Money And Change

Bernanke Killed The World Economy, New Academic Study Confirms
  
ZeroHedge.com      Sat, 02/23/2019 - 19:15
 
Authored by Martin Hutchinson via TBWNS.com,
This column has contended for several years, based on empirical data observations from several countries, that low interest rates worldwide were killing productivity growth. A University of Chicago paper finally provides some academic back-up for this contention and suggests a mechanism through which it takes place. There are other mechanisms also, and I would suggest that the Ben Bernanke-inspired wild monetary experimentation from 2008 on has done more damage to the world economy than any other initiative in the history of mankind.

The paper, “Low interest rates, market power and productivity growth” by Ernest Liu, Atif Mian and Amir Sufi, examines the behavior of firms in a competitive marketplace as interests decline, and demonstrates that, although lower interest rates at first increase competitiveness through increased investment, they also increase the comparative advantage of large firms, thus after a time discouraging the smaller firms from investing and making the market less competitive. If low interest rates persist and approach zero, eventually even the larger firms stop investing, because they are no longer subject to significant competition and thus do not need to invest.

The paper provides theoretical backing to and a possible mechanism for the observation set out in this column on several occasions in the last few years: that ultra-low interest rates in Japan, the Eurozone, Britain and the United States were closely correlated with unprecedented declines in the rate of productivity growth in those countries. In all the high-income industrial countries where interest rates were held artificially low after 2008, productivity growth by 2016 had effectively disappeared altogether, or close to it. The worst effects were seen in the eurozone and in Britain, where inflation continued, making real interest rates sharply negative. Even in Japan, where interest rates have been held artificially low for two decades, the productivity dearth worsened substantially after 2009.

Only after President Donald Trump was inaugurated in the United States did U.S. productivity growth begin recovering towards its healthy historical levels. Undoubtedly part of this recovery was due to the Trump administration’s de-regulation policies – just ceasing to pile regulation upon regulation appears to have had some positive effect, especially in industries sensitive to environmental-regulatory harassment. However, the positive productivity signs became clearer during 2018, as interest rates climbed towards the U.S. inflation rate, albeit still below their healthy historic levels.

It has also been noted in the United States that small business formation, a key driver of productivity growth, in 2010-2016 ran about a third below its historic levels, and half the levels of the late 1970s, when figures were first compiled, even though the economy itself had moved towards recovery. This aligns with the theory postulated in the University of Chicago paper, that small businesses become discouraged by very low interest rates, and simply cease investing, or even cease being formed.

From Austrian economic principles, there is a clear explanation for the decline in productivity growth in low-interest-rate environments. Economies work best when interest rates are at or close to their natural level, that would be set in a free market. In a Gold Standard system with free banking, interest rates naturally stay close to that level. However, if as in modern economies governments have taken over the money creation and interest-rate-setting functions from the market and move rates a substantial distance from their natural level, then investment decisions become distorted and suboptimal. In such a situation, productivity growth will naturally decline; if the distortion of the interest rate curve is prolonged, productivity growth may even disappear as investments are made into entirely the wrong assets.

This is what happened worldwide after 2008 (arguably, in Japan from 1998 with a short remission in the mid-2000s). As the University of Chicago paper points out, ultra-low interest rates discouraged small businesses (that effect appears to have been especially strong in Japan, where almost no major new companies have emerged since 1990). However, there are other sources of distortion.

In the United States, vast sums have been poured by companies into buying back their stock, because the earnings cost of doing so is small at low interest rates and companies believe that if their cash flow is solid, they can survive ad infinitum without significant equity capital. They are wrong, but only the next recession will teach them so, at great cost to their employees and the U.S. economy as a whole (doubtless their foolish and greedy top management will emerge with substantial payoffs, as usual).

In London, San Francisco, New York and elsewhere, the prices of high-end real estate have soared without limit. Low interest rates reward those with borrowing capacity, and for more than 20 years now, it has been profitable for the rich to borrow gigantic amounts of money at low interest rates and invest it in high-end real estate. This bubble is now in the process of bursting, much to the benefit of Millennials, for whom the price of modest real estate has been over-elevated by the shenanigans at the high end.

Debt of all kinds has proliferated, whether in auto loans at the consumer end (less so in home mortgage loans since 2008) or in corporate leveraged loans used by the innumerable buyout artists at the high end. Default rates on all these debts are beginning to rise; they will cause massive losses before we are much older.

In Britain, Switzerland and the EU, interest rates have sunk so low that even investments without any profit at all have been attractive, provided money can be borrowed against them. I have written in the past about the possibility of a flood of Babylonian ziggurats in the major financial centers – technically religious buildings, thus exempt from local property taxes, but serving a religion with no current believers, thus making them a pure speculative asset suitable for the ultra-Keynesian New Age.

Not content with the damage they have already done, some extreme aficionados of low interest rates are devising schemes to drive them even lower, confiscating ordinary people’s cash holdings so that there was no longer any alternative to their diabolical financial schemes. Truly Ben Bernanke’s inspiration of 2002 to drop money from helicopters, uttered at a meeting of the National Economists Club at which I was present, has been among the most economically damaging ideas in all of history.

One competitor for that prize, I suppose, is Karl Marx’s Communism, so banally celebrated by the functionaries of the of the EU at last year’s bicentenary. However, that great fallacy never affected more than about a quarter of the world’s population, and eventually exploded under its own weight. Bernanke’s folly, on the other hand, shows no sign of correcting itself. Although a few more years of U.S. success with President Trump and higher rates might do the job of correcting it worldwide, our chances of getting this necessary combination are currently less than 50-50, I would say.

Another such competitor for Worst Idea was the invention of agriculture. Yes, it enabled the planet to support more people, but at what a cost! Instead of devoting only a modest portion of their time to finding and killing woolly mammoths, humanity was now forced to devote itself night and day to back-breaking manual labor in the fields. In the short term, this was truly an unspeakably bad trade-off. In the long term, of course, it led to civilization and industrialization, but it took several thousand miserable years to do so. We can however be sure that Bernanke’s brainwave will lead to no such economic breakthrough, however many millennia we wait.

Perhaps the most likely competitor to Bernanke’s contribution as a destroyer of economic value is Maynard Keynes’ “General Theory.” It unmoored us from the established truths such as the Gold Standard and balanced budgets and enabled greedy and unscrupulous politicians to waste ever more of our money in the name of “stimulus.” The California High Speed Rail scheme was just one $77 billion example of such folly; to misquote Oscar Wilde, a man would need a heart of stone not to laugh at its demise this week.

We do not yet know whether negative real interest rates or trillion-dollar budget deficits will be more ultimately destructive of our civilization, and Keynes, not Bernanke, is responsible for the latter. Unlike Marxism and like Bernankeism, Keynesianism has affected the entire planet; indeed, it seems irrefutable, the fallacy that will not die. However, Keynesianism’s effect on productivity is indirect; it merely grows government, a low-productivity activity, rather than destroying productivity directly. If I had to bet, therefore, I would bet that Bernanke, even more than Keynes, Marx or the inventor of agriculture, will be the chief destroyer of economic value in our long-term future.

By promoting ever-lower interest rates, set completely artificially by meddling bureaucrats, Bernankeism’s proponents have gone far to killing the engine of prosperity that is capitalism itself. Contrary to Keynes’ belief, the level of interest rates is the central variable in a well-functioning capitalist system. By meddling with it, politicians and bureaucrats are attempting to act as Gosplan, the central planning agency of the Soviet Union. It doesn’t work, and the attempt to meddle in this way is morally wrong as was Communism.

It is good to have some respectable academic backing for this column’s battle against the monetary folly of Bernankeism. The struggle continues!

The Return To A Gold Exchange Standard
ZeroHedge.com      Sat, 02/23/2019 - 12:35

Authored by Alasdair Macleod via GoldMoney.com,

This article makes the obvious point that a return to a gold standard is the only way nations can contain the interest cost of servicing debt, given the alternative is inflationist policies that can only lead to far higher interest rates and currency destruction. The topic is timely, given the self-harm of American economic and geopolitical policies, which are already leading America into a cyclical slump. Meanwhile, American fears of Asian domination of global economic, monetary and political outcomes have come true. The upcoming credit crisis is likely to kill off the welfare state model in the West by destroying their unbacked paper currencies, while China, Russia and their Asian allies have the means to prosper.

