Nassim Taleb: Ben Bernanke Does Not Understand Risk!
To understand the basic problems, the moral and economic issues, of continuous QE policies and currency debasement, watch this YouTube interview with Nassim Taleb on Bloomberg TV. He compares the FED’s policy very visually with a ketchup bottle that you shake and shake. Nothing comes out at first. It’s ‘risk-free’. So you shake harder, when suddenly the ketchup splashes out, across your plate, your table, and you’re your face…
Ben Bernanke and the FED do not understand risk! Or, worded differently, they are not telling the truth about the risks such policies entail. Moreover, those who are benefitting from the FED’s policies and who are enriched by their ‘quasi-risk-free’ financial maneuvers will not be punished for the risk-taking if things go wrong. It will be the savers, the retirees, and future generations shackled by excessive debt and financial waste.
The Knock-Out Punch: Has America Turned to Socialism
From the Spellman Report: In the days following the election there was a numbing silence. It was as if the body politic was dazed by a heavyweight champion’s blow to the head. It staggered and sought clarity to understand what is to become of our future. Even the 24/7 financial market/economic blogosphere went silent in contemplation. If there were any doubts, as the first order of business by Friday of election week, the president asserted that the election was a referendum revealing that Americans want taxes to increase for the wealthiest citizens but not anyone below the $250,000 income level. In his words, “Nobody — not Republicans, not Democrats — wants taxes to go up for folks making under $250,000,” he proclaimed. The definition of the bad guys has hardened.
While a very good case can be made for all taxpayers to pay more, apparently the imperative to redistribute income was more important than the goal of growing jobs and the economy or containing the fiscal deficits.
Real Treasury Yields Lower Than Inflation Rate
Lower yields – higher inflation. Some call it Financial Repression… Investors in Treasury securities will have to get used to yields lower than the U.S. inflation rate, according to Andrew Garthwaite, a global strategist at Credit Suisse Group AG.
The real yield on 10-year notes is less than zero for the second consecutive year. That hasn’t occurred since the 1970s, according to data compiled by Yale University Professor Robert J. Shiller. The real yield is calculated by subtracting the 12-month percentage change in consumer prices from the notes’ yield.
To reduce the ratio of government debt to gross domestic product and to bolster employment, the U.S. and other developed countries need to bring down real yields to minus 1.5 percent to minus 2 percent, the report said. Federal Reserve policy makers indeed decided to hold down their main interest rate as long as unemployment exceeds 6.5 percent and projected inflation is less than 2.5 percent.
The decision bodes well for stocks and points toward faster (nominal) GDP growth or accelerating inflation. The latter should raise your attention: Higher inflation expectations are risky in this debt trap territory. At some point, higher inflation expectations will make it difficult to keep interest rates low. That is when solvency issues turn into liquidity issues very rapidly.
World’s Biggest Economies to Hit “Stall Speed” in 2013
According to the OECD think-tank, global growth will be hampered next year by a slowdown in the world’s largest economies, including the U.S. economy. Global growth will slow to 1.3 percent to 1.8 percent from about 2 percent this year as the private sector isn’t healthy enough to step in and extend credit amid deleveraging. The term “stall speed”, a term used more frequently since 2010 when the global economies’ recovery from the crash began to cool down, has been getting good usage as of late. Last week, representatives of PIMCO used the term, and the concept popped up again in a Bloomberg interview as well. We continue to refer to our big picture “muddle through” scenario: the Reflationary Debt Trap.
More Monetary Easing in Japan
It hasn’t work so far, so why should it work now? Japanese opposition leader Shinzo Abe, in any case, intends on boosting the Japanese economy with unlimited monetary easing. Abe is pressing for more action to end deflation and boost an economy that is in its third recession in five years, including urging a 2 percent inflation target, up from the central bank’s existing 1 percent goal. JPMorgan Chase & Co. forecasts a 10 trillion yen ($119 billion) expansion of the Bank of Japan’s asset-purchase program at a meeting that ends on Dec. 20, four days after the election. It looks like Mr. Abe will get what he wants. We don’t expect this to help Japan find more solid footing any time soon.
Movement Seen in ‘Fiscal Cliff’ Talks
And the bazaar goes on. According to latest “cliff rumors”, the White House and congressional Republicans are a long way from agreeing on a plan to deal with the “fiscal cliff”. But it seems like some progress is being made.
House Speaker, John Boehner, is offering $1 trillion in higher tax revenue over 10 years and an increase in the top tax rate on people making more than $1 million a year. He’s also offering a large enough extension in the government’s borrowing cap to fund the government for one year before the issue must be revisited — conditioned on President Barack Obama agreeing to the $1 trillion in cuts. The additional revenue required to meet the $1 trillion target would be collected through a rewrite of the tax code next year and by slowing the inflation adjustments made to tax brackets.
In return, Boehner is asking for $1 trillion in spending cuts from government benefit programs like Medicare. Those cuts would defer most of a painful set of across-the-board spending cuts set to slash many domestic programs and the Pentagon budget by 8-9 percent, starting in January.
And the game goes on…
The December 21st End of the World Scenario