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Our monetary system is insane

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For years critics of U.S. central-bank policy have been dismissed as Negative Nellies, but the ugly truth is staring us in the face: Stock-market advances remain a game of artificial liquidity and central-bank jawboning, not organic growth. And now the jig is up.
...
What’s the larger message here? Free-market price discovery would require a full accounting of market bubbles and the realities of structural problems, which remain unresolved. Central banks exist to prevent the consequences of excess to come to fruition and give license to politicians to avoid addressing structural problems. And by preventing these market forces from playing out at each sign of trouble, the can gets kicked further and further down the road. Each successive recovery keeps the illusion alive, but “accommodation” requires ever-lower rates before the monsters return. In the meantime, debt keeps expanding, while each recovery produces less and less organically driven growth, and ever-higher wealth inequality. This is what this system produces.
...

https://www.marketwatch.com/story/stock-market-investors-its-time-to-hear-the-ugly-truth-2019-01-05

Reality is going be a real bitch when the music stops.

 

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Fun fact-80% of Americans think China and/or Japan are the largest holders of our treasury paper.  I wish that were the case.  MMT doesn't believe in owing on debt.  

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27 minutes ago, Lobo said:

Fun fact-80% of Americans think China and/or Japan are the largest holders of our treasury paper.  I wish that were the case.  MMT doesn't believe in owing on debt.  

Are China and Japan not the largest holder (by far) of our debt? What am I missing here? 

http://ticdata.treasury.gov/Publish/mfh.txt

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1 minute ago, Lagunamadre said:

Are China and Japan not the largest holder (by far) of our debt? What am I missing here? 

http://ticdata.treasury.gov/Publish/mfh.txt

They are the largest holders of U.S. debt by foreign governments, but foreign governments and investors only hold about 42% of our national debt. The rest is held by the government itself and domestic investors.

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1 hour ago, David Dennison said:

They are the largest holders of U.S. debt by foreign governments, but foreign governments and investors only hold about 42% of our national debt. The rest is held by the government itself and domestic investors.

Ahh. Gotcha. Was thinking along the lines are largest foreign holders. 

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They are the largest holders of U.S. debt by foreign governments, but foreign governments and investors only hold about 42% of our national debt. The rest is held by the government itself and domestic investors.
That's at least 58% I would wipe off the books. You just write it off Jerry.

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The dollar's reserve currency status makes for a whole world of opportunities, in terms of money supply manageent choices, that would not be tolerated for a "normal" currency.  The music will surely stop as the day approaches when competitive reserve currencies emerge, which will surely then mean usurping reserve currencies.  Then the US population (all dollar holders) will be in for some rude awakening.

This type of future risk has been talked a about for a long time, but the competitive currencies have been slow to emerge.  The RMB looks to now be the sure pack leader.

What should a person with a multi decade investement perspective do?

 

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20 minutes ago, DaysOff said:
1 hour ago, David Dennison said:
They are the largest holders of U.S. debt by foreign governments, but foreign governments and investors only hold about 42% of our national debt. The rest is held by the government itself and domestic investors.

That's at least 58% I would wipe off the books. You just write it off Jerry.

Why write it off when you can easily make your debt service payments? That serves no purpose.

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5 minutes ago, NBMisha said:

The dollar's reserve currency status makes for a whole world of opportunities, in terms of money supply manageent choices, that would not be tolerated for a "normal" currency.  The music will surely stop as the day approaches when competitive reserve currencies emerge, which will surely then mean usurping reserve currencies.  Then the US population (all dollar holders) will be in for some rude awakening.

This type of future risk has been talked a about for a long time, but the competitive currencies have been slow to emerge.  The RMB looks to now be the sure pack leader.

What should a person with a multi decade investement perspective do?