The fragility of state finances

In my last Goldmoney article I explained why the monetary policies of inflationist economists and policy makers would end up destroying fiat currencies. The destruction will come from ordinary people, who are forced by law to use the state’s money for settling their day-to-day transactions. Ordinary people, each one a trinity of production, consumption and saving, will eventually wake up to the fraud of monetary inflation and discard their government’s medium of exchange as intrinsically worthless.

They always have, eventually. This has been proved by experience and should be uncontroversial. For the issuer of a currency, the risk of this happening heightens when credit markets become destabilized and confidence in the full faith and credit, which is the only backing a fiat currency has, begins to be questioned either by its users or foreigners or both. And when it does, a currency starts to rapidly lose purchasing power and the whole interest rate structure moves higher.

The state’s finances are then ruined, because by that time the state will have accumulated a lethal combination of existing unrepayable debt and escalating welfare liabilities. Today, most governments, including the US, are already ensnared in this debt trap, only the public has yet to realize the consequences and the planners are not about to tell them. The difficulty for nearly all governments is the deterioration in their finances will eventually wipe out their currencies unless a solution is found.

There is a solution that if taken allows the state to survive. It could be modeled on Steve Hanke’s (of John Hopkins University) preferred solution of a currency board, that when strictly observed removes the state’s ability to create money out of thin air. He recommends this solution to currency debasement and the evils that come with it for Venezuela and the like, linking a distressed emerging market currency to the dollar. But here we are considering stabilizing the dollar itself and all the other currencies linked to it. The currency board in this case can only be linked to gold, which has always been the peoples’ money, free of issuer risk. In former times this was the basis of a gold exchange standard.

Professor Hanke’s currency board is a rule-based system designed to achieve the same thing. Once the system is in place, every currency unit subsequently put into public circulation by the monetary authority must be physically backed by a defined weight of gold bullion. This was the method of the gold exchange standard adopted by the Bank of England under the terms of the Bank Charter Act of 1844. A modern currency board, consisting of digitized currency, effectively works the same way.
A currency board system is not the best mechanism whereby currency is made exchangeable for gold. Its weakness is it relies on the state fulfilling its obligations, so it would be better to use gold directly, either in physical or digitized form. America reneged on its gold exchange standard in 1933/34, when it first banned gold ownership and then devalued the dollar. That was simply theft by the state from its citizens. Therefore, other safeguards for a gold exchange standard must be in place.

A return to a credible gold exchange standard will then put a cap on interest rates and therefore government borrowing costs. Instead of nominal rates of 10% going on 20% and beyond, a gold exchange standard will probably cap long-term government borrowing rates in a two to five per cent range. It also allows businesses with viable investment plans to progress as well. Not only is it an obvious solution, but it is similar to that adopted in the UK following the Napoleonic wars.
Britain had government debt levels in 1815 greater than that of all advanced nations today relative to the size of her economy, with the single exception of Japan. She introduced the gold sovereign coin in 1816, comprised of 0.2354 ounces of gold, as circulating money with a face value of one pound. Over the following nine decades, not only did she pay down her government debt from over 200% of GDP to about 30%, but her economy became the most advanced and wealthy in the world. This was achieved with sound money, whose purchasing power rose significantly over those nine decades, while the quality of life for everyone improved. A sovereign was still one pound, only it bought much more.

Ordinary people were encouraged to work, spend and save. They aspired to make their families better off. The vast majority succeeded, and for those few unfortunates who fell by the wayside, charitable institutions were set up by successful philanthropists to provide both housing and employment. It was never the function of the state to support them. It would be too much to claim that it was a perfect world, or indeed that everyone behaved as gentlefolk with the best of Victorian values, but the difference between the successful laissez-faire economy in Britain with its relatively minor faults compared with the bureaucratic socialism that succeeded it is stark.

The key is in the creation and preservation of personal wealth, contrasting with socialist redistribution and wealth destruction, which has steadily undermined formerly successful economies. The future is coalescing towards an inflationary collapse for all Western governments, the manner of which is described in more detail in the following section. For prescient politicians, it creates the opportunity to reverse out of socialism, because the silent majority, which just wants commercial stability in preference to state handouts, if properly led will support a move away from destructive socialism. It is not a simple task, because all advice that a politician receives today is predicated on the creed of inflationism and socialist imperatives.

Why and how an inflationary collapse occurs

Monetarists are fully aware that if a government increases the quantity of money in circulation, its purchasing power declines. Their theory is based on the days when gold was money and describes the effect of imports and exports of monetary gold on the general price level.

Pure monetarists appear to assume the same is basically true of fiat currencies, unbacked by gold. But there is a fundamental difference. When gold is used as money for settling cross-border trade, an arbitrage takes place, correcting price differentials. When prices are generally low in one country, that country would achieve sales of commodities and goods in other countries where prices were higher. Gold then flows to the lower price centre, raising its prices towards those of other countries. With un-backed national currencies, this does not happen.

Instead, national currencies earned through cross-border trade are usually sold in the foreign exchanges, and the determinant of trade flows is no longer an arbitrage based on a common form of money. The pure link between money and trade has gone, and whether foreigners retain or sell currency earned by exports depends mostly on their confidence in it. That is a matter for speculation, not trade.

Domestic users of state-issued currency are divorced from these issues, because foreign currencies do not circulate domestically as a medium of exchange. Instead of being a form of money accepted beyond national boundaries, as gold was formerly, there is no value anchor for domestic use. For this reason, a national currency’s purchasing power becomes a matter of trust, and it is that trust that risks being undermined in a credit crisis. The less trustworthy a government, the more rapidly a currency is in risk of decline.

This is why monetarism, which was based on gold as ubiquitous money, is no longer the sole determinant of currency values. It is true that an increase in the quantity of circulating money devalues the existing stock, but if the population as a whole is prepared to increase its preference for money, usually expressed as a savings ratio, there need be no detrimental effect on its purchasing power.

With fiat currencies we enter a world where statistics reflect the quantity of money, and never the confidence people have in it. Additionally, we should observe that statistics can tell you everything and nothing, but never the truth. It is possible for an economy to collapse, but statistically appear healthy as the following example illustrates.

Imagine, for a moment, that modern statisticians and their methods existed at the time of the Weimar Republic. Government finances were covered by approximately ten per cent taxes and ninety per cent monetary inflation. It was a government whose finances were run on the lines recommended by today’s modern monetary theorists.

There can be no doubt the low level of taxation was an encouragement to business and permitted the redeployment of earnings for investment. A falling exchange rate delivers excess profits for export businesses as well. Interest rates were attractive relative to the rate of price inflation, and the economy, statistically anyway, was expanding rapidly.

This was certainly true measured in nominal GDP, the basic measure of economic activity today. Official prices, which are always the latest gathered and indexed, lag monetary debasement by at least a month, possibly two or even three. To this we must also mention governments always under-record price inflation, which is the natural consequence of earlier debasement. Therefore, even after an official price deflator is applied to nominal GDP, “real” GDP growth in Germany between 1918 and early-1923 would be judged by today’s government economists to be booming.
Interestingly, Joseph Stiglitz and a raft of left-leaning economists and politicians believed Hugo Chavez’s socialist policies were successful in 2007, when statistics revealed a similar interpretation for Venezuela’s inflation-ridden economy. However, instead of Germany being deemed to be in an economic boom, in 1920 economists in the classical and Austrian traditions saw it for what it was. Even Keynes wrote about it in his Tract on Monetary Reform, published coincidentally in late-1923 when the papiermark finally collapsed.

Germany’s inflation may have been a statistical success, but it concealed crippling wealth destruction through the transfer of wealth and wages from private individuals to the state through monetary debasement. As Lenin is reputed to have said, “The way to crush the bourgeoisie is to grind them down between the millstones of taxation and inflation.”

In Germany, inflationary financing started before the First World War to finance a build-up of armaments. At the outbreak of war, gold convertibility was suspended, and the unbacked papiermark began its inflationary drift. Exploiting the facility to issue valueless pieces of paper as currency and for the people to circulate them as legal tender became the principal source of government funds.

This trick worked until approximately May 1923. By then, the purchasing power of the mark had fallen consistently at a relatively even pace. It then took only seven months to lose all its purchasing power, when the public collectively realised what was happening, and manically dumped their marks for anything. It was the katastrophenhausse, or crack-up boom, the end of life for a state’s un-backed currency.

