"On the Edge of a Precipice"​ - A Challenging Decade is Upon Us

This is by far the best and most realistic outlook for the 2020s I have read during the holiday.
Well worth the time!

Submitted by Erico Matias Tavares  of Sinclair & Co.
 https://www.linkedin.com/pulse/edge-precipice-challenging-decade-upon-us-erico-matias-tavares/

While a decade is just an arbitrary measure of time, people often attribute certain emotional and cultural characteristics to it, such as the "roaring 20s" of the 20th century.

The 20s of the 21st century are promising to mark a defining period in world History, particularly for the West, as vital trends that have been developing for years are expected to accelerate and reach a tipping point. "Roaring" might not be the best description by the end of it.

Consider that at the very start of the decade the UK will no longer be part of the EU, itself a monumental change with deep social, economic and geopolitical consequences. The US and other major economies will face even more profound developments this decade.

The dominant context behind all this is what British historian C. Northcote Parkinson defined in the early 1960s as the great dynamo of History - the passing of the baton of global preeminence between East and West since historical records began.

Nobody knows what will happen 6 months from now, much less a decade, but recognizing the ascendancy of the East as a whole - and the evident decline of the West - can help pinpoint important trends and cycles that are likely to materialize in the near future. That ascendancy has started decades ago and will solidify in the short years ahead.

This is a humble "back of the envelope" attempt by the author to read some through important tea leaves, colored (as a disclaimer from the outset) by his rather pessimistic view of the prospects of his native West and by his admiration of the resilience of the East:

1. The productivity of debt in most major economies is already below 1, meaning that it takes several dollars in new debt to create a dollar of GDP. This is particularly the case with government debt, and consequently in order to sustain even meager economic growth debt loads as percentage of GDP will continue to growing strongly, following Japan's path;
2. This in turn means that interest rates can never be normalized, otherwise such debt loads would become immediately unsustainable. Financial repression will thus continue, likely even be expanded. Central banks will continue to monetize debts at unprecedented levels and even take on the role of steering industrial policy, a good example being the "green economy";
3. These actions by central banks have enabled Eurozone banks over the last decade to become liquid but not necessarily solvent, a situation exacerbated by negative interest rates and the flaws of and structural imbalances generated by the Euro. A quick look at the share price of Deutsche Bank, Germany's largest bank, clearly shows this;
4. Birth rates across the West will continue to fall further given a confluence of social and economic problems. Many Eastern countries are are wrestling with this problem, but the way Western elites are dealing with it are transforming its cyclical nature into a structural one, with deep generational consequences;
5. Related to that, the pension crisis will come to the forefront, with more Baby Boomers retiring (where possible) into pension plans that for the most part are underfunded, in many cases severely, despite record high asset prices;
6. Modern agriculture has been very successful in delivering calories, basically by converting copious amounts of fossil fuels into food, but rather less so in delivering nutrients. This is because it exhausts top soil and organic matter, critical to produce nutrient-dense foods. As such the health crisis will become worse as a depleted nutrition acts as a catalyst to major diseases;
7. All these factors will add more pressure for governments to take action, meaning that all those contingent liabilities will finally start materializing in budgets over the course of the decade - with a vengeance;
8. This situation is particularly serious in the US, where it is very possible that the government will lose control of its budget deficit at some point (if it hasn't already), especially given zero political will and capability to address this. One look at the Congressional Budget Office decadal projections should raise alarm, especially as no recession is expected, but no party seems to care;
9. Mass migration into the Western world will continue unabated driven by massive demographic imbalances between developed and developing countries, and Western elites seeking to maintain control by "dividing and conquering" their societies and absorbing the spoils into supranational compacts that they control;
10. Another thing which is unlikely to change is the US' foreign entanglements. Like with immigration and the budget deficit, no party has the will to do anything about it. Three dynamics make highly likely the emergence of a new, bigger conflict where the US will once again become involved this decade: (i) the military being spread all over the planet, raising the chances of some fire exchange with someone, even by accident, (ii) enormous military spending, already larger than several major countries combined, that keeps on growing, and (iii) America's enemies becoming more entrenched and determined in their quest to develop capabilities to seriously challenge its dominance (like Iran developing medium-range nukes this decade, along with others);
11. Automation, the replacement of humans with machines, will accelerate and start replacing enough jobs to generate even more income inequality between workers and capital owners, already a sensitive topic thanks to the monetary and fiscal policy imbalances of the last decade;
12. It is therefore inevitable that populism will continue to increase, both on the right and the left of the political spectrum. The hollowing out of the moderate center, tied to a neo-liberal model that is seriously sputtering, will prompt a major political and social polarization in many Western societies not seen since the 1930s;
13. The trend towards globalization will be impaired, despite the best efforts of supranational organizations like the UN to maintain the status quo. Major exporting economies like Germany will be disproportionately impacted, creating more tensions inside an already frail EU;
14. The political landscape will massively change in the US. The fragmentation of political views and aspirations already means that a two party-system is incapable of dealing with differing objectives inside their respective electorates. However, the emergence of new parties is severely limited by lack of access to funding necessary to win at the federal level, which means that democracy will suffer;
15. This loss of democracy is even more likely given the profound demographic change taking place in the US, where immigrants tend to vote overwhelmingly for the Democratic Party. As a result Texas and other states will likely swing Blue by the end of the decade, meaning that Republicans will be locked out of power for a generation+. Once again California led the way for the rest of the country, with an entrenched Democrat super-majority there. As democracy recedes, societal and ethnic conflict will gradually become mainstream;
16. What this really means is the beginning of the end for the great American experiment this decade, as its traditional institutions - including its Constitution - can no longer properly function under such conditions. This is hugely consequential for the world in terms of prosperity and freedoms;
17. One feature of diverse societies is that they are inherently unstable, meaning there's a far greater need for a government to mediate the interests and conflicts between different groups. Politicians will increasingly tighten their grip on society, aided by technology that will become even more intrusive. Silicon Valley and Washington DC will thus become even more intertwined;
18. Societal fragmentation will not be limited to the US, far from it. French President François Hollande warned in 2016 (after he left office, of course) that his country would eventually break apart. This may become a de facto reality in the 2020s as multiple societal, demographic and economic factors converge in French society. In fact the new decade was inaugurated with dozens of cars set on fire in Paris. These factors will also impact other European countries in similar ways, including Sweden, Belgium, even Germany;
19. The EU will become increasingly authoritarian to prevent more BREXITs and keep that political project going. Any dissent of its main guiding policies, from the environment to immigration, is already being stamped out under the guise of "hate speech". It will only get worse from here. A draconian social credit system similar to what China is developing might be in place by the end of the decade. It seems inevitable that the political make-up of the EU and several of its members will be radically different by the end of the decade compared to today;
20. BREXIT might have been a fantastic idea given all that is happening in the EU, but the timing will prove to be off. First, we are close to a global recession, which absent very vigorous central bank action might become serious, thus curtailing any initial enthusiasm. Second, Boris Johnson will be pursuing free trade deals when the globalization tide is turning against him. Third, because in order to ensure the City of London's preeminent access to global capital markets he will have to offer a bargaining chip, and that is what's left of British industry - meaning the working class seats the Conservatives were able to impressively flip from Labour on the back of BREXIT. Perhaps the UK as well might not escape the coming fragmentation;
21. Working and middle classes across the West, including the UK and especially the US (if one looks objectively at the results of three years of "America First" policies under Donald Trump), will finally realize that they have no real political representation. The real political fault line is not between right and left, rich and poor, liberal and conservative, but rather globalism versus nationalism. There is no money in the latter, beyond extracting taxes to pay for that burgeoning government (that will inevitably oppress them) and elite pet projects, like solving "climate change" and the "migrant crisis";
22. The West thrived when its working and middle classes thrived. These are the people who consume, who largely maintain the national traditions, who fight their wars. Financially and demographically they are in a very tough spot, with birth rates far below replacement levels and life expectancy plunging due to drugs and health problems. Half of Americans can't cut a $400 check for an emergency. As things stand this rot will likely accelerate as the decade progresses;
23. All this does not mean that it will be smooth sailing for the East, far from it, as those economies still depend a great deal on Western markets. Still, they have a highly motivated, educated and productive workforce, comparatively low debt levels (ex-Japan), high savings and very little contingent liabilities. They are also very safe to live in. Attracting top talent from the US and Europe, in addition to their own, should not be too difficult, further cementing their competitiveness. In a sense these economies are merely reverting to the global place they used to occupy before that baton swung to the West;
24. Russia is an interesting case as it was always between East and West, given its vast cultural, ethnic and geographical components. Thanks to incredible short-sightedness and (frankly speaking) stupidity from the NeoCons in Washington DC it will now embrace its Eastern future. The 2020s will consolidate the emergence of Eurasia as a super economic block towards the end of the century, independent from any US interference;
25. That sets up different scenarios for the coming fracturing of the EU by mid-century, if not sooner. Eastern European countries should gradually gravitate towards Eurasia, including Germany - the worst case scenario for US hegemony. The center West of Europe will become more culturally and demographically aligned with Africa, and so might pursue its future there. And Portugal and Spain, if they had any sense, should seek close ties with their cultural peers in Latin America and Africa;
26. Africa could be the one bright spot in the middle of all the turmoil elsewhere, especially given that it has a lot of development potential and a vast supply of all sorts of natural resources. China (i.e. the East) is spending vast sums to unlock this potential and is now the continent's largest trading partner. Unfortunately, the constraints holding Africa back are all too familiar: corruption, loss of their most enterprising people to mass migration, weak institutions incapable of addressing the aspirations of its very young populations and increasing social and ethnic conflicts, exacerbated by a resurgence of political Islam - another quintessential Eastern ideology that gains force whenever the West declines. This decade will indicate which way it will eventually go the rest of the century;
27. Energy prices should remain very volatile, as demand is pressured by a weakening of the economic cycle and supply by a coming peak in US crude oil production this decade. The explosive situation across the Middle East, from Libya to Pakistan, will add much greater uncertainty as the decade unfolds. The West faced serious oil shocks in the 1970s as the US could no longer ramp up its production to counter supply embargoes from the Middle East; it is vulnerable to a repeat of that by the end of the decade. Sustained crude oil price rallies above $100/bbl would very likely put a nail in the coffin of the financial house of cards concocted by Western central banks;
28. Commodities markets in general should perform better on a relative basis this decade, especially when compared to US stock markets, which have been on an absolute tear since the end of the financial crisis in 2009. The longest bull market in the context of the weakest capital expenditures cycle since WW2 suggests that significant productive capacity might be taken offline at some point this decade. Mean reversion is a real thing in capital markets;
29. Aging farming populations worldwide, quite severe in some cases, will finally put significant pressure on food supplies by mid-decade, if not sooner. And the young, so far, are not replacing them. As a result, record food supplies globally at the start of the decade may turn into food deficits by the end, especially given strong population growth projections (including in the West via mass migration);
30. And the US dollar? Its cycles typically last around a decade, and if that is the case we might be nearing the end of is bull run, certainly this decade. Adding to this cyclical outlook is the fundamental deterioration of the US fiscal position outlined above. That deficit will have to be financed somehow, and some pretty juicy yields might have to be offered especially if the dollar starts weakening. While it may still remain the world's reserve currency given lack of competitors, cryptocurrencies might increasingly offer an alternative. StableCoins, a variant, in particular offer governments a monetary alternative to generate growth within the constraints of the Euro, for instance;
31. Gold should remain part of any investor's portfolio (in physical form), although nobody can say for sure whether prices will be higher in dollar terms by the end of the decade. Trillions of dollars in debt issued in the last decade will become due and together with weak economic growth the risk of a deflationary shock remains significant;
32. The wildcard in predicting financial outcomes is as Western societies profoundly change so will the rules of the investment game. It's not inconceivable that capital controls will be in place before the end of the decade. The more Europe and the US sink into deep fiscal and economic issues, the bigger that wildcard will be;
33. Investors' focus will gradually shift from speculation to wealth preservation, given the dearth of fairly valued opportunities at the start of the decade and a far more uncertain global environment.

