Mish's Global Economic Trend Analysis |
- Sisyphean Fed Struggle to Create Inflation; Faber on Gross' Deflation Theory, Japan's Bond Ponzi Scheme, and Gold
- 166 Local Tax Increase Proposals on California Ballots; Not For the Kids
- Cameron's Lies Reach "Point of No Return" Warning From Merkel; Chameleon Politics
| Posted: 03 Nov 2014 05:20 PM PST Sisyphean Fed Struggle Earlier today in The Trouble with Porosity and Prosperity Bill Gross mentioned the possibility of deflation in the US and spoke of the Fed's Sisyphean struggle to create inflation. Before the advent of central banks in the early 20th century, prices were just as likely to go up as down. The world of the 1930s and the more recent lost decades of Japan give testament. Prices change – and while they usually go up these days, sometimes they do not. We are at such a moment of uncertainty.Faber on Gross' Deflation Theory and Japan's Bond Ponzi Scheme In a Bloomberg TV interview, Trish Regan asked Marc Faber about Gross' deflation theory. Faber also discussed Japan's latest QE endeavor. Faber stated: Japan is Engaged in a Ponzi Scheme. Click on link to watch video. Transcript TRISH REGAN: Hello, Marc. Always good to see you. What do you think here about what Bill Gross is saying? Do you think in fact deflation is a real possibility. MARC FABER: Well, I think the concept of inflation and deflation is frequently misunderstood because in some sectors of the economy you can have inflation and in some sectors deflation. But if the investment implication of Bill Gross is that – and he's a friend of mine. I have high regard for him. If the implication is that one should be long US treasuries, to some extent I agree. The return on 10-year notes will be miserable, 2.35 percent for the next 10 years if you hold them to maturity in each of the next 10 years. However, if you compare that to French government bonds yielding today 1.21 percent, I think that's quite a good deal, or Japanese bonds, a country that is engaged in a Ponzi scheme, bankrupt, they have government bond yields yielding 0.43 percent. Well I think they're engaged in a Ponzi scheme in the sense that all the government bonds that the Treasury issues are being bought by the Bank of Japan. REGAN: So Japan's engaged in a Ponzi scheme. What about the US? We've done our share of money printing. We've had record low interest rates for six years. FABER: I think the good news is – for Japan is that most countries are engaged in a Ponzi scheme and it will not end well. But as Carlo Ponzi proved, it can take a long time until the whole system collapses. Faber on Gold Here are a few excerpts courtesy of Bloomberg that did not appear in the above video. REGAN: I know you have been bullish in gold for – well, pretty much forever, Marc. But now we're in a situation where gold is at a four-year low. Goldman now predicting 10, 15 down [percent]. Soc Gen saying $1,000. Where do you see gold finishing the year? FABER: I would say Goldman Sachs is very good at predicting lower prices when they want to buy something. I would say, yes, we are down from $1,900 to $1,160 or something like this, and it's been a miserable performance since 2011. However, from the 1990 lows we're still up more than four times. So I just looked at performance tables over 10 years and 15 years. Gold hasn't done that badly, has done actually better than stocks. Now I personally, I think that we may still go lower. It's possible. I'm not a prophet, but I'm telling you I want to own some gold because I don't trust the financial system anymore. I think the whole thing is going to collapse one day and then I'll be happy to have some assets. But of course the custody is important. I wouldn't hold my gold at the Federal Reserve because they will lend it out. I wouldn't hold my gold in the US at all. REGAN: Okay. So you want gold even at these levels. Where do you see – you still see it going lower however as we close out the year? FABER: I don't know whether it will go lower, but I think by the time I die, it will be meaningfully higher. I'm now 68 and I don't think it will be 100 [I will die at 100]. I'm not that optimistic. Mish Comments on Gross' Deflation Theory Gross and Faber are primarily talking about prices (price inflation and deflation, not monetary inflation and deflation. However, Gross mixes the two when he discusses printing presses and credit math. Nonetheless, Gross' context is clear. I run into this myself and dislike having to write "price", "monetary", or "credit" in front of every inflation or deflation reference when context should make it clear. Good Deflation vs. Bad Deflation Bill Gross says "Deflation is no longer acceptable." I suggest, ordinary consumer price deflation will not hurt banks one bit. The problem for the Fed is not price deflation, but asset-price deflation. Gross should be able to figure this out. Interestingly, Gross even spoke of "good deflation with output rising by 2% to 3% from 1873 to 1893." The truth of the matter is falling consumer prices never have and never will hurt banks. The alleged "bad deflation" which Gross did not mention is in regards to falling asset prices. If banks extend loans on houses or other investment property, and the loans go