It was the pattern firmly established in all fiat currency collapses, which, besides the currencies in existence today, has happened to all of them throughout the history of post-barter trade, without any known exception. It is the familiar route along which the dollar and other paper currencies are travelling today. Now that we are entering a statistical slowdown in most major economies, Weimar-style financing is set to return to centre-stage. The fate for unbacked state currencies, unless somehow averted, will be the same.
The lesson from Weimar and today’s monetary inflation is that the period before the public cottons on to it can be prolonged. In Germany it was 1914-1923, followed by a swift seven-month collapse. Today it is from 1971 and still counting. But the final collapse could be as rapid as Germany’s between May and November 1923.
Doubtless, we will see rising price inflation later this year, but that statistic will continue to be suppressed. With the gap between the effect of accelerating monetary inflation and the official rate of price inflation widening, we could see for a brief period the statistical recovery in GDP that so badly misled Professor Stiglitz and others observing Venezuela’s economy twelve years ago.

A gold standard alone is insufficient

A major problem for governments when price inflation begins to rise is the notional cost of borrowing, because markets alive to the decline in the currency’s purchasing power will drive interest rates higher, despite official attempts to suppress them. So far, the problem has been successfully covered up by central banks rigging government debt markets, and by government statisticians masking the true rate of price inflation through statistical trickery. In future, efforts to keep a lid on reality will presumably intensify as a core feature of monetary and economic policy. In light of another wave of monetary debasement, the question then arises whether markets will permit this market rigging to continue. If not, the purchasing power of un-backed currencies will be visibly undermined by the erosion of public confidence in them.

We cannot know this outcome for sure until it is well on the way. The Lehman credit crisis led to a global explosion in the quantity of money as central banks worked in tandem to rescue the banks and the entire financial world. That injection still circulates in the global blood-stream. A second globally-coordinated monetary debasement is just starting, notably with China leading the way. A realistic assumption must be that this time the purchasing power of state currencies will be the victim of a severe monetary overdose.

This being the case, there is bound to be an upward adjustment in nominal interest rates forced on central banks by the markets. Government financing becomes overtly inflationary, embarking on a modern equivalent of the papiermark route. How else do you describe accelerated quantitative easing?

A loss of confidence in currencies is always reflected in the prices of gold and silver, which by then should be heading considerably higher. Crypto-currencies could compound the problem by becoming an alternative for people no longer content to retain bank deposits.

Governments and their central banks will be at a fork in the road. One direction towards monetary stability is rough, tough, suspension-breaking, but leads to a better place. The other towards accelerating monetary debasement is smoother, more familiar, but just out of sight leads to a cliff-edge of monetary destruction.

Which road will your government take?

Western governments are poorly equipped to make this decision. There are a few people in the political establishment who might understand the choice, but they will have to deliberately put the clock back, and reverse government policy away from socialism and state regulation towards free markets and sound money. They will be fighting the neo-Keynesian economic establishment, the inflationists who form the overwhelming majority of experts and advisers. These neo-Keynesians populate the central banks and government treasury departments almost to the exclusion of all other economic theorists. Spending ministers and secretaries of state will have to be told to reduce their power-bases, which goes against their personal ambitions and political instincts.

It will take an extraordinary feat of leadership to succeed.

In favor of a brave statesman will be the free-market instincts of the silent majority. It is only at times of crisis that a statesman can muster this support. In a different context, Churchill in 1940 comes to mind. The public will not know the solution, but with the right leadership they can be led along the path to economic and monetary salvation. The currency will have to be stabilized by making it convertible into gold bullion, and government spending will have to be slashed, by as much as a quarter or a third in most advanced economies. This means enacting legislation cancelling government responsibilities, something that could require a state of emergency. The message to the electorate must be the government owes you nothing. And so that you can look after yourself, the government must encourage individuals to accumulate personal wealth by removing taxation from savings.

Obviously, the most socialist welfare states will face the greatest challenge. There will be extreme tension between financial reality and entrenched interests. There can be no doubt that their currencies are most likely to fail. 

The Eurozone poses a particular challenge, with one currency circulating between nineteen member states. Conventional opinion is that all the troubles visited on the PIGS (Portugal, Italy, Greece and Spain) are due to an inflexible currency. Here, there is likely to be a split, with Germany and perhaps a northern faction gravitating towards the protection of a gold standard, while the PIGS will press for more interest rate suppression and infinite supplies of easy money from the ECB.

The US is a pivot of disaster

The US has a different but more worrying problem. It refuses to accept its decline as the dominant super-power, retreating into trade protection and autarky. Consequently, the US Government is taking destructive decisions. Since President Trump was elected, he accelerated inflationary financing late in the credit cycle in the belief it would lead to greater tax income in due course. He has also replayed the Smoot-Hawley Tariff Act of 1930, in the belief that trade protectionism somehow makes America great again (MAGA). Instead, it has crashed global trade, just as it did in the 1930s. MAGA is a fateful combination of tax cuts and trade protectionism. It is a curious form of self-harm, which backfires badly on American consumers and corporations. And it does not help foster good relations with America’s creditors, who have allowed America to live beyond her means for decades.

Foreigners now own dollars in enormous amounts, for which interpret they are America’s reluctant bankers. They are now beginning to be net sellers as a consequence of a dollar glut in their hands, combined with America’s clumsy geopolitical maneuverings. TIC data for December showed foreigners sold a net $91.4bn[ii] – the largest monthly outflow during Trump’s presidency, and this only a few months after everyone believed foreigners were buying yet more dollars to service their own debts.

While ignoring its dependency on foreign finance, America is trying to strangle China’s economic and technical development, but that horse has already bolted. Washington surely knows the jig is up, and that the US, Japan and Britain are merely islands on the periphery of a vitalized Eurasian powerhouse. We were all warned this would happen in one form or another by Halford Mackinder over a hundred years ago. America, it appears, is prepared to destroy herself rather than see Mackinder’s prophecy come true.

Consequently, the whole world is being thrown into a trade-induced slump, and the American government is central to the problem. We can expect its economy, along with all the others, to decline significantly in the coming months. It will be an encouragement for yet more inflationism. The monetary expansion which is sure to follow is set to lead to an acceleration in the decline in the dollar’s purchasing power, as foreigners turn from dollar bankers to dollar sellers. This will lead to an increase in the value of time-preference set by markets, and unless the Fed counters this increase sufficiently by raising its rates, the dollar will simply slide.

Under current circumstances, the 1980-81 Volcker solution of raising interest rates to 20% to stabilize the currency does not appear to be available. Furthermore, to reverse the Nixon shock of 1971 and reinstate gold backing for the dollar as a means of limiting the rise in interest rates is simply not in the establishment’s DNA. America, which is very much the guilty party in destroying its own Bretton Woods monetary arrangements, will find it very difficult to change its tack with such economic cluelessness at the top.

The SCO bloc

Things are very different in Asia. The eight members of the Shanghai Cooperation Organization, together with those seeking to join, represent roughly half the world’s population. It is led by gold-friendly China and Russia. A further two billion people can be said to be directly affected by the way the SCO develops, including the populous nations of South-East Asia, the Middle East, and Sub-Saharan Africa. That leaves America’s questionable sphere of influence reduced to roughly one and a half billion souls out of a global population of seven. It is proof of Halford Mackinder’s foresight.
China and Russia still have significant infrastructure plans, which will stimulate Eurasian economic activity for at least the next decade, perhaps two. If the formerly advanced national economies slump, of course Asia will be adversely affected, but not as much as even China-watchers fear. The upcoming credit crisis is likely to mainly affect America, UK, Western Europe and their military and economic allies. The SCO bloc could escape relatively lightly, if it takes the right avoiding action.
The threat to the SCO’s future is mainly from its current monetary policies, with China in particular using credit expansion to manage the economy. She has sought to control the consequences of domestic monetary policy through strict exchange controls, a strategy which has so far broadly succeeded.

The growing possibility of a dollar collapse will call for a radical change in China’s monetary policy. We know the direction this new policy will take from the actions of Russia, China and increasingly those of other SCO members, and that is to somehow incorporate gold into their paper monies. Furthermore, they are capable of doing it and making it stick.

While it is clear to us that China and Russia understand the importance of gold as true money, it is not clear whether they have a credible plan for its introduction into their monetary systems. The Russians seem to have a good grasp of the issues. China had a good grasp, but many of her economic advisors are now Western-trained in neo-Keynesian inflationary beliefs. Therefore, China is not wholly immune to the faults that are likely to destroy the dollar and other Western currencies. But the central message in China’s successful cornering of the physical gold market is a switch will be made to sound money when it is strategically sensible, despite the neo-Keynesians in it ranks.

