Friday, January 3, 2014

Reinhart and Rogoff Return: Debt Overhang, Financial Repression, Inflation and 'Saver's Tax'

Forgetting the day-to-day action of the stock market for a moment to focus on the really, really larger issue of macro-economics, comes this daft little piece of literature from the infamous duo of Carmen M. Reinhart and Kenneth S. Rogoff, prepared for the IMF, entitled, boorishly, "Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten," as though the central bankers of the world have forgotten their purposes in life, which would be, in no particular order:
1. Create and control all of the world's currency;
2. Put governments, businesses and individuals in debt;
3. Act like you're doing everyone a favor.

The authors of this [PDF] 21-page memo to the IMF bring up some old tomes familiar to those in the central banking business, which, more likely than not, they have NOT forgotten, not at all, such as financial repression, inflation (the central way central banks enrich themselves and impoverish the rest of the world), and outright debt defaults, this final theme one which the central banks will encourage sovereigns to pursue, in the best interest of everyone.

When one reads this little write-up and thinks it through, a couple of ideas immediately sprout forth from the pages.

One, inflation, the central banker's ally in its never-ending quest to eventually destroy the value of all currencies, has been latent and absent for some time, something the Fed head, Ben Bernanke, has openly whined about, and probably privately been chastised by his handlers in the global banking cartel. Inflation will have to make a big comeback, soon, lest the Fed and fellow central banks lose out on massive profits from the ongoing, recent economic crises gripping all nations.

They have the means to do so, and they certainly will, now that they've successfully re-capitalized their member banks (all the biggest ones, which were insolvent in 2008), through various means, the most obvious being the "taper," or winding down of their balance sheet, and higher interest rates, making money more expensive and credit all-but-impossible to get, which will have the desired result of pushing prices skyward while crashing the stock markets and making most citizens, now already poorer due to the stealth tax of low interest rates over a prolonged period, severe debt slaves.

The central banks, through their conduits in central sovereign governments, will also encourage defaults on massive amounts of debt, causing even more panic and a rush of cries from governments to individuals for the central banks to "save us," when in reality, it is they who are causing the pain.

While Reinhart and Rogoff are surely on the right track - though a bit opaque in their language - they are telegraphing the next moves for central bankers, who will, soon enough, declare that all their efforts have not succeeded in creating economic prosperity, so they will embark on, sorry, more austere measures. Governments will overtax and overburden their citizens (to some degree this is already occurring in Europe and Japan), but eventually - maybe in five years, or ten, or more - there will at last be a period of economic "normalcy" with interest rates on, say, 10-year notes at about 5%, inflation raging along at 5-8% (payback for the years of no or low inflation) and employment (with associated confiscatory taxes and fees) steadily declining for some countries, still high for others.

For most people and businesses, surviving this period will be tantamount to picking up nickels in front of a runaway steamroller: barely profitable, but highly risky. Many will be crushed; others wounded, the steamroller that is the Fed, the ECB, the IMF, World Bank and the BIS will grind nations, businesses and individuals into wretched little nothings.

That's the message from these authors, and, no, the central bankers of the world have not forgotten. It's coming. Not all at once, and not with any dramatic waving of wands or arms or hands, but slowly, gradually, eventually...

On the second day of trading for 2014, stocks took a bit of a roller-caster ride not dissimilar to those encountered during bear markets, but with a twist of day-trading irony, up at the open, crashing back to unchanged mid-day, rallying late before giving all of it back, the Dow being the only average on the positive side of the ledger today, the NASDAQ still down, the S&P marginally negative.

No, this was not a snap-back rally, and no, again, everybody's not waiting for Monday to "really" start trading. These first two sessions of 2014 were real and they count. Money is being pulled out of the market because money knows what's ahead, and it's seeking safe harbor.

Two things to note: the divergence of the a-d line from the headline close, and the continued low numbers of new highs and new lows.

Thanks for a week of hope and no change.

DOW 16,469.99, +28.64 (+0.17%)
NASDAQ 4,131.91, -11.16 (-0.27%)
S&P 1,831.37, -0.61 (-0.03%)
10-Yr Note 97.90, +0.60 (+0.62%) Yield: 3.00%
NASDAQ Volume 1.56 Bil
NYSE Volume 2.76 Bil
Combined NYSE & NASDAQ Advance - Decline: 3577-2094
Combined NYSE & NASDAQ New highs - New lows: 205-21
WTI crude oil: 93.96, -1.48
Gold: 1,238.60, +13.40
Silver: 20.21, +0.083
Corn: 423.50, +3.00

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