Here Come Negative Capital Flows


I hope you’re ready.

This, incidentally, is one of the items in my Year End Ticker due out in a few days.

The Chinese raised rates over the holiday, and their market sold off to the tune of 2%, after being reasonably-stable in early trade.  The futures this morning are down fractionally, with Europe getting hit a bit.  A foot of snow isn’t bringing people into work on the East Coast, of course, which will certainly mute trade some today during a week that is usually very light in volume to begin with.

The fatal error that Bernanke has committed is about to become clear: ZIRP can only “work” in a world where the entire world is ZIRP, or close to it.  If it’s not then you get capital flight.  Japan found this out the hard way and became a funding currency for a “Carry Trade”, but they had a huge buffer in the form of personal savings.  That’s now gone, and yet they have been unable to exit their zero interest policy, and in fact have continued to “buy” (monetize) various “financial assets” in a futile and desperate effort to “normalize” their economy.

Ultimately lawmakers and citizens may figure it out: ZIRP, and indeed all of Fed Policy for the last three years, has had nothing whatsoever to do with the general economy or the common weal of our nation, and has been focused on only one point – attempting to prevent recognition of the insolvency of virtually every large financial institution in The United States.

Incidentally, for those who think I’m nuts, it is a matter of record that the same thing happened under Volcker – and he explicitly told the big banks (especially Citi) that he’d let them lie – for a while.  But he also told them that if they didn’t clean up their crap that he’d eventually run out of the ability (or willingness in Congress and elsewhere) to do that, and if he did before they cleaned up their act they’d be toast.  They did, and he did, and the deception remained “hidden” for more than a decade.

Today it’s different.  The banks have been given no timeline to clean up their crap.  Instead Bernanke has engaged in the most-outrageous action of any central banker in the last 100 years and perhaps of all time, literally monetizing more than two trillion dollars of government debt as a means of trying to keep the grand Ponzi Scheme alive.

He will fail.  He must fail for one reason above all others – the banks have refused to take down their leverage and sell off their crap.  Instead they have gone back to their old compensation metrics, paid out over $100 billion in bonuses and wages in the last year, and have extorted Congress and FASB to make legal intentionally-bogus marks on assets that have no relationship to their current value (or any reasonable expectation of future value!)

Tom Coburn has raised the spectre of what he claims is a “8-9% decline in GDP” if we “don’t tackle our unsustainable fiscal situation.”  Uh huh.

Tom ought to pay attention to this:

-8% GDP eh?  We’ve been running that now cumulatively for three years on, faking economic “growth” via debt issuance (just like whipping out the credit card after losing one’s job) and there is no sign that the government intends to stop it.

8-10%?  You’re insane Tom.  There’s a nearly 30% embedded GDP distortion in the system right now!  I warned of this back in 2007 but then, of course, nobody wanted to hear it.  Nobody still wanted to hear it in 2008, or 2009.  No, we were too concerned about making damn sure that a handful of rapacious banksters that, I’d argue, should all be in the dock facing multiple felonies got to keep not only their past “bonuses” but also (and far worse) got to keep up with their BS games!

The record in this regard in terms of the facts, and that I’ve been publishing them for the last three years, is clear.  And no, Tom, we don’t have “three or four years” to deal with it – we’re already in the hole 30% in terms of where our GDP needs to contract to in order to come into balance with our actual productive output, and if we don’t cut this crap out now we’re not going to face 18% unemployment and a 10% contraction in GDP, we’re going to face an economic collapse with “official” unemployment north of 20%, U6 north of 30% and we’ll be lucky if our economic and political system do not fail outright.

Cut the crap Tom.  The forced choices are here now, not three or four years out.

We’re able to choose serious pain (as opposed to collapse) today. 

In three or four years, that choice will have expired.

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