Almost none of the SCO nations have significant welfare commitments to their populations. It is therefore possible for them to contain government spending in an economic downturn. Not only can Russia and China introduce a gold exchange standard and make it stick, but fellow SCO members and those nations tied to it can either introduce their own gold exchange standards, or alternatively use gold-backed roubles and yuan to anchor their currencies.

The economic and monetary direction taken by the SCO in the coming years could turn out to be relatively successful, at least compared with the difficulties faced by the welfare states. Such an outcome would be immensely positive for humanity as a whole and be a lifeline for those of us deluded into inflation-funded socialism. You never know, it might even force spendthrift Western governments to reform their ways and return to sound money policies.

The effect on the price of gold should be obvious. It is said that foreign students in Berlin in 1923 were able to buy houses with the spare change from their allowances, sent to them by their parents, usually in dollars or pounds. Dollars at that time were as good as gold. Today, a currency board or gold exchange standard would have to be fixed at a rate significantly higher than current fiat-currency prices. Gold is the ultimate protection from theft by currency debasement.

A Return To Sound Money: Echoes Of 1929 & The Threat To 'Unbacked' Currencies
ZeroHedge.com      Mon, 02/18/2019 - 18:00
 
Authored by Alasdair Macleod via GoldMoney.com,


In this article I draw attention to the similarities between the current economic situation and that of 1929, and the threat to today’s unbacked currencies. There is the coincidence of trade protectionism with the top of the credit cycle, and there are the inflationary events that preceded it. The principal difference today is in modern macroeconomic delusions, which hold that regulating inflation of money and credit is the solution to all ills. I conclude that economic salvation can only come from ditching today’s macroeconomic theories and by returning to monetary stability through credible gold exchange standards.

Introduction

There is an assumption in economic circles that when the general level of prices changes, it is always due to changes in supply and demand for goods and services. Prices change all the time, but without a change in the public’s preference for or against holding money and with all else being equal, the general level of prices simply cannot change. Changes in the general level of prices are due to changes in the purchasing power of the money, which stems from the public’s preferences for or against it and do not emanate from goods and services.

This may not at first sight appear to matter, but it calls into question the widespread assumption that price changes are only due to changes in supply and demand for goods and services. It is a basic error behind modern monetary theory (MMT), whose supporters are busy reviving Georg Knapp’s Chartalist theories of money, the theories that permitted Bismarck’s inflationary pre-war armament financing and the subsequent collapse of the German currency in 1923. Believers in a divine right for the state to issue currency will not let themselves be distracted by inconvenient facts. MMT followers are only one group of neo-Keynesian inflationists, who are generally blind to the blunders of their revisionist economics.

Instead, they assume that the purchasing power of a state-issued currency is objectively fixed, only varied by changes in its quantity. Preferences for or against money are not in their economic lexicon. They ignore the evidence of hyper-inflations, where the loss of purchasing power is never a straight-line affair. A myopic approach allows them to believe their feared deflation can be offset simply by regulating the increase in the quantity of money to ensure price stability, when in fact they are advocating what amounts to a hospital pass.

This notwithstanding, it is the apparently innovative solutions of MMT and other whacky ideas to address the evolving global credit crisis that are likely to unite inflationists in their drive to buy off with yet more monetary inflation the consequences of their disruptive actions earlier in the credit cycle.

This article is the third in a series about a prospective credit crisis, and its likely characteristics. The first (Trade wars – a catalyst for economic crisis) discussed the consequences of American trade protectionism coinciding with the top of the credit cycle. The second (Why monetary easing will fail) gave three reasons why monetary easing would fail to secure intended economic objectives. This article is about the consequences of accelerating inflationary policies for the purchasing-power of state-issued currencies. The comparison upon which our analysis is based is the credit cycle that terminated in the Wall Street crash of 1929 and the slump that followed, for reasons that will become clear. But first, we must remind ourselves of those depressing events.

The 1930s experience

Until 1933, the American dollar was on a gold exchange standard, whereby members of the public could exchange their dollars for gold at the rate of $20.67 to the ounce. By then the great depression was well advanced, and prices of commodities and raw materials had fallen heavily. An index of raw material prices fell approximately 50% between September 1929 and Spring 1933. Semi-manufactured products lost 40% and finished goods 30%. Agricultural prices were especially hard hit, with farm products falling 60% and wholesale food prices declining over 45%.
It was the fall in prices which led to the dollar’s devaluation to $35 per ounce of gold in January 1934, which by then was no longer available for public exchange. The dollar’s devaluation was an attempt to manage an economic outcome through price manipulation. But the reason for the collapse in prices in the first place was the dollar was tied to gold, and preferences for gold compared with goods had increased.

In effect, it was prices measured in gold through the medium of the dollar that was the issue. As noted above, when the general level of prices shifts, it is always because the purchasing power of the money they are measured in changes. Therefore, measured by an index of raw material prices, gold’s purchasing power doubled between September 1929 and Spring 1933. By the time of the dollar’s devaluation ten months later, the index of raw materials had recovered to a level which indicated a new dollar-gold relationship of $35 to the ounce was roughly right.

Today, there is no such relationship between the dollar and gold. While the US Treasury holds gold reserves, they are not available for monetary exchange. Furthermore, it is the stated objective of monetary policy to maintain a rate of price inflation targeted at two per cent. Therefore, if we face a replay of the slump following the Wall Street Crash then it is the purchasing power of gold that will rise, while that of the dollar will fall. This assumes the general price level can be controlled, which is never the case. And to the extent that other currencies use the dollar as their international yardstick, they will lose purchasing power as well.

The next crisis could be on the scale of 1929-34
We have no way of knowing the future in advance, but there are enough common factors that suggest the next credit, financial and systemic crisis might be of a similar or even greater level of disruption compared with the stockmarket collapse in 1929 and the great depression that followed it. This is why it was worth revisiting those events. Factors common to both periods are summed up in the following four bullet points:

• On 30 October 1929 Congress passed the Smoot-Hawley Tariff Act. Getting wind of it in advance, investors sold stocks, driving prices down 34% in just fifteen days. Smoot-Hawley coincided with the top of the credit cycle, which made the combination brutal for both markets and the economy. Not only did 1929 mark the end of the greatest bull market in stocks since the South Sea bubble, but the destruction of personal wealth was wholly unexpected throughout society. Today, we face a similar combination of American trade protectionism being introduced at the top of the credit cycle. Stockmarket psychology seems equally unprepared today for the consequences.
  
• There has been a prolonged period of monetary inflation since the Lehman crisis, lasting ten years to date. This compares with the inflationary period between 1921-29 of eight years. Furthermore, today’s inflationary phase of the credit cycle is in addition to a series of previous inflationary cycles, leaving a heritage of past distortions still to be unwound. Before the 1921-29 period, a short sharp depression in 1920-21 meant there was an insignificant legacy of economic and financial distortions carried over. Therefore, a credit and systemic crisis today has the potential to be more damaging than the crisis that preceded the great depression.
  
• In 1921-29, the price-inflation consequences of monetary expansion were concealed by benefits from improved farming and manufacturing methods. Today, price inflation is also concealed through statistical manipulation. The lack of apparent price inflation in the earlier period coupled with low long-bond yields (less than 4%) fuelled a stock market boom that ended in 1929. The same dynamics today have fuelled a similar stock market boom, which may have ended last year.
• In 1921-29, the growth of bank lending at approximately 50% over the period was similar to commercial and industrial bank lending between 2009-18, which increased by 57%. The reason for this comparison is bank lending in the 1920s was substantially to commercial and industrial customers. Additionally, in the 1920s finance through discounted bills became highly inflationary. The current period commenced with a massive monetary injection by the Fed, and in addition both consumers and the government are also heavy borrowers.

There are also some additional factors to consider for the current credit cycle.