sour, banks become capital impaired, unable or unwilling to lend. The irony is the Fed (central banks in general), cause asset price inflation (followed by deflationary asset price busts), when they attempt to create 2% inflation willy-nilly as if consumer price deflation is bad. "Bad Deflation" Doesn't Really Exist Actually, there is no such thing as "bad deflation". All deflation is inherently good. Deflation is the natural state of affairs as a result of rising productivity and technological advancements. Falling prices means more affordability for more people. Deflation only seems bad when banks make poor lending decisions on risky assets, then become capital impaired when the loans go bad. Why does that happen? Easy ... The Fed has created a moral hazard. Banks believe the central bank will always bail them out if they get in trouble. And so far they have. So banks keep making risky loans, and investors keep plowing into riskier and riskier assets. Bubbles of Increasing Amplitude Via the moral hazard of bailouts, the Fed sponsors bubbles and crashes of increasing amplitude over time. But the biggest bubble of all is belief central banks will always be able to handle these busts. Gross needs to replace "simple math" with "exponential math" coupled with the fact central banks can (for a while) target prices in general, but they cannot target wages or the prices they want. Back to the Drawing Board The Fed expanded money supply by $4 trillion dollars and the CPI is up less than 2%! What's the Fed going to do for an encore when the global economy slumps, US jobs with it, and prices of goods services, and assets sink? Expand money supply by $8 trillion? $16 trillion? $32 trillion? Buy equities? Buy more than 100% of debt issuance like Japan? How nuts does it get? Gross concludes with "The real economy needs money printing". I suggest Gross go back to the drawing board and come up with a different answer. Suggested Reading for Bill Gross
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| 166 Local Tax Increase Proposals on California Ballots; Not For the Kids Posted: 03 Nov 2014 11:17 AM PST There are 166 tax increase proposals on the ballot in California. 118 of them are bond proposals. It matters little what the proposals are for. Forget about any claim, "it's for the kids". Politicians have a way of doing whatever they want with the money once the tax hikes pass. Ed Ring writing for Union Watch notes new tax revenue is in too many cases, suspiciously equal to the amount that pension contributions need to be raised in the next few years. But wait, doesn't money have to be spent on what the bond proposal says it's for? If you think so, please consider this guest post by Ed Ring. Note: everything that follows until the last line is from Ring. California's $12.3 Billion in Proposed School Bonds: Borrowing vs. Reform "As the result of California Courts refusing to uphold the language of the High Speed Rail bonds, the opponents of any bond proposal, at either the state or local level, need only point to High-Speed Rail to remind voters that promises in a voter approved bond proposal are meaningless and unenforceable." Jon Coupal, October 26, 2014, HJTA California Commentary If that isn't plain enough – here's a restatement: California's politicians can ask voters to approve bonds, announcing the funds will be used for a specific purpose, then they can turn around and do anything they want with the money. And while there's been a lot of coverage and debate over big statewide bond votes, the real money is in the countless local bond issues that collectively now encumber California's taxpayers with well over $250 billion in debt. Over the past few weeks we've tried to point out that local tax increases – 166 of them on the November 4th ballot at last count, tend to be calibrated to raise an amount of new tax revenue that, in too many cases, are suspiciously equal to the amount that pension contributions are going to be raised over the next few years. For three detailed examples of how local tax increases will roughly equal the impending increases to required pension contributions, read about Stanton, Palo Alto, and Watsonville's local tax proposals. It is impossible to analyze them all. As taxes increase, money remains fungible. More money, more options. They can say it's for anything they want. And apparently, bonds are no better. At last count, there are 118 local bond measures on the November ballot. And not including three school districts in Fresno County for which the researchers at CalTax are "awaiting more information," these bonds, collectively, propose $12.4 billion in new debt for California taxpayers. All but six of these bond proposals (representing $112 million) are for schools. Refer to the list from CalTax to read a summary of what each of these bonds are for – "school improvements," "replace leaky roofs," "repair restrooms," "repair gas/sewer lines," "upgrade wiring," "renovate classrooms," "make repairs." To be fair, there are plenty of examples of new capital investment, "construct a new high school," for example, but they represent a small fraction of the stated intents. On November 4th, Californians are being asked to borrow another $12.3 billion to shore