 

Not enough people understand how important us being the reserve currency is to our current economy and our debt laden government.  I have often felt that none of the social issues or current banshee screaming issue driven loons will bring us to our knees, but rather a combination of:  1)us not being the reserve currency (watch as oil trades in other currencies/barter), 2) our total public and private debt and the interest paid, and then 3) the pension/SS and health care promises.  These three will eventually take us down (or might be in the process of right now).  What is the  saying...A fiat currency works until it doesn't.  And also remember, that all fiat currencies thru history have eventually failed.

 

PS;  Sometimes, if you sit and think about it, how exactly does one get away with charging interest on a fiat currency?  With a system of fractional reserve banking/a central bank, and a fiat currency, and with a high debt driven economy, it's almost like all a bank charter is now is a license to print money.

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Just now, Whitman said:

Not enough people understand how important us being the reserve currency is to our current economy and our debt laden government.  I have often felt that none of the social issues or current banshee screaming issue driven loons will bring us to our knees, but rather a combination of:  1)us not being the reserve currency (watch as oil trades in other currencies/barter), 2) our total public and private debt and the interest paid, and then 3) the pension/SS and health care promises.  These three will eventually take us down (or might be in the process of right now).  What is the  saying...A fiat currency works until it doesn't.  And also remember, that all fiat currencies thru history have eventually failed.

 

PS;  Sometimes, if you sit and think about it, how exactly does one get away with charging interest on a fiat currency?  With a system of fractional reserve banking/a central bank, and a fiat currency, and with a high debt driven economy, it's almost like all a bank charter is now is a license to print money.

They get away with it because it's legal and because people don't make enough money to afford the American Dream without them.

It's all by design.

 

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14 minutes ago, NBMisha said:

The dollar's reserve currency status makes for a whole world of opportunities, in terms of money supply manageent choices, that would not be tolerated for a "normal" currency.  The music will surely stop as the day approaches when competitive reserve currencies emerge, which will surely then mean usurping reserve currencies.  Then the US population (all dollar holders) will be in for some rude awakening.

This type of future risk has been talked a about for a long time, but the competitive currencies have been slow to emerge.  The RMB looks to now be the sure pack leader.

What should a person with a multi decade investement perspective do?

 

This is my basic view of the situation too.  I think there is definitely pain to come, but I don't know what the safe havens will be.  Land?  Food?  Ammo?

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6 minutes ago, The Royal We said:

This is my basic view of the situation too.  I think there is definitely pain to come, but I don't know what the safe havens will be.  Land?  Food?  Ammo?

I would think that the safe (ish) haven will be minimal-to-no debt so that you don't have to worry about servicing it.  It is interesting to read the guesses on inflation vs deflation if things seize up.  I would think the logical thing would be a mixture (I've heard it called biflation but there might be a better term) where things that are typically bought with debt will drop in price, whereas other things like consumables, etc., will rise.  

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13 minutes ago, The Royal We said:

This is my basic view of the situation too.  I think there is definitely pain to come, but I don't know what the safe havens will be.  Land?  Food?  Ammo?

If you own unencumbered real property, you're golden.

Assuming you can pay your property taxes.

Edited by David Dennison

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That's what I've been leaning towards.  How do y'all think other income producing assets would hold up - rent houses, storage units, mineral ownership, etc?  I could see rent houses being a double edged sword - inflation would make it harder for people to buy and keep their homes, but it would also hinder their ability to pay their rent.  Same goes for storage units, but at least you would own their junk when/if they stopped paying their bills.

I like the idea of owning land with timber and mineral rights, but that's obviously a very cash intensive prospect with slower returns.

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6 minutes ago, David Dennison said:

If you own unencumbered real property, you're golden.

Assuming you can pay your property taxes.

If we are looking at total financial collapse then only certain property will be safe and only for a certain amount of time.  In my opinion a total financial collapse will have the look that Whitman suggested.  In that scenario we are also looking at total government collapse or government reformation in the eye of our creditor.  If that happens to be communist China then properties rich in resources (oil) are likely to be very risky because as we have seen over and over, the first thing to happen when a government goes poor is the resources are repatriated.  Luckily, the US has a shitload of square miles and the common citizen probably won't lose their home but you texas boys living off of mineral royalties are likely to see a drop in income.

