Balance Sheet

I have a suggestion for everyone before you vote for president this coming November. Take two pieces of paper labeling one Trump and the other Biden ... and draw a vertical line down the middle of each ... indicating pluses on the left and minuses on the right.

Next list all the good things for each candidate on the left of this balance sheet and, of course, the negatives on the right. Be honest. If you have no pluses for Trump or minuses for Biden ... you are clearly a partisan idiot ... or work for MSNBC.

And now, if you have some extra time, weigh and then rank the pluses and minuses for each candidate ... using the same metric for all four columns. Use your logic ... not your emotions.

Once you have conscientiously done this exercise ... look it over carefully ...  then you can go vote.

STAND UP FOR AMERICA!

Headlines

Trump calls for ousting GOP congressman from party ahead of coronavirus relief vote

Coronavirus live updates: Lack of Internet leaves millions cut off, Real ID deadline extended

USA now leads world in cases ... Peak second week in April ...

New York Times blames evangelical Christians  for coronavirus

Poll: Majority approve of Trump’s coronavirus response, but more Americans say he was too slow to start

Trump criticizes GM, CEO Mary Barra for wanting ‘top  dollar’ for producing ventilators

UK rocked: Boris positive ...

Hundreds die in Iran after drinking poison ‘cure’ for coronavirus

Judge orders release of 10 immigration detainees from N.J. jails

Cramer sees oil plummeting below $20 per barrel

Federal Reserve’s balance sheet tops $5 trillion for first time ...

Dr. Deborah Birx steers away from making Doomsday prediction

The Big Unwind

When in 2014 the Federal Reserve Bank’s Chairman Janet Yellen stopped Ben Bernanke’s  three rounds of Quantitive Easings that had held the Obama economy’s lhead above water ... and had expanded the Fed’s balance sheet by 3.6 trillion dollars, we were assured by Bernanke that this excess liquidity in its balance sheet could be unwound without any consequence ... see: Bernanke Plan.

Unfortunately, he was dead wrong. When this process was eventually started and before the Fed had reduced its balance sheet by $500 billion (mostly under Trump), it has had to reverse itself and pump about this same amount of liquidity back into the economy ... due to soaring repo rates.

So much for an august Princeton economics professor’s understanding of economics!

A Federal Case

The US Federal Reserve Bank has had to inject massive amounts of funds into the banking system recently as shortages have caused overnight interbank lending (repo) rates to spike over 7% whereas normally these rates hover around 1.9% ... see: CNBC Story. Many economists are scratching their heads as to why this drying up of liquidity has occurred. I have a thought ... bear with me.

Now, I’m not an economist nor do I play one on this blog ... but I think I might have an idea what is going wrong. Over the last many months the Fed had reduced its balance sheet by over $600 billion (see chart) ... that had been bloated during the repeated “quantitative easings” employed during the Obama administration to hold our economy’s head above water.

The then-Fed chairman, Ben Bernanke expanded the Fed’s balance sheet by $3.6 trillion to $4.5 trillion (again see chart) by buying government bonds and mortgages ... see: Investopedia Entry This basically means that this same amount of readily-available money (M1) had been injected into the banking system ... resulting in pushing up asset prices and slightly stimulating the economy.

Enter stage right in 2017 President Trump ... and, as a reward, the Fed began to “burn off” its balance sheet, see: guerillastocktrading and the above chart. And the Fed also increased interest rates by 2 percentage points ... while Trump was reducing taxes and regulations. These are countervailing forces ... yet our economy started to grow much faster than had been the case. However, these Fed actions, combined with Trump’s trade war with China, has started slowing our economy down somewhat ... which would suggest a lower need for liquidity injections from the Fed.

So what is going on? My conclusion: Once any banking system gets used to a certain money supply, it cannot easily adjust to a markedly lower one ... no matter what Professor Bernanke had assured us. This may be due to inherent sluggishness in how the velocity of money changes?

