ALERTJanuary, 2016

MAKING COMPLICATED INVESTING SIMPLE

ALERT is our monthly newsletter, provided by the Brinkman Academy.To receive your own ALERT newsletter go to TODAY and sign up.www.robbrinkmanacademy.com

"It seems that we are out of ammunition— the policy magazine is empty. But if the problem we face is inadequate nominal demand, the magazine is never empty, and there is always one more option left. That option is “fiat” money creation, using central bank-printed money either to finance increased public deficits or to write off existing public debt."

Between Debt and the Devil: Money, Credit, and Fixing Global Finance, by Adair Turner

Timing is everything. I mentioned in a recent video that when I heard Hillary Clinton posture the notion of forgiving student loan debt, my antenna went up. Not one of increduli-ty, but rather “Hmm, how are they going to do that?” For, if we’ve learned anything from politics, it is that nothing is said by accident.

In tandem, I’ve been hearing the term helicopter money for the better part of a year and believing the two were linked, I determined to find its original source. In doing so, I just completed the highly influential book mentioned above by Adair Turner, who became chairman of the UK Financial Services Authority (the equivalent to the head of our SEC) two days after Lehman Brothers failed on September 20, 2008. He also played a major role in global financial reform as a key member to the Basel III, which initiated new bank capital standards.

Then this past Friday we learn that the Bank of Japan is implementing a negative interest rate for their institutional banks and this article appeared in the Daily Mail about an upcoming vote by the Swiss people on whether the government should pay everyone $2,500 a month: http://www.dailymail.co.uk/news/article-3422775/Swiss-govern-ment-proposes-paying-1-700-month-work-not-bid-end-poverty-insists-people-want-job.html

The remedies for the global economic slowdown aren’t working. All the Federal Reserve money printing schemes are proving to be unfruitful for us and Europe, Japan and China aren’t being bashful in admitting that they are in deep trouble. Something has to change – we’re not going to be able to grow out of the mess created by the 2007-2008 melt down.

Our current Federal Reserve Bank was formed out of a clandestine meeting in 1910 at Jekyll Island, Georgia. The ultimate motivation by the attending members, who were high powered New York and European bank and financial families, along with Washington politicians, was to create a machine that would control banking in the United States. At that juncture our country was going through an incredible boom in the west and private banks were popping up from St. Louis to Ft. Worth and Denver to San Francisco. Independent bank entrepreneurs were cutting into the East Coast money machine and something had to be done.

100 years later, we’re right back in the same spot. The global money center elites feel that it’s time to reign in the mavericks. It’s not without evidence. Trading in derivatives played a minimal role in the financial system of 1980, but it now dwarfs the size of the real econo-my; from zero in 1980, the total notional value of outstanding interest rate derivative contracts had soared by 2007 to more than $400 trillion, about nine times the value of global GDP. (no, $400 trillion is not a misprint).

If there was one single finan-cial instrument that exasperat-ed the financial collapse in 2008, it was the massive amount of derivative’s that went sour. So, what is a deriv-ative?

The root is Derive, in that its value is ‘derived’ from some-thing else. In the case of the 2008 collapse it was billions of sub-prime mortgages that were packaged by the originating lenders and sold to a larger concern. That institu-tion then sold it among a bigger package, hoping to take a rather risky investment and make it less so by diluting with other investments.That’s all fine and well until there’s a demand on account-ing and a value must be assigned to the original investment that the derivative was ‘derived’ from. In 2008, many of those investments were mortgages that the owner was no longer paying. It’s like you looking at your bank balance and a CD that you thought was worth $100,000 isn’t. Oops.

So, we’re one major crisis away from an opportunity for the global chess players to implement some new solutions. As a start, let’s put some pieces on the table and see if we can at least make an outline of a puzzle that I believe we should all be paying attention to.

In 1948, the revered economist, Milton Friedman, introduced that, “if an economy was suffering from deficient demand, (people spending money and stimulating the economy), the government should print dollar bills and scatter them from a helicopter. People would pick them up and spend them: nominal GDP would increase; and some mix of higher infla-tion and higher real output would result.”

In 2003, Ben Bernanke didn’t use the term helicopter money, but did advocate the same basic idea of printing fiat money when he suggested it to Japan and making it clear that no new fiscal debt would be incurred and thus no additional debt-servicing burden would be created. And in 2012, at the Jackson Hole conference, world leading New Keynesian monetary theorist, Michael Woodford, proposed the same strategy – “that central bank committees that today vote to approve interest rate movements or quan-titative easing operations could also be given the power to approve or disapprove a helicopter style money drop or a one-off government debt write-off.”

I’m sure you’re saying, “come on, Rob, we’ve had even crazier ideas floated by these super intellects throughout history, it doesn’t mean they’ll actually do it.” Okay, I hear you. But, let’s look at some global bias, pulled from Turner’s book, that I’ll bet you dinner at your favorite restaurant, were specifically discussed and debated in Davos Switzerland over the past two weeks.