Not that I have a nest egg but, if I were to have $100M I would probably put about 30-40% of it in foreign currencies.  I wouldn't hold US dollar because holding US securities is the same thing.  I'd hold RMB, Indian Ruppees, and maybe even the russian ruble.  Chinese and Russian because I believe that if the US fails to exist in its current state then those two countries would benefit and still exist.  Ruppees because on the whole it is a reasonably stable currency with a population that is so vast turning it upside down would cause more problems for the aggressor than it would value for them.  If the US goes down then I don't want shit to do with Europe.  They have worse cultural and financial issues than we do and they aren't isolated like we are so they will have a tougher time fixing their problems.

From there I would also look at foreign real estate in isolated areas that are relatively easy to get to and aren't a "target" by other nations.  Caribbean nations would probably be my direction.  I would also hold very liquid securities that I can jump out of quickly, mostly in the form of options.  For little exposure I can play the game and infuse the position with cash if there is a great earning opportunity, but I still hold cash if not.  I'd also stock gold and silver.

**Please note, this isn't for growth in my portfolio, this would be for safety.  I count on my investment in my career for the growth and would only put about 35-40% of my portfolio toward securities.

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Gas & Oil folks would feel good in their real asset holdings, even with future-looking minerals and/or non-op working interests.  

However, we'd be wise to remember that a wonderful part of being the reserve currency is that all Crude, Brent and WTI all, is traded in U.S. Dollars.  A pro now.  A con later.  

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Not if we went broke because of a system meltdown they wouldn't.  The first thing broke countries do is take the oil rights from the owners.  I doubt lease bonuses and royalties would be preserved.  If the countries that were left standing after our collapse had their say the first thing they would do is deplete our assets as much as possible.  At that point it would become about long term control and not about ROI.  When the bank comes calling you only have so much time to pick and choose where the money comes from before they start dictating where it comes from.  Just like a public company, the citizens are the shareholder of the government.  China, or whoever it is, wouldn't care that they are forcing something down the throats of the citizenry.  They would say "you shouldn't have elected those leaders to lose all of your assets" and then they would do everything in their power to force the repayment on us, and they would be well within their rights to based on how the rules are, and would be, written.

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41 minutes ago, Lobo said:

Gas & Oil folks would feel good in their real asset holdings, even with future-looking minerals and/or non-op working interests.  

However, we'd be wise to remember that a wonderful part of being the reserve currency is that all Crude, Brent and WTI all, is traded in U.S. Dollars.  A pro now.  A con later.  

only matters if the traders hold onto those dollars at all times.  i don't know if they do or not.   the reserve part of being "reserve currency" means that foreign governments are holding dollars and those aren't coming back to the US in a short time window.  if traders are buying dollars to settle the crude sale, but then those dollars are put back onto the forex market shortly, then they're not reserve.

Edited by elfenix

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I know there's a lot of nuance to it, but just one of those things that could go from being a tremendous advantage to a complete shitshow in a handful of scenarios.  Not at all suggesting any of them happen, but the rapidity with which a commodity market as global as crude could help tank our currency is worth a consideration.  Say what you want about real estate backed crisis, they take a few months to unfold.  Just a tangent, obviously several dominos would have to align to make the tradeable crude in USD become a liability.  But hey, a world where your leverage table commands 40% commodity hedge would one day command a 40% currency hedge as well.  And that's when the small Asians come in with their fancy maths and electric cars.  

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Something I read a few weeks ago.  https://usafacts.org/reports/annual/2018

Steve Balmer (yeah th emicrosoft guy) put together a 10-k and annual report for the USA.  Very interesting and very informative.  Shows where we have liabilities and for those who read this kind of stuff it can give great contributions to the discussion.