Market Deflators

The stock market is in the red for the year ... for a number of reasons ... whose priorities seem to change from day to day. Today, it seems that the following are the reasons, in order of descending importance, for what are depressing the stock market ... or keeping it from going up as fast:

- Fed's stance on raising interest rates and outlook for same

- Status of tariff war with China

- Fed's monthly $50 billion reduction of its balance sheet and economic liquidity

- Slowing worldwide economic growth/US corporate profits and outlook for same

- Strength of the dollar and outlook for same

- Growth of US budget deficit

- Status of trade negotiations with the EU, Britain and Japan

- Brexit morass

- Potential US government shutdown over immigration

- Mueller's investigation and possible political repercussions

- Trump's tweets

Tomorrow all these things could be shuffled ...

Hanging in the Balance

Four and a half trillion dollars ... that's a lot of money for the U.S. Federal Reserve Bank to be carrying on its balance sheet. This liquidity is a function of the Fed's trying to keep the U.S. economy's head above water since the recession of late 2008 with "quantitative easing" ... because the fiscal side of this equation was non-functional. Now the Fed is thinking about unwinding this five-times expansion of this rotten nest egg since our last recession ... see: CNBC Article.

See also: What Could Go Wrong.

The questions that present themselves are: What does this mean? or What will be the ultimate cost of removing all this excess liquidity from our economy? and How might it be accomplished?

Let us take this last two questions first. The easiest (and longest) method would be for the Fed to stop buying any more mortgage-backed securities or rolling over government debt as it matures ... other than helping to service our federal deficits. This strategy could take as long as thirty years for the Fed to get its liability number below $1 trillion ... unacceptable since during this period there certainly would be a need for re-expansion. And the other downside is that removing all this liquidity from the U.S. economy at a much faster pace... particularly with the low monetary multiplier caused by the Dodd-Frank regulations ... would certainly cause major economic and stock market malaise. So, no matter how confident the Fed sounds about the ease with which it can work off these huge balance sheet figures, don't believe it.

And now the first question's answer: The Obama administration's reliance on monetary policy to extract us from our last recession means that this option has been removed for the next one. It is only aggressive fiscal policy, a return to painfully high inflation rates along with the lengthening of our national debt's maturities ... that have any hope of keeping our country solvent for our grandchildren.

So be prepared for one or more of these events.

Funny Numbers

The federal government is quite punishing to corporations which report inflated figures to their stockholders. In fact, ever since the Sarbanes-Oxley Act of 2002, CEOs and CFOs must personally sign off on their financial statements under the penalties of personal prosecution. But not so the federal government. Our White House hosers feel that they can manufacture any numbers that suit their political purposes. The most recent example is the inflation of the Obamacare sign-up numbers last Spring by 1.3 million out of 8 million reported ... see: Breitbart Article. This is a 16.2% inflation of this figure ... or a "material" misstatement in corporate terms ... one that might well end the responsible executive in the hoosegow.

And this is not the first time that the Obama administration has used funny numbers to serve their political purposes. Remember how there was a convenient reduction in the unemployment rate right before the 2012 presidential election? See: My Tinfoil Hat. This, in my opinion, was due to the politicizing of the Bureau of Labor Statistics. This slight-of-hand has oft been repeated when Obama brags about the number of new jobs he has created ... see: Weasel Words. And, as a consequence, I have become suspicious of most of the numbers that our current government publishes ... deficits, Federal Reserve balance sheet numbers (see: Finger on the Scale), and maybe even macro-economic measures may have been compromised.

I wonder how old our president really is?

Race to the Bottom

The world is taking a dangerous and rocky path to universal monetary collapse.  Japan is now following the United States's Federal Reserve in devaluing its currency ... in order to give its economy a shot in the arm, see: CNBC Story.  The U.S. Fed’s Chairman, Ben Bernanke, has been pushing “quantitative easing” (QE) for the last three years in order to sop up all the debt that this country is forced to issue to cover it’s fire-hose federal spending … to the point where it has expanded our money supply (and its balance sheet) by $3 trillion.  And, in order to keep this crushing debt burden from sinking things further, it has kept generic interest rates artificially low with its banking muscle.  It has been able to run the monetary printing presses night and day without setting off crushing inflation because our economy is still so weak …  reflected in our poor employment and wage-increase statistics.