Summing up, this decade will very likely be remembered for the end of the world order that had been in place since WW2.

Yes, there is a positive drift on societies across the world emanating from relentless technological progress, but it is highly unlikely that this will do anything to stop the profound demographic, financial and cultural changes that have accelerated this past decade. 

Adam Smith noted that a nation can take a lot of ruin. For decades Westerners have been doing their best to figure out how much. Not only that, but a progressive cultural revolution starting in the 1960s has upended all Western traditional values and morals, and so the present generations are ill-prepared to cope with the massive challenges that lie ahead.

If there is a silver lining in all this is that young people are starting to acknowledge the failure and dead-end of the current economic, moral and governance models, and are gradually returning to tradition, family life and communities. Localism, as opposed to globalism, will gain traction. Building resilience should be the motto of the coming decade.
And with that, wish you a very hopeful, positive and healthy 2020.

Climate change is the new religion!

As Gary Barnett argues below, climate change looks and sounds more and more like the new religion and less and less like science.

With 97% of scientists agreeing that climate change is real, that means there are only 3% of diehard heretics left to argue that climate is "static"? Really?

And with Greta Thunberg at 16 as the priestess of the new religion, who indeed can argue with her and her rhetoric from the heart? To hell with financial and social concerns about the consequences of the extreme policies implied!

The 18 century was the age of reason which gave birth to the 19C, the age of technology and then the 20C, the age of science.  From the beginning, it was unlikely that the forces of obscurantism would be defeated so easily. History said otherwise and the recent past is proving history right.

Germany is on the verge of crashing one of the wealthiest economy ever created on the totem of this new religion. Since the point of no return is just 12 short years away, there is simply no time left to discuss the merits and demerits of what looks more and more like a dogma. "We must act now" less poor Greta and her whole generation are left without a future.

Never mind the horrendous costs of transforming our energy sources from fossil to "renewable" in an absurdly short time (Closing all nuclear power plants in Germany by 2022 comes to mind although "nuclear" is as carbon neutral as can be!) which may but probably won't improve the energy balance of the country in 10 years (Think corn oil in the US!) Or becoming "carbon neutral" within a few decades which will decimate the existing industrial infrastructure of the country, starting with the car industry forced march to a 2030 full electric future.

Only at a time of "fiduciary money" (money without anchor) and zero interest rates forever financial bubbles can such nonsense be entertained seriously without opposition and overwhelming calls to reason. It is simply suicide on a grand scale for the most extremist countries at the heart of Europe with a guaranty to go bankrupt long before the unattainable goals are even within technological sight (which they are not today) and the relentless lowering of living standards on this unpaved road. which goes together.

So let's not argue with 97% of scientists by saying that the oceans are not rising much faster than they have over the last 10,000 years, between 1 and 2mm per year and that most examples of encroaching seas are actually man made and due to soil subsidence, or that entropogenic CO2 emissions may or may not be the main driver of rising temperatures, together with the sun cycles and water vapor or that the models are far less clear than people are made to believe. Or even, god forbid, say that the planet has experienced far higher levels of CO2 and temperatures in the past without much trouble or worse that a sudden cold snap is more likely and dangerous than the nicely rising temperatures of late!

 

Look at the video, then let's try to understand why, this particular narrative is pushed upon us with such force and for what purpose. Could it be, as Gary Barnett explains a trick to regain control of society, which just a brief instant was almost lost thanks to the Internet and it's democratizing power?

The Transformation of Religion and the Control Over Society

December 4, 2019

By: Gary D. Barnett

Full article at:
https://www.garydbarnett.com/the-transformation-of-religion-and-the-control-over-society/
https://www.lewrockwell.com/2019/12/gary-d-barnett/the-transformation-of-religion-and-the-control-over-society/

Religion is still useful among the herd – that it helps their orderly conduct as nothing else could. The crude human animal is in-eradicably superstitious, and there is every biological reason why they should be. 
Take away his Christian god and saints, and he will worship something else…” ~ H.P. Lovecraft

Worship by the human animal began long ago, and has taken many forms. The human species has forever looked for the answers to life, and has looked toward those who claim to speak to God, and has also looked to science. The reverence shown toward those wearing royal robes, vestments of service to God, has never been completely isolated to the claimed devout. Mankind has always been filled with fear and has been gullible, so those he followed and worshipped could be any port in the storm. Fear and gullibility is a dangerous pairing to be sure, and in this progressive and multicultural world of today, the end result of false religious fervor could be one of total societal control.
Religion has always been about control. In the church a thousand years ago, the highest member of clergy might claim that he talked directly to God, and that because he had exclusive knowledge of divine power, all should do as he says. They should turn over their money and individual freedom in order to comply with God’s will. At that time, this was accepted, as the masses of common people put faith in such beliefs as these, and due to fear, complied. That is not the case today, as with time, this bowing down to “holy” masters is mostly seen as foolish. So those seeking to control others needed a new religion, one that would be more widely accepted.
Rulers by definition seek to rule, and in order to accomplish their mission, control over others is necessary. In modern times, control over society has remained in place, but the basis of that control has dramatically changed. There is an old saying that a “Tiger never changes his stripes,” and this is an accurate description concerning the ruling elites, as money, power, and control have always been their only gods. Instead of magic and superstition, instead of faith-based religious rule, instead of the rule of royalty, and instead of rule by the majority, the planned rule sought will be one guided by “science” and technology. Real science is not considered in this equation, as future rule will be based on politicized science, which is completely immune from steadfast scrutiny, from question, from doubt, and from unrelenting challenge. In other words, the politicized science of today is not science at all, but is merely agenda driven fake science.
Legitimate individual scientists understand the concept of extensive and continuous research, of challenge, of new information, and of dissent, but when science is politicized, it is no longer valid. When most all science agrees, it is false. No truth can come from the group, as any group is essentially made up of different individuals, so mass scientific consensus is a certain sign of corruption. That corruption is guaranteed because the bulk of science today is funded from outside sources, and therefore is agenda driven. When scientists are paid to study and research, they are bound to a particular outcome, an outcome that is desired by those funding the research. This is obvious in the entirety of today’s scientific research at the university level, at the corporate level, and at the government level. In fact, all these shameful entities work together to achieve a particular end. The result sought is the control of everything and everybody.
Those who have an agenda to control the United States, as well as the rest of the world, are committed to rule administered by a select few experts that relies on science and technology as the basis for curing the human condition. This is a rule called Technocracy, and is now being quietly implemented at a rapid pace. The public at large so far is going along without much resistance, and this is a dangerous precedent to set.
While this anticipated rule by the elites is multi-faceted in nature, the single most important aspect of the propaganda necessary to fuel this takeover of human behavior is the con-game called “climate change.” This lie of politicized science is the driver of a technocratic agenda that will allow for domination of the world’s populace. In my opinion, this is the most dangerous type of control possible, as it will be all consuming, and based on capturing the entirety of humanity. This is a plan to affect a total behavioral change through technological means in a system without escape, and on a worldwide scale.