• The overall consequences of a credit and economic crisis are greatly magnified by the lower proportion of genuine production relative to the whole economy today. Compared with the 1920s, state finances today are more highly geared to economic outcomes.
• What has been ignored by inflationists is the economic destruction from monetary inflation, which transfers wealth from bank depositors and wage-earners to the banks, their favoured customers, the government and the central bank. Therefore, inflationary monetary policies conceal the true extent of an economic slump, make it worse and certainly do not cure it.
• In 1929-34, Banks defaulted in large numbers. Central banks today do their utmost to stop commercial banks from failing. The demands for yet more monetary inflation will be impossible to resist because of the need to support both the banking system and rapidly deteriorating government finances.
• Central banks are breaking ranks, with Russia and China leading Asian states away from the dollar. Russia already has gold as its principal reserve currency, and China has successfully become the world’s largest gold miner and refiner, while her people take up nearly two-thirds of global mine supply[v]. The consequences for currencies whose issuing banks do not follow this Asian path could be significantly worsened if they continue to insist gold plays no part in their monetary policy.
• Bond yields in the 1929-34 period fell to levels that are still higher than those of today, with the lowest yield on long bonds at 3.26% in April 1931.[vi] The originary rate at that time reflected the dollar’s convertibility into gold. The originary rate of interest is set by the time-preference accorded to money in free markets, so is primarily the public’s view of the quality of that money. Today, dollar and other currency bond yields remain heavily suppressed, with five out of six major central banks still expanding their balance sheets and three of them with negative interest rates.[vii]The risk is that when markets adjust to a time-preference value that takes account of this aggressive monetary debasement, a massive interest rate shock will be triggered.
• The widespread use of exchange-traded and indexed funds divorces investors from investment risk. If and when an increase in market risk becomes apparent, the public are likely to become indiscriminate sellers of ETFs and other index trackers, accelerating a stock market decline and bringing forward a collateral-led shock.

In summary, greater monetary forces appear to be at play today than existed in 1929-34. If they undermine the ability of policymakers to manage outcomes, the monetary consequences are bound to be very serious. But they will different in one important respect compared with ninety years ago: the purchasing power of gold can be expected to rise substantially while the purchasing powers of currencies fall. The success of policymakers in managing a crisis similar in scale to that of the great depression depends on their understanding of economics, which is our next topic.

The great depression informed today’s academics

The monetary policies followed by central banks will be crucial for the survival of state-issued currencies in the coming years, if as seems increasingly likely, we are on the verge of a new credit crisis.

Experience gained from the great depression is behind today’s economic theories. By that time, leading proponents of the Austrian school of economics had demonstrated that the causes of the great depression had their roots in the monetary expansion of the previous decade. Leading theorists, particularly Von Mises and Hayek perfected market-based sound-money theories, their validity honed and confirmed by Europe’s post-war monetary collapses in the early 1920s.
Meanwhile, in 1913 the US had established a federal banking system, which flourished in the 1920s on the back of credit expansion. The warnings of Austrian economists about credit expansion were ignored. When the crash they predicted occurred, the federal banking system excused itself from culpability. Instead, theories that deflected blame to free markets and absolved the federal system were actively promoted. A new theory of statism that enhanced the supposed virtues of state-issued money gradually evolved. And it is this which has become the basis of today’s macroeconomic theory.

Austrian and other laissez-faire free-market economic theories were passed over. Today, nearly everyone subscribes to macroeconomics. Its high priests claim it fundamentally differs from classical economics, which they assert is relevant only to microeconomic analysis. It became a handy way for neo-classical economists to absolve themselves from addressing fundamental questions, such as Say’s law, the socialist calculation problem, and other established truths impossible to explain away.

At the heart of macroeconomics is mathematics. Macroeconomists imply that in aggregate, the uncertainties of future human action cancel out, validating a mathematical approach. With this comes statistics aggregating transactions and prices. To neo-Keynesians, monetarists and MMT followers alike, government statistics are the basis for economic and monetary policies. But because they exclude human action, they are fundamentally flawed and badly misleading for policy determination.

These economic policies are sure to be applied even more vigorously to resolve the next crisis. They are the sources of the errors that if continued are bound to lead to a devastating conclusion. The logical outcome is the end of fiat currencies and all state theories of money. The Austrians had a description for it, having experienced it in 1922 and observed Germany the following year: the crack-up boom, or flight out of state currency into real values.

The likely progression of a new credit crisis

If, as seems likely, central banks see an increasing probability of recession, then interest rate policies will initially be eased. The rally in stock markets since mid-December has been discounting this possibility, which is now emerging as fact. However, cautious cuts in interest rates at the start of a cyclical downturn usually fail to stimulate the economy, only leading to a market rally, which in 1929-30 lasted five months. This one has lasted two so far and still counting.

The future course for advanced economies depends on the confidence of lending bankers in the medium-sized and small businesses that make up roughly 80% of total business activity. We have already seen funding dislocations in the corporate bond markets, which will have confirmed to bankers the increasing risk attached to offering working-capital facilities for businesses. Businesses which based their calculations on cheap credit being available are putting investment plans on hold and considering cutting existing commitments, at least in part because of their bankers’ cautious attitude. This is already evident in capital investment statistics around the world.
It appears that the psychology underlying productive activity has changed. Every time a central banker makes a reassuring statement, instead of applauding it, commercial bankers question the motive, saying there’s no smoke without fire. It’s the same for investors. Next time the stockmarket slides, look out for senior government figures attempting to reassure investors, and investors taking the hint that things must be worse than they appear if they need reassuring.

If suspicions are correct that trade tariffs being introduced at the top of a credit cycle is lethal timing, then equities could be embarking on a substantial bear market. It follows that there will be a switch from owning stocks as a sure-fire way of making money to owning stocks rapidly becoming a liability. The speed of the switch in sentiment will depend on a number of influences. But given that a comparison with the 1929-32 crash has some validity, it could be unexpectedly severe. There is also uncertainty over an additional factor, the presence of index-tracking funds.

Index trackers are not investments, though they are authorized and marketed as such. They are bets on a market’s direction. It stands to reason that when the direction changes, there will be widespread liquidation of bullish trackers and increased interest in trackers which profit from falling markets. Therefore, the speed of the fall could be accelerated significantly by liquidation of these funds.
The effect of a deepening economic crisis on government finances in welfare-driven states is potentially catastrophic. Not only will welfare commitments rise, but tax revenues will fall. And as noted above, the genuinely productive element of a modern welfare state upon which the whole economy depends has already shrunk as a proportion of the whole. Furthermore, governments will be reluctant to return to the days of austerity. So-called, but not austerity at all, because only expected increases in spending were scaled back. Simultaneously, governments everywhere will be increasing their borrowing, thereby draining wealth and capital resources from the already depleted productive sectors of their economies at an accelerating pace.

Central banks will find themselves attempting to finance escalating government deficits and underwriting their commercial banking systems with all their derivatives at the same time. Monetary inflation can only be cranked up, on top of the monetary inflation that persisted for all the cycle just ended, with five of the major central banks still expanding their balance sheets and three of them still imposing negative interest rates.

This is why, unless there is a major change of policy direction, the purchasing power of unbacked fiat currencies will be undermined. The destruction of wealth through monetary inflation, far from rescuing the economy, simply adds to the national woes by devaluing the efforts and wealth of ordinary people. Accordingly, unless there is a rapid acceptance that self-serving macroeconomic policies are at the root of this evil, interest rates will quickly rise beyond the authorities’ control as the fiat money delusion is revealed for what it is.

There is a way to stabilize interest rates, which government economists won’t like: return to a credible gold exchange standard, then interest on long-term government borrowing will be capped at under 5% and falling, assuming credibility in government finances is restored. It will require far higher gold prices to stick, which will catch out any government which has been lying about its bullion reserves. But at least that will give government finances a chance to stabilize while other actions to reduce the burden of government on the productive sector of the economy are put in place.

$166 Billion In Student Debt Is Now Officially Delinquent
 
ZeroHedge.com      Sun, 02/17/2019 - 21:30

According to the Federal Reserve Bank of New York's latest quarterly household debt report, student loan delinquencies surged last year, up to $166.4 billion in the fourth quarter. The report includes the total owed and the percentage of delinquent accounts past 90 days or in default. 
The percentage of delinquent accounts figure has stood at 11% since about mid-2012, but the total amount of debt outstanding has increased to a stunning $1.46 trillion at the end of December 2018 - and unpaid student debt rose to its highest levels ever. 
Delinquencies rose even as unemployment fell below 4%, telegraphing that the U.S. job market simply hasn't generated the level of wage growth necessary to deal with the country's growing debt load. 

Bloomberg Intelligence interest-rate strategist Ira Jersey said: "Income levels for graduates are not necessarily high enough for debt payments overall. If you have a choice to pay your student loan or for food or housing, which do you choose?”
 
According to Jersey, the loans "probably won't hurt the economy" because they are government-sponsored. Which is another way of saying taxpayers will once again come to the "rescue."
"But incrementally, it does mean higher federal deficits if the loans are not repaid,” he conceded. 
Echoing what we first said back in 2012, Bloomberg notes  that the total amount in arrears is twice the amount the U.S. Treasury paid to bail out the auto industry during the last recession.
Meanwhile, with the cost of higher education doubling over the last 20 years, even the St. Louis Fed was unsure as to whether or not "college was still worth it", according to a blog posted on their website. 
 