But one economic “benefit” of this monetary expansion is a weak U.S. dollar which tends to help export markets and crimp importers.  Given how poor the U.S. balance of payments actually is … image what a disaster it would be without the Fed’s dollar deflationary measures?  However, our trading partners are losing patience with us and, as indicated in the referenced article, are now mimicking Bernanke’s strategy.  The European Central Bank (ECB), China, Great Britain, Japan, and even Switzerland (for heaven’s sake) are falling over one another to try to devalue their currencies with their own QEs.  A U.S. Dollar slide begets a Chinese Yuan slide which begets an Euro slide which begets a Japanese Yen slide which begets a British Pound slide which begets a Swiss Pound slide.  This is all a very dangerous race to the bottom.

How will this end?  With all this quantitative easing, the world will be, in short order, awash in money.  The balance sheets of the central banks will have reached unsustainable levels … probably the ECB first; and the only way out will be for them to let the dogs out … allow inflation to reduce the carrying-cost pain of their excessive debts.  And, this time, run-away inflation will not be as localized as it was in Germany in the 1920s.  It will be world-wide and will engender political upheavals that are likely to be quite painful.  (At this point Bernanke will not look quite so angelic.)  So be forewarned and be prepared … own real hard assets (not cash) and owe lots of money … and live in an area of relative political sanity.

A Snipe Hunt

Recently I blogged a piece about the International Monetary Fund and, in it, referenced its incredible lack of transparency (see:  I.M.F...ing).  Since then I have spent time on the IMF site (see: IMF Site) trying to find out exactly how much money the United States contributes and has contributed to this fund ... and into all the various slush-fund pockets it seems to have?  Ditto for China. Ditto for Russia. Ditto for Germany and France.  Etc.  And I would also like to find out who is lent (given?) this money on a year by year basis from these various slush funds?  And how much of this money has been paid back historically?  And how much has never been paid back?  What interest rates are charged? 

How much does the IMF spend annually for operating expenses?  (The former IMF head, Dominique Strauss-Kahn spent $3,000 per night for the hotel room where he was caught in his peccadilloes.) Specific salaries (I found on the NY Times how much Strauss Kahn was paid.  He made $442,000 per annum with a $79,120 expense account ... see: NY Times Article)?  What does the IMF income statement look like?  How about its balance sheet?  A cash flow statement?  Who has contributed gold to the IMF reserves?  Has much of this gold has been sold or otherwise disposed of?

If any reader out there has a week or so to devote to this snipe hunt on the above referenced web site, I welcome your travails and answers.  Like the U.N. (see: The U.N.) and the World Bank (see: The World Bank), I suspect  that the real meaningful numbers are locked up in New York or Geneva or Washington somewhere where prying eyes such as mine will never find them.  (I just hope that the Congress has access to this data.)  The only thing that these international (unelected) agencies allow us schnooks to see is the mountains of  gibberish and spin provided on their web sites.  They are self-perpetuating bureaucratic mazes whose major function seems to be politically correct arm waving and spending someone else's moolah.  If any U.S. corporation were as opaque as these international organizations, its entire management team would be peeking out from behind bars.

Finger on the Scale

I have earlier written on how the accounting profession bears much of the blame for our many financial crisis's (see: Off Balance)  Now our august Federal Reserve Bank is sneaking a finger on the scale by changing an accounting methodology so that its balance sheet will no longer be truly reflective of its financial condition (see: Accounting Tweak)  This change is, to me, not just a "tweak."  It is a very dangerous action on the part of this trusted institution.  It is not just moving potential liabilities off its balance sheet.  It is moving them to the income statements of its regional banks (if, in fact, they even show up there) where they will not be so obvious.

I know that Ron Paul is now the incoming Chairman of the House's Domestic Monetary Policy Subcommittee (see: Here) and has sworn to hold hearings on many of the Fed's actions of late.  I would hope that he makes this accounting "tweak" his first order of business.