150 Years Of Bank Credit Expansion Is Near Its End

　

This is by far the best and most current article on money that I have read in a long time.

It predicts disruptions on the scale of the 1929's great deflation altough of course this time inflation is unavoidable.


　　　
150 Years Of Bank Credit Expansion Is Near Its End

Sat, 11/23/2019 - 07:00

Authored by Alasdair Macleod via GoldMoney.com,

The legal formalisation of the creation of bank credit commenced with England’s 1844 Bank Charter Act. It has led to a regular cycle of expansion and collapse of outstanding bank credit.

Erroneously attributed to business, the origin of the boom and bust cycle is found in bank credit. Monetary policy evolved with attempts to control the cycle with added intervention, leading to the abandonment of sound money.

Today, we face infinite monetary inflation as a final solution to 150 years of monetary failures. The coming systemic and monetary collapse will probably mark the end of cycles of bank credit expansion as we know it, and the final collapse of fiat currencies.

This article is based on a speech I gave on Monday to the Ludwig von Mises Institute Europe in Brussels.

Introduction
So that we can understand the financial and banking challenges ahead of us, this article provides an historical and technical background. But we must first get an important definition right, and that is the cause of the periodic cycle of boom and bust. The cycle of economic activity is not a trade or business cycle, but a credit cycle. It is caused by fractional reserve banking and by banks loaning money into existence. The effect on business is then observed but is not the underlying cause.


Modern banking has its roots in England’s Bank Charter Act of 1844, which led to the practice of loaning money into existence, commonly described as fractional reserve banking. Fractional reserve banking is defined as making loans and taking in customer deposits in quantities that are multiples of the bank’s own capital. Case law in the wake of the 1844 Act, having more regard to the status quo as established precedent than the fundamentals of property law, ruled that irregular deposits (deposits for safekeeping) were no different from a loan. Judge Lord Cottenham’s judgment in Foley v. Hill (1848) 2 HLC 28 is a judicial decision relating to the fundamental nature of a bank which held in effect that:

“The money placed in the custody of the banker is to all intents and purposes, the money of the banker, to do with it as he pleases. He is guilty of no breach of trust in employing it. He is not answerable to the principal if he puts it into jeopardy, if he engages in haphazardous speculation….”

This was undoubtedly the most important ruling of the last two centuries over money. Today, we know of nothing else other than legally confirmed fractional reserve banking. However, sound or honest banking with banks acting as custodians had existed in the centuries before the 1844 Act and any corruption of the custody status was regarded as fraudulent.

This decision has shaped global banking to this day. It created a fundamental flaw in the gold-backed sound money system, whereby the Bank of England, as a prototype central bank, could only issue extra sterling backed entirely by gold. Meanwhile, a commercial bank could loan money into existence, the drawdown of which created deposit balances. The creation of these deposits on a system-wide basis meant that any excesses and deficiencies between banks were easily reconciled through interbank lending.

Bankers’ groupthink and the credit cycle
While an individual bank could expand its balance sheet, the implications of all banks doing the same may have escaped the early banking pioneers operating under the 1844 act. Thus, when their balance sheets expanded to a multiple of the bank’s own capital, there was little cause for concern. After all, so long as a bank paid attention to its reputation it would always have access to the informal interbank market. And so long as it can call in its loans at short notice, the duration mismatch between funding by cash deposits and its loan book would be minimised.

Since the Bank Charter Act, experience has shown the expansion of bank credit leads to a cycle of credit expansion, over-expansion, and then sudden contraction. The scale of bank lending was determined by its management, with lenders tending to be as much influenced by their own crowd psychology as by a holistic view of risk. Of course, the expansion of bank credit inflates economic activity, spreading a warm feeling of improving economic prospects and feeding back into increasing the bankers’ confidence even further. It then appears safe and reasonable to take on yet more lending business without increasing the bank’s capital.

With profits rapidly increasing due to lending being a multiple of the bank’s own capital, confident bankers begin to think strategically. They reduce their lending margins to attract business they believe to be important to their bank’s long-term future, knowing they can expand credit further against a background of improving economic conditions to compensate for lower margins. They begin to protect margins by borrowing short from depositors and offering businesses term loans, reaping the benefits of a rising slope in the yield curve.

The availability of cheap finance encourages businesses in turn to enhance their profits by increasing the ratio of debt to equity in their businesses and by funding business expansion through debt. By now, a bank is likely to be raking in net interest on loan business amounting to eight or ten times its own capital. This means that an interest margin of a net two per cent is a 20% return to the bank’s shareholders.