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37 minutes ago, Lobo said:

I know there's a lot of nuance to it, but just one of those things that could go from being a tremendous advantage to a complete shitshow in a handful of scenarios.  Not at all suggesting any of them happen, but the rapidity with which a commodity market as global as crude could help tank our currency is worth a consideration.  Say what you want about real estate backed crisis, they take a few months to unfold.  Just a tangent, obviously several dominos would have to align to make the tradeable crude in USD become a liability.  But hey, a world where your leverage table commands 40% commodity hedge would one day command a 40% currency hedge as well.  And that's when the small Asians come in with their fancy maths and electric cars.  

remember the old saying about owing the bank $1,000 vs. owing the bank $100,000,000?  there's a whole lot of inertia against the dollar unwinding.  china sent us stuff for little bits of paper with no inherent worth.  so did the saudis, the germans, and whoever else.  foreign central banks have a lot of reasons to defend the dollar.  the US is, essentially, the beneficiary of the biggest moral hazard the world has ever seen.

Edited by elfenix

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Very true.  You gotta admit, FDR saw more of the future than any U.S. president ever will.  From Pearl Harbor, the military-industrial complex, the fight against communism right after WWII, Bretton-Woods/reserve currency, the Marshall Plan, The Manhattan Project, staging our military overseas---permanently as a form of tacit empire building, etc.  A despot in a wheelchair isn't a dictator---he's called a visionary.  And we benefit from his long game even still...

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15 minutes ago, Lobo said:

Very true.  You gotta admit, FDR saw more of the future than any U.S. president ever will.  From Pearl Harbor, the military-industrial complex, the fight against communism right after WWII, Bretton-Woods/reserve currency, the Marshall Plan, The Manhattan Project, staging our military overseas---permanently as a form of tacit empire building, etc.  A despot in a wheelchair isn't a dictator---he's called a visionary.  And we benefit from his long game even still...

Aside from the founding fathers, FDR is probably the only politician who was able to scheme more than 20 years out in front of his own tenure in government.  What is amazing, and inspiring from a business owner standpoint, is the foundation he created (even if you don't agree with much of it) in the time he created it.  He got the ball far enough down the road that there was no turning back and we haven't turned back since.  A watershed era that set the USA on the path that it now cannot get off of.  Saved our assess then, maybe have torched our future, but amazing none the less.

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15 hours ago, elfenix said:

... foreign central banks have a lot of reasons to defend the dollar.  ...

Unfortunately there are also a lot of reasons that foreign central banks are looking for an alternative.

Quote

The U.S. dollar’s share of currency reserves reported to the International Monetary Fund fell in the third quarter to a near five-year low, while the euro’s share of reserves grew to its largest in almost four years, data released on Friday showed.
...

https://in.reuters.com/article/forex-reserves/us-dollar-share-of-global-currency-reserves-hits-near-5-year-low-imf-idINKCN1OR1DO

From October:

Quote

Central banks are set to increase their purchases of gold in 2018 for the first time in five years as eastern European and Asian countries seek to diversify their reserves.

Net purchases of gold by central banks are forecast to rise to 450 metric tons this year, up from 375 tons in 2017, according to consultancy Metals Focus Ltd. That will be the first increase since 2013, when banks boosted their holdings by 646 tons, the most for several decades.

With just over two months of the year left, it’s more likely that the projection will be raised than lowered because central banks generally seem interested in purchases, according to Junlu Liang, a senior analyst at London-based Metals Focus.
...

https://www.bloomberg.com/news/articles/2018-10-24/central-banks-to-increase-gold-buying-for-first-time-since-2013

US sanctions on Iran are pushing much of the world to develop a payment mechanism alternative to the dollar/SWIFT.  Europe is still trying to figure out how to get their "Special Purpose Vehicle" working, but Russia is pushing oil trade in Euros, Turkey has said it won't play ball with the sanctions (and has acted as a intermediary in the past in oil for gold trades with Iran), and India has started trading with Iran for oil in Rupees.