Another stunning observation: the age group that is transitioning to delinquency the fastest is not workers fresh out of college, but the 40 to 49 year old cohort, partly as a result of parents shouldering the load and borrowing to pay for their children's expenses. 
This has forced some schools to provide more support for those attending. For instance, Cornell increased tuition for 2019-2020 by "the lowest it has been in decades" and the school is "budgeting for a significant increase in financial aid". Purdue University will also not boost room and board rates for 2019-2020, the seventh year in a row it has avoided hiking these prices.
On average, however, in-state tuition and fees for a public four year institution has risen by 3.1% beyond inflation over the last decade. 

Nomi Prins: Get Used To "The Powell Put"
 
Fri, 02/15/2019 - 18:30
Authored by Nomi Prins via The Daily Reckoning,

In the land of the Federal Reserve and its market-manipulating mechanisms, there’s now an unofficial market term called the “Powell Put” or the “Powell Pivot.” It is in direct reference to Fed chairman Jerome Powell. Before he became chairman, Wall Street referred to prior heads’ policies with terms like the “Greenspan Put” the “Bernanke Put” and the “Yellen Put.”

In layman’s terms, what the term means is that if the markets fall by too much, the Fed will swoop in and try to save the day, the month, or the year. A “put” in options terminology is insurance against a drop in prices. Nowadays, the “Powell Put” is the market’s insurance that the Fed will act to stimulate the markets if necessary.

Markets had been waiting for it to materialize. But Powell had previously talked about the need to raise rates to give the Fed “enough ammunition to fight the next crisis.” The size of the Fed’s balance sheet would also have to be reduced enough to provide it enough room to grow if needed.
Markets began to worry the Powell Put might never materialize when he raised interest rates in December, when the market was in the middle of a severe correction (that nearly culminated in a bear market). He also said the balance sheet reductions, or quantitative tightening, would run on “autopilot.”

Markets tanked on his comments. But then on Jan. 4, after stocks fell nearly 20%, the “Powell Put” finally materialized.
In comments addressing the American Economic Association, Powell said he was “prepared to adjust policy quickly and flexibly.”
And about the balance sheet reduction policy that was on autopilot in November, he said
“We wouldn’t hesitate to change it.

Powell has subsequently emphasized the need for “patience.” The Dow has continued to rally behind his newfound dovishness. In fact, this January was the best January in 30 years. If the rally continues, the market could soon be testing its early October highs.
What this means is that the Fed isn’t going to raise rates anytime soon. As my colleague Jim Rickards has explained, “patience” isn’t just a word. It’s a signal to markets that the Fed will not be raising rates anytime soon, and that it will give them notice when it is.
The Fed is also unlikely to reduce the size of its balance sheet in a bold way, as long as economic headwinds from around the world continue. That in turn, means dark money will remain available to boost markets.

There are two main ways the Federal Reserve can unleash dark money into the financial system. One is by keeping interest rates (or the cost of money) low or at zero percent. The other is through quantitative easing (QE) or bond-purchasing, where the Fed creates money electronically and uses it to give to banks to buy Treasury or mortgage bonds from them.
Reducing the cost of money, or interest rates to zero, was done for the first time by the Fed in the wake of the financial crisis. The Fed did this supposedly as an emergency measure to inject money into the system because banks had stopped lending. In addition, QE was enacted because interest rate policy wasn’t effective enough. Again, supposedly, it was supposed to be an emergency measure.

But we saw how the stock market reacted when Powell said QT would run on autopilot. Now the Fed is ready to finalize plans that would leave the balance sheet at a much higher level than it previously envisioned. Again, that means additional support for markets.
In the latest development, as Brian Maher discussed in yesterday’sDaily Reckoning, Federal Reserve Bank of San Francisco President Mary Daly suggests that the Fed could decide to use its balance sheet as a routine part of how it guides the economy, not just as a last-ditch measure to deploy in emergencies.

That means what was once supposed to be an emergency measure could become just another regular policy tool if normal interest rate policy isn’t enough to stimulate a non-responsive economy. We’ll have to wait and see if this idea gains traction within the Fed. Either way, reducing the balance sheet to “normal” levels is no longer a priority for the Fed.But it’s not just the Fed that is putting additional tightening on hold. Central banks around the globe have been re-calibrating their policies to reflect the weaker economic environment. As one Wall Street Journal article recently reported, “Central bankers have geared their messages toward pausing on tightening steps rather than imminently launching new stimulus.”

Central banks from South Korea, Malaysia, Indonesia and Canada, who all raised rates last year, are now questioning such plans. The Bank of Japan and European Central Bank also indicated last week that their negative rates are here to stay for the foreseeable future. The truth is it’s all about the $21 trillion of dark money fabricated by, and dispersed from, the world’s major central banks. The volatility periods, including last year’s nearly 20% correction, are related to the fear that dark money supplies will go away.

These factors will keep sparking intermittent fear and volatility this year — but dark money collusion will not be going anywhere. While there will be some minor rate hikes here and there, and mild tweaking of massive asset books, the overall story will remain the same. You should expect major central banks to end the year, on average, with asset books in total size right where they started.

Once again, that means dark money will continue to be available to markets.
The fact is, dark money is the #1 secret life force of today’s rigged financial markets. It drives whole markets up and down. It’s the reason for today’s financial bubbles.
On Wall Street, knowledge of and access to dark money means trillions of dollars per year flowing in and around global stock, bond and derivatives markets.
I learned this firsthand from my career on Wall Street. My first full year working on Wall Street was in 1987. I wasn’t talking about “dark money” or central bank collusion back then. I was just starting out.

Eventually, I would uncover how the dark money system works, how it has corrupted our financial system and encouraged greed to the point of crisis like in 2008. When I moved abroad to create and run the analytics department at Bear Stearns London as senior managing director, I got my first look at how dark money flows and its effects cross borders.
That dark money goes to the biggest private banks and financial institutions first. From there, it spreads out in seemingly infinite directions affecting different financial assets in different ways.
Yet these dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups. To be a part of the dark money elite means to have control over many.

These is not built upon conspiracy theories. To the contrary, alliances make perfect sense and operate publicly. Even better, their exclusive dealings and the consequences that follow are foreseeable — but only if you understand how the system works and follow the dark money flows.
Dark money rules the world, and it could keep the bull market running longer than most people expect, even though the eventual turnaround could be ugly.

Get Ready To Pay More For Toilet Paper, Cat Litter And Garbage Bags
 
ZeroHedge.com      Thu, 02/14/2019 - 13:05
  
After finding they could largely get away with raising prices last year, makers of household staples are planning another round of inflationary price hikes in order to offset higher commodity costs and boost profits, according to the Wall Street Journal. 

Unsurprisingly, the price increases have been working out swimmingly for makers of consumer-goods, particularly for companies whose competitors have responded with their own price hikes, according to  
According to an analysis of Nielsen data by Sanford C. Bernstein, US sales volumes of personal and household products declined 1.4% in January, while dollar sales of those products rose 0.7% in the same period - suggesting that the price increases are more than offsetting the decline. Meanwhile, a robust job market providing Americans with the largest annual wage increases since the end of the recession has boosted average hourly earnings for private-sector workers by 2.9% y/y; the most since January 2009. 

Maker of Arm & Hammer products Church & Dwight recently increased its prices on 30% of its products - including baking soda, cat litter and OxiClean cleaning products, while Clorox raised prices on about half of its product portfolio last year - including their Glad trash bags and plastic wraps. Clorox attributed price hikes to a boost in profit margins in its most recent quarterly filing, yet because Glad's competitors did not follow suit with higher prices of their own, the company experienced an overall sales decline in the period. The company most famous for bleach plans to boost spending on promotions in the near term to make up for the sagging sales, executives announced on Monday. 

CEO Benno Dorer last week voiced confidence in Clorox’s pricing strategy over the long term, and the company expects to invest in new products. Higher prices for Kingsford charcoal and Burt’s Bees products went into effect in December and February, respectively. -WSJ
That said, while Clorox reports higher sales in other categories such as cat litter and bleach, there are limits to what people will pay. 