There is nothing like profitable success to boost confidence, and the line between it and overconfidence is naturally fuzzed by hubris. The crowd psychology fuelled by a successful banking business leads to an availability of credit too great for decent borrowers to avail for themselves, so inevitably credit expansion becomes a financing opportunity for poorly thought out loan propositions.

Having oversupplied the market with credit, banks begin to expand their interests in other directions. They finance businesses abroad, oblivious to the fact that they have less control over collateral and legal redress generally. They expand by entering other lines of banking-related business, assuming their skills as bankers can be extended into those other business lines profitably. A near-contemporary example was Deutsche Bank’s failed expansion into global investment banking and principal trading in foreign securities and commodities. And who can forget Royal Bank of Scotland’s bid for ABN-Amro, just as the credit cycle peaked before the last credit crisis.

At the time when their balance sheets have expanded to many multiples of their own capital, the banking crowd then finds itself with lending margins too low to compensate for risk. Bad debts arising from their more aggressive lending decisions begin to materialise. One bank beginning to draw in its horns, as it perceives it is out on a limb, can probably be weathered by the system. But other bankers will stop and think about their own risks, bearing in mind operational gearing works two ways.

It may be marked by an unexpected event, or just an apparent loss of bullish momentum. With bad debts beginning to have an impact, groupthink quickly takes bankers from being greedy for more business to fearful of it. Initially, banks stop offering circulating credit, the overdraft facility that lubricates business activity. But former lending decisions begin to be exposed as bad when the credit tap is turned off and investments in foreign lands begin to reflect their true risks. Lending in the interbank market dries up for the banks with poor or marginal reputations, and banks begin to report losses. Greed turns rapidly to fear.


The cycle of bank credit expansion then descends into a lending crisis with increasing numbers of banks exposed as having taken on bad loans and becoming insolvent. A slump in business activity ensues. With frightening rapidity, all the hope and hype created by monetary expansion is destroyed by its contraction.

Before central banking evolved into acting as the representative and regulator for licensed banks, the credit cycle described above threw up some classic examples. Overend Gurney was the largest discount house in the world, trading in bills of exchange before it made long-term investments and became illiquid. When the railway boom faltered in 1866 it collapsed. Bank rate rose to 10% and there were widespread failures. Then there was the Baring crisis in 1890. Poor investments in Argentina led to the bank’s near bankruptcy. The Argentine economy slumped, as did the Brazilian which had its own credit bubble. This time, a consortium of other banks rescued Barings. Nathan Rothschild remarked that if Barings hadn’t been rescued the entire banking system in London would have collapsed.

Out of Barings came the action of a central bank acting as lender of last resort, famously foreseen and promoted by Walter Bagehot.

In the nineteenth century it became clear that crowd psychology in the banks, the balance of greed and fear over lending, drove a repeating cycle of credit boom and slump. With the passage of time bankers recovering their poise from the previous slump forgot its lessons and rhymed the same mistakes all over again. Analysts promoting theories of stock market cycles and cycles of economic activity need look no further for the underlying cause.


In the absence of credit expansion, businesses would come and go in random fashion. The coordinated expansion of credit changed that, with businesses being bunched into being created at the same time, and then all failing at the same time. The process of creative destruction went from unnoticed market evolution to becoming a periodic violent event. Monetary institutions still ignore the benefits of events being random. Instead they double down, coordinating their interventions on a global scale with the inevitable consequence of making the credit cycle even more pronounced.

It is a huge mistake to call this repeating cycle a business cycle. It implies it is down to the failure of free markets, of capitalism, when in fact it is entirely due to monetary and credit inflation licensed and promoted by governments and central banks.

The rise of central banking
Following the Barings crisis in 1890 the concept of a lender of last resort was widely seen to be a solution to the extremes of free markets. Initially, this meant that the bank nominated by the government to represent it in financial markets and to oversee the supply of bank notes took on a role of coordinating the rescue of a bank in difficulty, in order to stop it becoming a full-blown financial crisis. When the gold standard applied, this was the practical limitation of a central bank’s role.

This was the general situation before the First World War. In fact, even under the gold standard there was significant inflation of base money in the background. Between 1850 and 1914 above ground gold stocks increased from about 5,000 tonnes to nearly 24,000 tonnes. Not all of it went into monetary gold, but the amount that did was decided by the economic actors that used money, not the monetary planners as is the case today.

It was against this background that the US Federal Reserve Bank was founded in December 1913. Following WW1, it became a powerful institution under the leadership of Benjamin Strong. Those early post-war years were turbulent times: due to war time inflationary financing, wholesale prices had doubled in the US between 1914-1920, while the UK’s had trebled. This was followed by a post-war slump and by mid-1921 unemployment in the UK soared to 25%. In the US, the Fordney-McCumber tariffs of 1922 restricted European debtors from trading with America, necessary to pay down their dollar debts. A number of countries descended into hyperinflation, and the Dawes plan designed to bail out the Europeans followed in 1924.

While America remained on a gold standard, Britain had suspended it, only going back on to it in 1925. While the politicians decided overall policy, it was left to central bankers such as Strong at the Fed and Montague Norman at the Bank of England to manage the fallout. Their relationship was the most tangible evidence of central banks beginning to cooperate with each other in the interests of mutual financial stability.

With the backing of ample gold reserves, Strong was an advocate of price targeting through the management of money supply, particularly following the 1920-21 slump. His inflationary policies assisted the management of the dollar-sterling exchange rate, supporting sterling which at that time was not backed by gold. Strong also made attempts to develop a discount market in the US, which inflated credit markets further. One way and another, with the Fed following expansionary money policies and commercial bankers becoming more confident of lending prospects, monetary inflation fuelled what came to be known as the roaring twenties.

