent to 28 percent; doubling the capital gains tax rate from 20 percent to 39.6 percent and imposing a new wealth tax on unrealized gains; increasing the Medicare tax rate on earned and unearned income above $400,000 from 3.8 percent to 5 percent; and expanding the Net Investment Income Tax (NIIT) to include the active income of pass-through business owners and raise the rate from 3.8 percent to 5 percent.”

The budget proposal comes as Congress faces a looming debt ceiling deadline. Lawmakers have to raise the debt ceiling or default on U.S. debt obligations, an unprecedented occurrence that would send shockwaves through the global economy. Republicans want to use the coming cliff to negotiate, but Biden has said he will not negotiate.

Republicans also leveled criticism at Biden’s budget, suggesting the debt ceiling battle won’t be easy.

“President Biden just delivered his budget to Congress, and it is completely unserious,” said House Speaker Kevin McCarthy, R-Calif. “He proposes trillions in new taxes that you and your family will pay directly or through higher costs. Mr. President: Washington has a spending problem, not a revenue problem.”

Democrats defended the budget, pointing again to the reduced deficits and a range of spending proposals to help Americans.

“The Biden budget plan protects Social Security, strengthens Medicare and invests in our children,” said House Minority Leader Rep. Hakeem Jeffries, D-N.Y.

*****
This article was published by The Center Square and is reproduced with permission.