Tyler Aftab, a 35-year-old teacher in Green Brook, N.J., said he noticed at his local Costco last week that Charmin and Bounty, which were normally under $18 last year, were both being sold for about $23. Glad trash bags, normally under $15, were listed at about $19.
Mr. Aftab bought the Glad kitchen bags discounted for under $16. He opted to buy Costco’s Kirkland Signature brand of paper towels instead of Bounty. He decided to not buy any toilet paper.
“I am a fairly loyal consumer of Charmin, but I will not pay $23 for the pack,” Mr. Aftab said. “I will wait until those prices come down.” -WSJ

Meanwhile, Procter & Gamble has been experimenting with price increases of its own on a rolling basis - from around 4% to 10% on products such as Puffs brands, Papers, Bounty and Charmin - which consumers can expect to see as soon as this month. The price hikes led to an increase in organic sales, according to a January report by the company - "a closely watched metric that strips out currency moves, acquisitions and divestitures," reports the Journal. 

Church & Dwight CEO Matthew Farrell said last week that the company has been in discussions with retailers to raise prices on other products - including personal care items. According to the Associated Press, the price hikes will address the company's lower than expected gross margin, which was attributed to "the household business growing faster than expected and U.S. tariffs, the impact of which has been addressed with the announcement of 2019 price increases."
"The good news is that competitors are raising price in those categories as we speak," said Farrell on a conference call last week. 

Kimberly-Clark, whose portfolio of produicts includes Viva, Huggies, Cottonelle, Kleenex and Depend adult diapers, said last month that it expects volumes to suffer - especially with tissue products, after price increases averaging in the mid-to-high single digit percent range are expected to put a damper on sales. That said, the company expects organic sales to increase by 2% this year. 

According to Bernstein analyst Ali Dibadj, copmpanies without a mix of migh and low-priced products won't find it as easy to pull off price increases because price-sensitive customers may abandon their brands completely. 

"The big fear is your pricing is too high and that consumers are just not going to come back to your brand." 

Rats, Public Defecation, & Open Drug Use: Our Major Western Cities Are Becoming Uninhabitable Hellholes

ZeroHedge.com      Thu, 02/14/2019 - 04:33

Authored by Michael Snyder via The End of The American Dream blog,

Almost everyone that goes out to visit one of our major cities on the west coast has a similar reaction. 

Those that must live among the escalating decay are often numb to it, but most of those that are just in town for a visit are absolutely shocked by all of the trash, human defecation, crime and public drug use that they encounter.  Once upon a time, our beautiful western cities were the envy of the rest of the world, but now they serve as shining examples of America’s accelerating decline.  The worst parts of our major western cities literally look like post-apocalyptic wastelands, and the hordes of zombified homeless people that live in those areas are too drugged-out to care.  The ironic thing is that these cities are not poor.  In fact, San Francisco and Seattle are among the wealthiest cities in the entire nation.  So if things are falling apart this dramatically now, how bad will things get when economic conditions really start to deteriorate?

Let’s start our discussion by looking at the rat epidemic in Los Angeles.  Thanks to extremely poor public sanitation, rats are breeding like mad, and at this point they have even conquered Los Angeles City Hall…
Officials at Los Angeles’ City Hall are considering ripping all of the building’s carpets up, as rats and fleas are said to be running riot in its halls.

A motion was filed by Council President Herb Wesson on Wednesday to enact the much needed makeover amid a typhus outbreak in the downtown area.Wesson said a city employee had contracted the deadly bacterial disease at work, and now he’s urging officials to investigate the ‘scope’ of the long-running pest problem at the council building.

People from all over the world are drawn to Los Angeles because of what they have seen on television, but it is truly a filthy, filthy place.  The number of homeless has been rising about 20 percent a year, public drug use is seemingly everywhere, and there are mountains of trash all over the place.  Needless to say, rats thrive in such an environment, and the epic battle that one L.A. journalist is having with rats was recently featured in the L.A. Times…
Eastside, Westside, north and south, they’re everywhere. If you’re a rat, the California housing crisis has not hit you yet and it never will.

At our house, it sounded like the rats were having relay races in the ceiling, and they don’t wear sneakers. Your eyes blink and your leg twitches as you drift off to sleep knowing that if the plague comes back, you are living at ground zero.

In our garden, they devoured entire heads of lettuce. They destroyed my squash just before it was ripe and ready to eat. They stole my tomatoes, cilantro and Anaheim chili peppers. Were they bottling their own salsa?

But let’s not be too hard on Los Angeles, because the same things that are going on there are happening in major cities all over the western portion of the country. For example, a massive rat infestation recently forced authorities to close a shockingly filthy homeless encampment under a bridge in Salem, Oregon…

Amid the trash, human despair and anguish, one weeping woman prepared to leave the most recent place she knows as home without any real inkling of where she’ll go next.
Terry Balow, an outreach worker with the Salvation Army, has been here for the darker moments of living life under a bridge — anger, mental illness, drug use and human frustration boiling over at times everywhere one looks.

Yet it was a rat infestation and concern about human health that prompted the city of Salem to move the campers out.

“It just grew and grew and got worse,” Balow said. “It’s badder than people can imagine.”
Yes, there have always been homeless encampments in this country, but in modern times we have never faced anything on the scale that we are facing now. More than half a million Americans are homeless right now, and that number continues to grow.  And as it grows, communities will increasingly be forced to make some tough decisions.

I am quite eager to talk about San Francisco, but before we get to the City by the Bay, let’s take note of something that just happened in Denver. If you are into public defecation, you will be very happy to learn that Denver just made it legal…

First, the obvious: The Denver City Council has voted unanimously to decriminalize a number of offenses, including defecating in public. Also, urinating in public. Camping on public or private land without permission. Panhandling. And lying across public rights-of-way, such as sidewalks.
Democrat Mayor Michael Hancock and city officials explained the new ordinances are designed to protect immigrants — legal and the other kind — from “unintended consequences.” These consequences were fines and longer jail terms, as has been customary in most places for violating the behavioral norms of civilized American society.

If only America’s founders could see us now. They would be so proud.

Speaking of public defecation, San Francisco has become world famous for the piles of human poop that constantly litter their streets.  During one seven day stretch last summer, a total of 16,000 official complaints were submitted to the city about human feces.
Blessed with such beautiful natural surroundings and so much wealth, San Francisco should be a great place to visit, but that definitely is not the case.

When reporter John Stossel recently visited San Francisco, he was stunned by what he found…
San Francisco is a pretty good place to “hang out with a sign.” People are rarely arrested for vagrancy, aggressive panhandling or going to the bathroom in front of people’s homes. In 2015, there were 60,491 complaints to police, but only 125 people were arrested.

Public drug use is generally ignored. One woman told us, “It’s nasty seeing people shoot up — right in front of you. Police don’t do anything about it! They’ll get somebody for drinking a beer but walk right past people using needles.” In San Francisco they actually give out free syringes to drug addicts, and it is being reported that they handed out a total of 5.8 million free syringes in 2018.
That is a lot of syringes.They also try to get the syringes back in order to prevent the spread of disease, but that hasn’t been too successful…

There’s just one problem – well, more than one – despite spending an extra $1.8 million last year in an effort to retrieve needles, the San Francisco Chronicle reports that the department handed out about 2 million more syringes than it got back… many of which are now washing around the streets of one of the richest cities in America (along with the feces of their users). And with so much public drug use going on, it should be no surprise that crime is completely and totally out of control. 

Here is more from John Stossel…
Each day in San Francisco, an average of 85 cars are broken into.
“Inside Edition” ran a test to see how long stereo equipment would last in a parked car. Their test car was quickly broken into. Then the camera crew discovered that their own car had been busted into as well.

It has been said that “as goes California, so goes the country”, and if this is where the rest of the nation is headed then we are in serious trouble. When Bill Blain recently visited San Francisco, he was so horrified by what he encountered that he felt he must write about it…

I hope my American hosts will forgive me for raising this, but the squalor we saw in The City was frightful. San Francisco has always been one of favourite US cities, but the degree of homelessness, mental illness and drug abuse we saw on this trip was truly shocking. Walking round SF on a Sunday Morning and we saw sights we couldn’t believe. This must be one of the richest cities in the world – home to 4 of the 10 richest people on the planet according to Wiki. I asked friends about it, and they shrugged it off.. “The City has always attracted the homeless because of the mild weather,”.. “It’s a drug thing”.. “its too difficult”… “you get used to it..”
Well, I didn’t.