That came to a sharp halt in October 1929 when the credit cycle turned, and the stock market crashed. Top to bottom, that month saw the Dow fall 35%. The trigger was Congress agreeing to the Smoot-Hawley Tariff Act on 30 October, widely recognised at the time as a suicide note for the economy and markets, by raising trade tariffs to an average of 60% from the Fordney-McCumber average of 38%. President Hoover signed it into law the following June and by mid-1932 Wall Street had fallen 89%.

With such a clear signal to the bankers it is not surprising they drew in their horns, contracting credit, indiscriminatingly bankrupting their customers. All the expansion of bank credit since 1920 was reversed by 1934. Small banks went bankrupt in their thousands, overwhelmed by bad debts, particularly in the agricultural sector, as well as through loss of confidence among their depositors.

The depression of the 1930s overshadowed politics in the capitalist economies for the next forty years. Instead of learning the lessons of the destruction wrought through cycles of bank credit, economists doubled down arguing more monetary and credit inflation was the solution. To help economic sentiment recover, Keynes favoured deficit spending by governments to take up the slack. He recommended a move away from savers being the suppliers of capital for investment, with the state taking a more active role in managing the economy through deficit spending and monetary inflation.

The printing of money, particularly dollars, continued under the guise of gold convertibility during the post-war Bretton Woods system. America had enormous gold reserves; by 1957 they were over 20,000 tonnes – one third of estimated above-ground gold stocks at that time. It felt secure in financing first the Korean then the Vietnam wars by printing dollars for export. Unsurprisingly, this led to the failure of the London gold pool in the late 1960s and President Nixon suspending the fig-leaf of dollar convertibility into gold in August 1971.

Once the dollar was freed from the discipline of gold, the repeating cycle of bank credit was augmented by the unfettered inflation of base money, a process that has continued to this day.

The current position
Since the turn of the millennium there have been two global bank credit crises: the first was the deflation of the dot-com bubble in 2001-02, and the second the 2008-09 financial crisis that wiped out Lehman. It was clear from these events that the debate over moral hazard was resolved in favour of supporting not just the banks, but big business and stock market valuations as well. Furthermore, America’s budget deficits were becoming a permanent feature.

The cyclical rhythm of bank credit expansion and crisis was taking place against a background of increasing wealth transfer from the productive sector by means of an underlying monetary inflation. The beneficiaries have been the government and non-productive finance as well as large speculators in the form of hedge funds. The evidence of this transfer of wealth through the effect on the general level of consumer prices was increasingly suppressed by statistical method. While the official consumer price inflation indicator has been pegged between one or two per cent, independent analysts (Shadowstats and Chapwood Index) reckon the true figure is closer to ten per cent.

That being the case, the use of a realistic price deflator tells us that the US economy, and presumably others, in recent years have been contracting in real terms. Furthermore, GDP, nominal or real, is an appalling indicator of economic progress, being no more than a measurement of the increasing quantities of government funny-money inflating the economy. It does not tell us how that money is used and the benefits that actually flow from it, nor the degree of price distortion it generates.

It is hard to avoid concluding that manipulating the statistics to hide the evidence is the last throw of the fiat currency dice, just as the Emperor Diocletian collapsed the Roman economy by suppressing evidence of rising prices through his edict on maximum prices in 301 AD.

This brings us to the current position, which is increasing looking like being on the edge of another cyclical crisis. If so, it marks the end of a period of far greater monetary and credit expansion than seen in previous cycles, coinciding with a Smoot-Hawley lookalike in the trade war between the two largest global economies.

The following big-picture factors are relevant to the likely timing for a credit crisis:

Global debt has accumulated to an estimated $255 trillion, up from about $173 trillion at the time of the Lehman crisis An alarming proportion of it is unproductive, being government, consumer borrowing, and funding for financial speculation as well as owed by unviable businesses.

With annual debt payments already accounting for most of the US budget deficit and that deficit getting larger, any rise in dollar interest rates would be ruinous for Federal government finances. Eurozone governments are in a similarly precarious financial position. Governments are ensnared in a classic debt trap.

An estimated $17 trillion of global bonds are negative yielding, which is unprecedented. This is a market distortion so extreme that it cannot be normalised without widespread financial disruption and debtor destruction. There is no exit from this condition.

The repo market crisis in New York indicates the banking system is in intensive care. The start of it coincided with the completion of the sale of Deutsche Bank’s prime dealership to BNP. It would be understandable if large deposits failed to transfer with the business and went to rivals instead. The problem has continued, indicating senior bankers’ groupthink is already turning from greed to fear.

US bank exposure to collateralised loan obligations and the leveraged loan market, comprised mainly of junk loans and bonds, is the equivalent of most of the estimated $1.9 trillion sum of bank capital. It confirms this article’s thesis that the level of ignorance over banking risk is late stage for the bank credit cycle and likely to be catastrophic.

The share prices of Deutsche Bank and Commerzbank indicate they are not just insolvent but will need to be rescued – and soon. Banks in other Eurozone jurisdictions are in a similar situation. However, all Eurozone countries have passed bail-in laws and do not expect to bail out individual banks. The upshot is at the first sign of a bail-in being considered, a flight of large deposits will very likely be triggered and bank bond prices for all Eurozone issuers will collapse. The room for error in crisis management by central banks is considerably greater than at the time of the Lehman crisis eleven years ago.

The forthcoming credit crisis could repeat 1929-32
An extreme amount of monetary creation over the last ten years and the US-China trade war over the last two is horribly reminiscent of late 1929, when the combination of the end of the credit cycle and escalating trade protectionism combined to wreak financial destruction on a global scale. We face a possible repeat of the 1929-32 experience and the depression that followed. The long-term expansion of global trade has already come to a halt. The secondary impact on economies such as Germany’s is beyond question.

Even if a halt to the trade war between the US and China is agreed in the coming weeks, the crisis has been triggered and our empirical evidence suggests it will get worse. It appears that common sense on trade policies is unlikely to prevail, because the conflict is far deeper than just trade, with the Hong Kong riots as part of the overall picture.