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India from Iran in Rupees is the most staggering news out of everything that's happening globally in the last month.  The ramifications of that (should it continue to grow) is beyond anything else we're mumbling about in the U.S. finance community.  

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3 hours ago, bernorange said:

Unfortunately there are also a lot of reasons that foreign central banks are looking for an alternative.

that's different than a fast unwind, which was what lobo had postulated. 

3 hours ago, bernorange said:

US sanctions on Iran are pushing much of the world to develop a payment mechanism alternative to the dollar/SWIFT.  Europe is still trying to figure out how to get their "Special Purpose Vehicle" working, but Russia is pushing oil trade in Euros, Turkey has said it won't play ball with the sanctions (and has acted as a intermediary in the past in oil for gold trades with Iran), and India has started trading with Iran for oil in Rupees.

russia isn't a significant holder of US debt, neither is iran.  india holds about 2.2% of US debt. 

the big holders are china and japan with a bullet. they buy US debt because they want to sell us things.  we give their companies dollars, and the companies have to offload the dollars because the companies buy things in RMB and yen, so the central banks buy the dollars and use the dollars to buy US assets.  when china and japan don't want to sell anything to us anymore, then we may have a problem (though, again, they don't want a fast unwind because all those bit of paper have no inherent value).

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There is an endpoint.  China is the long game player, and will have the world's dominant economy.  At a certain stage of their economy maturing wrt internal consumption (not so far off), they will target winning as having the RC privelege.  If they see that goal, they will achieve that goal.  They have the only path to it.  The US has no path to stop it.

That means long term serious erosion of USD.  But does it mean RMB is the safe haven?

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@elfenix - yes, what you said is true, but I didn't mention the oil trade issues to specifically highlight Russia & Iran.  It's more about global support for the petrodollar.  If Europe can trade for oil in Euros (whether they develop that SPV or not), it's going to be significant.  It kind of highlights the issue with US-Saudi relationship and Khashoggi/MBS.  We need Saudi/OPEC to keep trading oil in dollars.  If they switched to Euros, it would be bad for us.  Every nation that stops trading for oil in dollars reduces global demand for dollars whether they are using them directly in trade (or investment) with us or using them to trade with other global partners.

Regardless, the fiat money system is insane and one day the debt bubble will burst.

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16 minutes ago, bernorange said:

@elfenix - yes, what you said is true, but I didn't mention the oil trade issues to specifically highlight Russia & Iran.  It's more about global support for the petrodollar.  If Europe can trade for oil in Euros (whether they develop that SPV or not), it's going to be significant.  It kind of highlights the issue with US-Saudi relationship and Khashoggi/MBS.  We need Saudi/OPEC to keep trading oil in dollars.  If they switched to Euros, it would be bad for us.  Every nation that stops trading for oil in dollars reduces global demand for dollars whether they are using them directly in trade (or investment) with us or using them to trade with other global partners.

Regardless, the fiat money system is insane and one day the debt bubble will burst.

The debt bubble will only burst in a meaningful way when the United States can no longer service its debt. 

 

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21 minutes ago, bernorange said:

Regardless, the fiat money system is insane and one day the debt bubble will burst.

this is nothing but supposition.  i'd rather not tie up useful materials if that's the alternative.  further, i'd rather the market decide what a currency is worth, rather than some arbitrary peg.

Edited by elfenix

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7 minutes ago, elfenix said:

this is nothing but supposition

are you saying bernorange should shove his money up his ass?

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On 1/10/2019 at 3:16 PM, Captainant said:

are you saying bernorange should shove his money up his ass?