I found it quite shocking the number of folk sleeping rough on the sidewalks, the smell of weed and drug impedimenta everywhere, the filth, mental illness and degradation on view just a few meters from the financial centre driving Silicon Valley. It’s a city where the destitute seem to have become invisible to the Uber hailing elites. We found ourselves hopping on one of the beautiful F-Route Trolley Buses to find nearly every seat occupied by someone lugging around their worldly possessions around in a plastic bag. It was desperately sad.

San Francisco has a new mayor, and they are going to spend millions upon millions of dollars to try to clean up the streets.But it won’t be easy to turn things around, because more drug users and homeless people are moving into the city every single day…

And San Francisco is generous. It offers street people food stamps, free shelter, train tickets and $70 a month in cash.“They’re always offering resources,” one man dressed as Santa told us. “San Francisco’s just a good place to hang out.”So, every week, new people arrive.

We like to think that we are setting a positive example to the rest of the world, but the truth is that they are laughing at us.America is in an advanced state of decay, and it is getting worse with each passing year.If we keep doing the same things we will keep getting the same results, and right now there are no signs that the overall direction of this nation will change any time soon.

Millions Of Angry Americans Will End Up With A Smaller, Or No Refund This Year: Here's Why
 
ZeroHedge.com      Tue, 02/12/2019 - 10:22
 
When Congress passed the Tax Cuts and Jobs Act (TCJA), a/k/a Trump's tax code overhaul in early 2017, the big expectation for tax season 2018 - the first tax-filing season under the new tax law - was that virtually all Americans would end up receiving a bigger refund. And yet, as numerous analysts have noted, as many as tens of millions more taxpayers will end up with no refund, or a smaller one, compared with a year ago, before the lower rates fully took effect.

How is that possible be? The explanation rests with the many other changes that made it into the revised tax code, and as millions of American taxpayers sift through the revised tax code, some are venting their surprise and anger.

First, the facts: with about 10% of households having filing their returns through the weekend, the percentage of households getting tax refunds is similar to last year, but the average refund size is down 8%, to $1,865. The number of returns filed so far -16 million - is also down 12% from the similar point a year ago.

To be sure, the first batch of weekly data from the IRS offers a very preliminary, unrepresentative look at what’s happening to taxpayers using the new tax system, which increased the standard deduction, lowered rates, and curbed some deductions. Typically, early filers are those who expect significant refunds, while those who owe money file closer to the mid-April deadline.
Furthermore, as the WSJ notes, the picture will become clearer later this month, as tens of millions more returns are processed, and while the IRS had been partially shut down in the run-up to filing season, the US tax agency says it is running smoothly so far (although all that may change on Friday should the government be shut again should a border deal not be reached between Trump and the Democrats).

Meanwhile, in absolute terms, about two-thirds of US households are getting tax cuts for 2018 under the law, and just 6% are paying more, according to the Tax Policy Center. But the size of those tax cuts may not be reflected in refunds, which are just the end-of-year reconciliation of what a taxpayer owes and what was withheld or paid during the year. As Bank of America observes, many taxpayers received much of the benefit through reduced paycheck-withholding throughout 2018, leaving nothing for the actual refund.

Here's the issue in a nutshell: while in 2018, personal income grew by 4% tax withholding actually fell by 0.6%. Analyzing the relationship between income and tax withholdings, BofA found that if withholdings had grown in line with income, tax withholdings would have been approximately $90bn higher. That is, about $90BNn of the tax cuts have already been paid out to households through the new withholding tables, which reflect the lower tax rates and the doubling of the standard deduction from the TCJA. Said otherwise, overall refunds will be $90BN less than if withholdings stayed constant.

That said, on average refunds should still be larger than usual according to estimates from Evercore ISI and Morgan Stanley, although tax experts and preparers expect many households to be surprised by the size of their refunds—in both directions—and, on balance, millions of people may shift from getting refunds to owing taxes.

Needless to say, they won't be happy, having expected - and likely already spent - a far greater refund than in 2018, especially since a clear majority of Americans - four out of five, according to the Tax Policy Center in Washington - are supposed to see a reduction in taxes.

So what happened, and why aren’t there lots more refunds? Here are some key observations from Bloomberg: The Internal Revenue Service offers ongoing guidance to help employees and employers decide how much money to withhold from paychecks so that most income taxes are paid automatically and gradually throughout the year. The shifting tax brackets - they now start at 10 percent and top out at 37 percent for income about $500,000 - plus changes to exemptions, deductions and credits meant that many taxpayers needed to adjust their withholding. But most taxpayers were confused how to do so, according to tax adviser H&R Block Inc. (The IRS reworked its calculations, but the updated tables didn’t translate precisely from the old law.) Home Depot Inc. found that only 1 percent of its employees had altered their withholding.
End result: fewer, and smaller, tax refunds.

The IRS expects to issue 105.8 million refunds this year, down 2 percent from last year’s 108.3 million. According to Ernie Tedeschi, a former Treasury Department economist who analyzed the topic for research firm Evercore ISI, many taxpayers with incomes below $100,000 will get their tax cut in the form of a bigger refund, while those with higher incomes got the tax cut in the form of higher paychecks throughout 2018 - and therefore might be expecting refunds that aren’t coming. Analysts anticipate the total dollar amount refunded to be slightly higher, meaning some people will get bigger refunds than in the past. Among them are couples with children, since the standard deductions for filing as a couple, as well as the child tax credit, both almost doubled in the revised tax code.

Some Americans won't be getting a refund at all.

More than 30 million Americans - 21 percent of taxpayers - didn’t have enough taken out of their paychecks throughout the year, meaning they will owe the IRS will they file their returns this year, according to a study from the Government Accountability Office. That’s an increase from 18 percent of taxpayers who were under-withheld last year. That means about 5 million people who got a refund last year won’t be getting one this year.
So who’s angry?

Some taxpayers have turned to Twitter to vent their unhappiness after completing their tax returns and seeing the bottom line. A representative sample: "I filed my 2018 tax return today as a substitute teacher. My refund will be 40% less than the refund I got last year."
What does this mean for consumer spending?

Despite fewer tax refunds overall, Wall Street analysts are expecting to see a boost in spending from the lower-income consumers who will benefit from the expansion of the child tax credit. Middle-income households, those earning from $55,000 to $75,000 a year, will also see benefits, with as much as half of their tax-cut bounty showing up in refunds, Wells Fargo said. The tax-cut sugar high could be short lived, however, the Congressional Budget Office said the effects of the tax cuts are set to wane in the coming quarters.

According to an analysis from Bank of America, the extra income from tax refunds could support greater consumer spending, however the bank sees reasons to fade some of the potential boost to spending. One reason is that a large share of the child tax credit will to go upper income households who are likely to have a lower marginal propensity to consume out of tax refunds. Also, those high income households in high tax states will need to account for the change in the SALT deductions which could lead to a significant decline in refunds or need to pay additional taxes during tax season. Also as noted above, in 2018, personal income grew by 4% but tax withholding fell by 0.6% as a result of smaller withholdings (and lower refunds in 2019). That means that much of the consumption benefit from lower taxes already took place in 2019, at the same time as the lower-taxed incomes were earned.

Then there is the impact of SALT: under the previous tax code, state and local tax deductions were one of the more popular tax breaks. In the 2017 tax filing season, over 33 million tax returns (roughly 22% of all returns) had deducted state and local taxes on their tax returns. However, under TCJA, deductions of state and local taxes will now be capped at $10,000, raising the tax burden on many tax filers from high tax states such as New Jersey, Connecticut and California .

For many, the impact will be nontrivial. In dollar terms, BofA estimates that the lost deductions would cost each impacted tax filer, on average, an additional $3,000 in federal taxes in 2019. Some may see a partial reprieve from lower marginal tax rates. However, this implies, many tax filers will see a substantial reduction in tax refunds or worse may need to pay additional taxes during tax season, potentially leading some households to forgo or delay consumption as they adjust to the new tax code.

Bottom line: under the aggregate numbers, BofA finds many different tax situations with clear winners and losers which could distort spending patterns as households adjust to their new tax reality. Translation: anyone who expected a uniform boost in refunds will be disappointed.
Finally, what are the political ramifications of this?

According to Bloomberg, fewer people getting refunds will give U.S. Democrats, who now hold a majority in the House of Representatives, an opening to question how much the tax law benefited the middle class. Only about 45% of voters approve of the tax cut, according to recent polls, and many Republicans in high-tax states already lost their seats in the 2018 midterm elections due to the changes in the deductibility of state and local taxes. Looking ahead to the 2020 presidential election, dissatisfaction with the tax law may give Democrats an opening to promise tax changes of their own, ones that favor the middle class.