The Chinese believe America has destabilised Hong Kong with good reason: the US Treasury has become dependent to receiving the lion’s share of international portfolio flows to support the dollar and finance the US budget deficit, and China’s own investment demands are a threat. With the dollar’s hegemony under attack and China seeking those same portfolio flows to invest in her own infrastructure projects through the Hong Kong Shanghai Connect link, Hong Kong had to be destabilised.

For this and other reasons, trade tariffs are only part of a wider financial war, which is increasingly likely to escalate further rather than abate. With his trade policies having backfired badly, President Trump is now under pressure with time running out ahead of the election in a year’s time. He is threatened with impeachment by Congress over the Ukraine affair, and his popularity ahead of an election year remains subdued. He has even appealed to Jay Powell, Chairman at the Fed, to introduce negative interest rates to boost the economy. Backing down over China is unlikely, because it would be a presidential policy failure.

What will the developing crisis look like?
Clearly, central banks will respond to the next credit crisis with an even greater expansion of money quantity than at the time of the Lehman crisis eleven years ago. The consequence of this monetary inflation seems certain to lead to an even greater rate of loss of purchasing power for fiat currencies than currently indicated by independent assessments of price inflation.

Monetary inflation is likely to be directed at resolving two broad problems: providing a safety net for the banks and big businesses, as well as funding rising government deficits. Therefore, the amount of quantitative easing, which will be central to satisfying these objectives, will soar.

The effect on markets will differ from being a rerun of the 1929-32 example in one key respect. Ninety years ago, the two major currencies, the dollar and sterling, were on a gold exchange standard, which meant that during the crisis asset and commodity prices were effectively measured in gold. Today, there is no gold backing and prices will be measured in expanding quantities of fiat currency.

Prices measured in fiat currencies will be determined ultimately by the course of monetary policy. But in real terms, the outlook is for a repeat of the conditions that afflicted markets and economies during and following the 1929 Wall Street crash. A further difference from the depression years is that today western governments have extensive legal obligations to provide their citizens with welfare, the cost of which is escalating in real terms. Add to this the cost of rising unemployment and a decline in tax revenue and we can see that government deficits and debts will increase rapidly even in a moderate recession.

This brings us to an additional problem, likely to be evident in a secondary phase of the credit crisis. As it becomes obvious that the purchasing power of fiat currencies is being undermined at a rate which is impossible to conceal through statistical method, the discounted value of future money reflected in its time preference will rise irrespective of interest rate policy. Consequently, borrowers will be faced with rising interest rates to compensate for both increasing time preference and the additional loan risk faced by lending to different classes of borrowers.

Besides closing off virtually all debt financing for businesses and increasingly indebted consumers, this will play havoc with governments accustomed to borrowing at suppressed or even negative interest rates. Prices for existing bonds will collapse, and banks loaded up with government debt to benefit from Basle regulations will find their slender capital, if they have any left, will be quickly eroded.

The world of fiat currencies faces no less than its last hurrah. Indeed, some of the more prescient central bankers appear concerned the current system is running out of road, with the dollar as the world’s reserve currency no longer fit for this purpose. They want to find a means of resetting everything, exploring solutions such as digitising currency through blockchains, doing away with cash, and finding other avenues to try to control the vagaries of free markets.

None of them will work, because even a new form of money will be required to rescue government finances and prevent financial and economic failure through inflation. The accelerating pace of monetary creation to address these problems will remain the one problem central to the failure of a system of credit and monetary creation: the impossibility of resolving the debt trap that has ensnared us all.

Just as Germany found in 1923, monetary inflation as a means of funding government and other economic liabilities is a process that rapidly gets out of its control. Eventually, people understand the debasement fraud and begin to dispose of the fiat currency as rapidly as possible. It then has no value.

The ending of the fiat currency regime is bound to terminate the repeating cycles of bank credit legitimised since 1844. The socialism of money through inflationary debasement will be exposed as a fraud perpetrated on ordinary people.

Got gold?

The Challenge to transform fast enough

The surprising similarities of the Japanese electronic industry in the 1990s and the German car industry today.

Here's a stunning example from Germany to understand the challenge every modern society and company are facing: How can you transform yourself fast enough when you reach the top? More specifically, how can you question success and prepare the future when past investments anchor you into existing social structures and technologies and the risks linked to innovation are so high that major decisions become a choice  between life and death?

Today, the car industry everywhere is facing a major challenge thank to a social and relatively artificial goal to move from gas or diesel to electric engines. Eventually the battery obstacle will be solved although putting affordable electric cars on the road will be more difficult in Germany than in China as the in-depth and very up to date documentary below makes plain.

Beyond that, the smart car will require a complete rethink of our mobility. And although this too is approaching fast, the interviewers carefully avoid the subject to stay focused on the transition from gas to electric.

And this I agree, is a challenge which needs to be understood in its context so let's rephrase the fundamental question which lurks behind:

Are societies and companies necessarily condemned to fail when they reach the top? From Portugal's explorations in the 16th century to Britain ruling the waves in the 19th century. From the IBM mainframe revolution in the 1960s to AOL opening the door of the Internet for all in the 1990s. It seems that investment rides on a wave of new ideas creating a new paradigm which flourishes, then matures and finally dies usually without being able to reinvent itself in the process. Exceptions are few and far between.

Of course, the most striking and recent example of this is Japan.

In the 1960s and 70s, following the war and an excruciating defeat which destroyed both its urban and industrial infrastructure, Japan rebuilt itself. But contrary to the consensus at the time, the country did not just imitate to build cheaper, junk products, it transformed the industrial process while doing so. Inventing new concepts like the Kanban system and Zero defects which quickly helped major companies like Toyota and Toshiba reach the pinnacle of their respective industries before being implemented around the world soon after.   

Then the financial bubble burst in 1990, investment stopped and the decline of Japan started. Having followed the rise and decline of the country up close, I was amazed to see how quickly winning solutions became handicaps. How for example, the well educated but docile, conservative and unimaginative workforce which was one of the major strength of Japan 10 years earlier became its main weakness in the later half of the 1990s, when companies moved from hardware to software centric at the turn of the 21st century.