up their public school system. They are being asked to pile another $12.3 billion onto over $250 billion of existing local government debt, along with additional hundreds of billions in unfunded retirement obligations for state and local government workers. They are being asked to borrow another $12.3 billion in order to do deferred maintenance. We are borrowing money to fix leaky roofs and repair restrooms and sewers. This is a scandal, because for the past 2-3 decades, California's educational system has been run for the benefit of unionized educators and unionized construction contractors who work in league with financial firms whose sales tactics and terms of lending would make sharks on Wall Street blush. These special interests have wasted taxpayers money and wasted the educations of millions of children. Their solution? Ask for more money. Nobody should suggest that California's public schools don't require investment and upgrades. But before borrowing more money on the shoulders of taxpayers, why aren't alternatives considered? Why aren't educators clamoring for reforms that would cut back on the ratio of administrators to teachers? Why aren't they admitting that project labor agreements raise the cost to taxpayers for all capital investments and upgrades, and doing something about it? If their primary motivation is the interests of students, why aren't they supporting the Vergara ruling that, if enforced, will improve the quality of teachers in the classroom at no additional cost? Why aren't they embracing charter schools, institutions whose survival is tied to their ability to produce superior educational outcomes for far less money? Why don't they question more of these "upgrade" projects? Is it absolutely necessary to carpet every field in artificial turf, a solution that is not only expensive but causes far more injuries to student athletes? Is it necessary to spend tens of millions per school on solar power systems? Does every high school really need a new theater, or science lab? Or do they just need fewer administrators, and better teachers? And to acknowledge the biggest, sickest elephant in the room – that massive, teetering colossus called CalSTRS, should teachers, who only spend 180 days per year actually teaching, really be entitled to pensions that equal 75% of their final salary after only 30 years, in exchange for salary withholding that barely exceeds what private employees pay into Social Security? Thanks to unreformed pensions, how many billions in school maintenance money ended up getting invested by CalSTRS in Mumbai, Shanghai, Jakarta, or other business-friendly regions? How much money would be saved if all these tough reforms were enacted? More importantly, how much would we improve the ability of our public schools to educate the next generation of Californians? Would we still have to borrow another $12.3 billion? Here's an excerpt from an online post promoting one of California's local school bond measures: "It will help student academic performance, along with ensuring our property values. If you believe that strong schools and strong communities go hand in hand, please vote…" Unfortunately, such promises are meaningless and unenforceable. The debt is forever. Ed Ring is the executive director of the California Policy Center. End Guest Post I will have some comments on the Illinois Gubernatorial election later this week. Real Clear Politics has Governor Pat Quinn in a slight lead over Republican challenger Bruce Rauner. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Cameron's Lies Reach "Point of No Return" Warning From Merkel; Chameleon Politics Posted: 03 Nov 2014 10:12 AM PST Hot Water Over Lies UK Prime Minister David Cameron is in increasingly hot water on a number of fronts as his lies become more and more transparent. Cameron has pledged to hold an up-down referendum on UK exit from the EU but only on the condition he wins the next election and even then, only on his promise that he can get an overhaul of EU rules for benefit of the UK. Promise or a lie? I suggest the latter. "Point of No Return" Warning From Merkel And without using the word lie, German Chancellor Angela Merkel warned UK could leave EU if David Cameron insists on migrant quotas. Germany would be prepared to accept that Britain will have to leave the European Union if David Cameron insists on restricting the number of immigrants from the bloc who can live and work in the UK.What's Next for Cameron? Inquiring minds may be asking "What's Cameron's Next Move?" The answer is the same as always: Lie. Cameron the Chameleon Right, wrong, or indifferent, Cameron will give into Merkel without admitting it. No lie is too great if he thinks it will help keep him in office. Cameron is a chameleon who wants to appease UKIP, appease the greens, appease Labour, appease the Liberal Democrats, appease the Tories, appease Scotland, appease your aunt Martha and my uncle Ben. If he had an ounce of integrity he would hold that up-down vote now. But he won't. Instead, look for creative excuses, more wishy-washy statements, and above all, more lies disguised as promises. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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