That last line says it all. We need to remember that outside of the United States borders, just about everyone else is either Socialist, Communist or Dictatorial. Inside our borders, we have two sparring Democrat politicians who either overtly say they’re socialist or tacitly admit so.

ALERT is our monthly newsletter, provided by the Brinkman Academy.To receive your own ALERT newsletter go to TODAY and sign up.www.robbrinkmanacademy.com

WWW.ROBBRINKMANACADEMY.COM

ALERT January, 2016

-

The Eurozone faces the same predicament as Japan did in the 1990s and with the same likely consequence – many years or even decades of slow growth and excessively low inflation…but a Japanese-style lost decade would be far more severe in the euro-zone…rebooting the eurozone is vital, and without fiscal as well as monetary stimulus ideally combined in the form of monetary finance, that reboot will not be achieved.

In fact financial markets, when left to free -market forces, can generate activity that is privately profitable but not socially useful. There can be too much finance, too much trading, and too much market completion.

Seven years after the 2007-2008 financial crisis the world’s major economies are still suffering its consequenc-es. Eurozone GDP has not yet returned to pre-crisis levels: unemployment is still 12%, and inflation is far below the ECB’s close to 2% target. Japan continues to struggle with low growth and relentlessly rising public debt. The United Kingdom has begun to grow and create jobs, but GDP per capita is still below 2007 level, and average real earnings are still some 6-8% below the pre-crisis peak. The U.S recovery has been more robust, but the employment rate remains far below 2007 levels. Inequality has continued to increase. Across the advanced economies many people are no longer confident that capitalist economies will deliver rising prosperi-ty generation after generation.

For Capitalism to be under attack is not news, but the mechanics now being teed up are very worrisome. From the global perspective, we’re to blame for the 2088 crisis, with our sub-prime debt, issuance of ridiculous levels of mortgage deriva-tives and bank/corporate greed. Significant forces are determined to change our independent influence over world econo-mies.

We have a Federal Reserve that at least influences, at best controls, our economy and stock and bond markets. They answer to no citizen or politician. They’ve proven their willingness to experiment with exotic economic theories at our expense and there’s nothing to stop them from exercising more.

Because wading through this can be tedious, I’m going to concisely display some of Turners recommendations with little editorial comment. If I opined on everything, this ALERT would easily grow to 6+ pages. At the end however, I have listed several excerpts from the book, that if read, will clearly give you the impression that these notions are not flights of fantasy.

“Ideally the major advanced economies should have implemented Bernanke-style helicopter money drops in the immediate aftermath of 2007-2008 crisis. If we had done so, the recession would not have been so deep, and we would now be further advanced in escaping the debt overhang.”

Turner believes that the UK and US have enough of a heartbeat that this action wouldn’t be necessary for us, but rather for Japan and the eurozone. The specific action being suggested is a simultaneous 3-year tax cut in all eurozone econo-mies, funded by long-term bonds, which the ECB buys and holds in perpetuity.

“The Japanese did not follow Bernanke’s advice in 2003. Instead they offset private deleveraging with large funded fiscal deficits, making a relentless rise in public debt. But they could now write off some of that debt, putting the selves in the position they would have been if they had accepted Bernanke’s advice.”

This is simply a form of money finance. The written off debt would be placed on the asset side of the Bank of Japan’s balance sheet as an accounting entry – a perpetual non-interest bearing debt owed from the government to the bank. Their hope is that it would become evident to the Japanese people, companies and financial markets that the real public debt burden is significantly less than currently published and everyone would therefore be more confident and desire to stimu-late demand.

“Viewing the disaster of 1929-1933, economists who were strongly committed both to free markets and sound money thus supported the radical combination of 100% reserve banks and money-financed deficits. The 2007- 2008 crisi has illustrated yet again what harm private credit and money creation can wreak.”

Henry Simons was one of the founding fathers of the Chicago school of economics. In 1933 he joined other economist in proposing to President Roosevelt “The Chicago Plan” that would require all banks to operate with 100% reserves. Under this plan, banks would hold money deposits for customers and make payments between accounts – that’s it. All deposits in commercial banks would be matched by deposits at the central bank. The ability of banks to create credit and money would be eliminated. Leaving the only money supply arbiter to a government or central bank via fiat-money.

So, it comes down to control. Whether it’s a single, all-encompassing entity or all the major central banks acting in coor-dination, money creation and economic expansion can’t be left to free-markets.

That’s what they believed caused the 2007-2008 crisis and we’re peering over the edge of another cliff. Something has to be done. Something…different…

WWW.ROBBRINKMANACADEMY.COM

ALERT January, 2016

ALERT is our monthly newsletter, provided by the Brinkman Academy.To receive your own ALERT newsletter go to TODAY and sign up.www.robbrinkmanacademy.com