In 1992, in Osaka, Sharp was presenting the very first color LCD panels which were going to revolutionize TV and computer screens first then basically every machine with better, clearer interface. As the same time, the company was selling an early organizer, "the wizard" which looked uncannily like an early I-phone but without the functionality. Hard not to believe that this was the future.

But this inability to develop attractive and useful software soon after turned out to be the problem. While hardware for which the Japanese were ahead was progressing slowly, software where they were not was progressing exponentially. Within 10 to 15 years, every company in the world would be offering hardware made in China or Korea with software made in the US. Finally, in 2016, Sharp was sold to Foxconn, a former part supplier based in Taiwan. This example was repeated countless times by a long list of Japanese companies, insuring that the lost decade of the 1990s morphed into the 2000s and finally into the 2010s with little hopes of a resurgence today. Amazingly, Softbank, the sole software giant in Japan announced last week that they would be sinking another 4 billion dollars into WeWork!

Based on this example, what are the chances that the German automobile industry will succeed and transition smoothly to electricity? The analyst in the documentary thinks the chances are 50/50 but in reality, experience and multiple examples as we just saw indicate that the chances are much lower. The weight of past investments, inertia, sclerotic ways of thinking, lack of agility, almost every factor acts as a brake on innovation. The very last, optimum diesel engine will most probably be German but by then it could represent less than 1% of the world automobile market. Just as today's Japanese TV screens!

Then again, the gas engine niche may remain larger than expected and Germany may succeed in facing the electric challenge. The future is not written yet, but this would be a rare exception, not the rule! It would imply a complete rethink of what a car is, not just changing the engine. Will such a revolution happen in Germany or in China? What are the odds?

The dispaly Ad industry is the next to be disrupted

The display ad sector has been growing extremely fast over the last few years as companies are trying to access their clients online.

Unfortunately as everyone can attest, the practice has been less than stellar lagging the theory of offering the right advertising to the right audience by a wide margin. Look for news on a new car and car adverts will follow you for months. Visit a place somewhere and lo, it will feel like you never left the place weeks after weeks.

So why is targeting so lousy and ineffective?

A large part of the answer has to do with the other side of the equation. Click factories and platforms willing to count whatever to improve numbers and nurture a nascent field.
 
Online advertising is supposed to be better because targeting is easier and everything is measurable. That would certainly be the case if numbers were reliable. They are not! And the consequences are plain to see.

This may be on the verge of a major evolution if the article below is right. But in the end, right or wrong, it does not matter. Blockchain will eventually transform the sector like so many others by introducing foolproof distributed systems which will improve tremendously the reliability of transactions and allow the potential of data and measurements the become reality.

Read on.  

Display Ad industry next to be disrupted

Published on Zero Hedge, October 1st 2019

Just like everything else that’s being disrupted, now we are looking at the ad serve industry.  First let’s explain what the marketplace concept for online advertising is.  Clients (Called Publishers) want to monetize their website with ads.  Advertisers create ads on the marketplace.  They bid on traffic, which is calculated per click.  This is known as Pay Per Click (PPC) marketing.  The exchange, or the marketplace, allows 2 sides to bid and offer just like a stock exchange would, taking the difference as their fee.  This model was pioneered by Google but now almost every ad platform uses a similar model, including Facebook.

But it’s not so simple, as there is an incentive for profit, there is an incentive for fraud.  When someone believes they can get money for free – here we go.  Click click click money comes.  But it’s not so easy.  Google will block Publishers who have ‘invalid clicks’ if they believe they came from the Publisher themselves or if there was a bot used to “Game” the system.  In fact, According to Click Guardian, $7.2 Billion was lost to click fraud in just 2 years:

    Click fraud is one of the most talked about issues affecting advertisers on Google and other Pay Per Click (PPC) platforms.  According to Click Guardian $7.2 billion was lost to click fraud between 2016 and 2018. That’s a staggering amount that millions of advertisers are losing to fraudsters and click errors.  So what is click fraud? According to Google it is an illegitimate action such as an unintentional click or a click resulting from malicious software.  In fact, Google chooses not to call it click fraud and calls it ‘invalid clicks’ instead. That’s understandable considering the confusion surrounding this topic and the various reasons why some clicks may be legitimate or an error.

So this is an ongoing problem in the industry, and we wanted to lay down the background before mentioning this exciting solution.  A company by the name AdEx has developed an open-source, transparent, and fraud-proof solution for display advertising.  What’s exciting about it is that they pay in real time on the Blockchain, so a click equals a payment.  Real time reporting and settlement means that fraud is complex as it can be spotted immediately.  And this can be done without giving up the users privacy.

Our background in this space is substantial, we started in 2006.  Our group has managed a remote SEO workforce of as many as 600 people, our monthly SEO spend has been well over $50,000 for a single client.   We’ve worked with companies big and small, ranging from car dealerships with multiple rooftops to local restaurants.  Content blogs, ecommerce, and more – they all have the same goal: increase traffic for the lowest possible fees.  The problem:  Google Ads works, but it’s expensive.  There is no way around inflation.

So we are hopeful that by eliminating fraud, providing efficiency, transparency, and a high tech low cost platform – costs of display advertising will decrease.

Display advertising is perhaps the most important business tool for startups or online businesses, due to its comparatively low cost.  Wait, didn’t we just say it’s expensive?  It is when compared with the cost of a cup of coffee, yet it’s still far cheaper than the traditional media which is print, TV, and radio.  Expect to spend millions on a TV ad and if you go with the ‘cheap’ option expect to have your ad displayed at night next to Ginsu infomercials.

The other alternative is SEO, which again is hard and involves hundreds of microtasks such as Meta Tag optimization too many to get into in this article.

The only drawback about AdEx is that it’s still private and in beta, so we will be waiting with bells on as they say, for the grand opening.