That's the first place "they" will look!

~~~

Quote

Zimbabwe will introduce a new currency in the next 12 months, the country’s Finance Minister said, as a shortage of U.S. dollars plunges the financial system into disarray, forcing businesses to close and threatening unrest.

The southern African nation abandoned its own hyperinflation-wrecked currency in 2009 at the height of an economic recession, adopting the greenback and other currencies including sterling and the South African rand.

But without enough hard currency to back up the $10 billion of electronic funds trapped in local bank accounts, businesses and civil servants are demanding payment in cash which can be deposited and used to make payments both inside and outside the country.
...

More:  https://af.reuters.com/article/commoditiesNews/idAFL8N1ZC056

This is likely a microcosm of things to come on the global stage.

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I'll give Rep. Cotez credit.  MMT went from an easily dismissed fringe theory in economics, literally laughed at by Paul Krugman (I have the link)...but thanks to her and others like her, it's suddenly popping up in mainstream media (not just academic journals).  I realize some of you will say it's valid and has been in the forefront of economic debate for decades.  And I'll grant you that you and I may know a bit about it.  But it's literally in Parade magazine now, so don't be obtuse---it's got a new life.  

And the weird thing is, I'm not even vehemently opposed to it since our FDR-envisioned days as the reserve currency are already showing dents in the armor...I didn't think it'd last more than another quarter century anyway.  

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23 minutes ago, RDCanecutter said:

Dammit, I gave away most of my Mercury Dimes. How will I be able to barter when SHTF?

Blowjobs.

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1 hour ago, RDCanecutter said:

There's an answer. How much do you get for them?

I kept my dimes, so don't know and no need. 

 

PS:  NTTIAWWT

Edited by Whitman

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Quote

...
The Fed earns interest income on the huge pile of securities it holds. After covering operating expenses, interest expenses, and some other items, it is required to remit the rest to the Treasury Department – to the taxpayer.

Therefore, the amounts in interest expense the Fed pays the banks on their “Excess Reserves” and “Required Reserves” comes out of the taxpayer’s pocket and its transferred to the banks to become bank profits, and thereby bank executive bonuses and stock holder dividends, funded by the dear taxpayers. And this amount was huge in 2018: $38.5 billion!

Here is what the Fed reported: ...

More:  https://wolfstreet.com/2019/01/10/fed-paid-banks-38-5-billion-in-interest-on-reserves-in-2018-slickest-annual-wealth-transfer-from-taxpayers-to-banks/

Above article reminded me of The Narrow Bank (TNB) story.

Quote

... TNB's model is to take money from large corporations or money market funds, invest that money at the Fed as interest-paying reserves, and give as large an interest rate back to the depositors as possible. Well, that's what their model will be if their suit against the Fed winds through the US legal system before the next crash, which is unlikely. These customers can't get large enough insured deposits at regular banks; that TNB invests entirely in reserves makes it impossible for TNB to fail so its customers don't need insurance. TNB doesn't want to let you or me give them money because that opens them to an immense amount of costly regulation.

The puzzling question is, how can TNB make money at that? TNB takes money, invests it with the Fed, and the Fed in turn buys US treasuries. How is that better than TNB simply operating a money market mutual fund that invests directly in treasuries?

The answer is, that for most of the last decade, the Fed has paid more interest on reserves than comparable treasury rates. Yes, "money" pays higher interest than "bonds," an inversion of classic monetary theory. Since money is more liquid, how can this survive? The answer is, because only banks can access this kind of "money." TNB was going to upend that.

...

https://seekingalpha.com/article/4231618-selgin-ioer-tnb

Quote

... the decision not to give TNB a master account was clearly illegal. Unless Congress changes the statutory limitations on the Fed, it is likely that the courts will compel the Fed to provide TNB a master account, opening the door for them, and other similar banks, to further experiment. It’s quite possible that such a decision could force a massive change in the way the Fed influences monetary policy.

http://www.brownpoliticalreview.org/2018/12/well-intentioned-illegality-feds-decision-nix-narrow-bank/

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