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  • They're calling it the "DeMarco Trade," and it's nailing mortgage REITs (at least those who focus on Agency paper) already stung by vanishing interest spreads. Agency MBS paper has been falling in price since the election, as Ed DeMarco's days as FHFA chief seem numbered, paving the way for principal forgiveness, "the mother of all pre-payment waves." [View news story]
    The government exists to "help the housing market"? Can you cite the clause in our Constitution that assigns that responsibility to the government?
    Nov 13, 2012. 09:53 PM | 1 Like Like |Link to Comment
  • They're calling it the "DeMarco Trade," and it's nailing mortgage REITs (at least those who focus on Agency paper) already stung by vanishing interest spreads. Agency MBS paper has been falling in price since the election, as Ed DeMarco's days as FHFA chief seem numbered, paving the way for principal forgiveness, "the mother of all pre-payment waves." [View news story]
    Excellent observations all. And when we break it down by mREIT we find that in some cases this is simply an outright panic. AGNC for example is known to have concentrated its portfolio in low loan balance MBS. That's exactly the kind of paper that would not be affected by any kind of handout scheme. If you've already paid down your loan, you're definitely not underwater, and you would gain little from a handout even if you were to be eligible, which is unlikely. So keep selling, folks. You're just giving away money.
    Nov 13, 2012. 10:47 AM | Likes Like |Link to Comment
  • The fiscal cliff matters: Even if the financial consequences aren't that severe, Josh Brown argues the mere perception of falling off the cliff would seriously harm financial markets. But if the fiscal cliff actually gets fixed, Jamie Dimon thinks the U.S. economy would boom, since the top problem holding it back is the looming tax increases and spending cuts that would kick in at year-end. [View news story]
    The important thing to keep in mind is that there's no central repository of gold in this system. People think back to Bretton Woods when they hear "gold", but that's not at all what I'm proposing. In my system, there is no dollar. The unit of account is literally an amount of metal in proportions defined by the constitutional amendment that eventually creates the system; it isn't itself a currency unit, it's simply an amount of metal. The Mint will be directed to strike coins convenient for commerce, and their metal content, not a currency unit, will be stamped on each. The Mint's coins can of course be independently assayed to ensure accurate content. The gold is therefore held by every man, woman, and child instead of paper, and this system is far more convenient and reliable than bags of dust. They may lend it to banks if they wish, or to others, or they may store it in vaults, or in their pockets. There is no paper. There is no dollar. There is no unit for the government to redenominate, and the impermissibility of altering existing contracts via lex monetae is constitutionally enshrined. This is the way humans settled transactions and stored wealth for 98% of history.

    There are no games to be played here. A bank can commit fraud, sure, but audits will reveal it and the bank will fail. There is little that can be done to eliminate fraud entirely, but contrast with the existing system which makes it very easy to commit fraud by concentrating all money and power in a tiny number of hands. Banks will have to compete based in part on the completeness of their auditing and the safety of their practices. Those that don't measure up will find no depositors and will be forced to slowly liquidate themselves. Since their balance sheets must be duration-matched, there is no possibility of bank runs.

    Panacea? Surely not. But a vastly more difficult system to game, and a system that would go a long way toward leveling the playing field in the working man's fight to build wealth. Your concerns are absolutely relevant to a Bretton Woods type system, but are largely addressed by eliminating centralisation of anything that cannot be easily verified by independent observers. No system is perfect. The one we have is an abomination. Mine is better.
    Nov 11, 2012. 08:45 PM | 1 Like Like |Link to Comment
  • The fiscal cliff matters: Even if the financial consequences aren't that severe, Josh Brown argues the mere perception of falling off the cliff would seriously harm financial markets. But if the fiscal cliff actually gets fixed, Jamie Dimon thinks the U.S. economy would boom, since the top problem holding it back is the looming tax increases and spending cuts that would kick in at year-end. [View news story]
    No, I'm not interested in picking winners at all. I'm interested in outcome-neutral policy, which we absolutely don't have today. And the whole point of being a trader is trading; they don't brew beer. If they're making beer, they're brewing, not trading.
    Nov 10, 2012. 11:56 PM | 1 Like Like |Link to Comment
  • The fiscal cliff matters: Even if the financial consequences aren't that severe, Josh Brown argues the mere perception of falling off the cliff would seriously harm financial markets. But if the fiscal cliff actually gets fixed, Jamie Dimon thinks the U.S. economy would boom, since the top problem holding it back is the looming tax increases and spending cuts that would kick in at year-end. [View news story]
    Of course. How many of them lasted 12 years and spread to the entire global economy? How many of them occurred in the absence of lex monetae? How many of them were under full-reserve banking regimes? How many met all three conditions? You're absolutely correct that eliminating one or two of the apparent causes of catastrophic collapses is not sufficient. It's necessary to eliminate all of them, and it's absolutely possible to do so. There will always be manias and panics, but their impact can be limited to those who participate.
    Nov 10, 2012. 11:54 PM | Likes Like |Link to Comment
  • The fiscal cliff matters: Even if the financial consequences aren't that severe, Josh Brown argues the mere perception of falling off the cliff would seriously harm financial markets. But if the fiscal cliff actually gets fixed, Jamie Dimon thinks the U.S. economy would boom, since the top problem holding it back is the looming tax increases and spending cuts that would kick in at year-end. [View news story]
    The intent is not for politicians to run central banks. I am proposing ultimately to do away with monetary policy entirely; however, as an interim step that might be politically tenable, Congress could amend the Fed's charter. The new charter would prohibit QE or any other form of balance sheet expansion beyond the nominal rate of GDP growth, and require that interest rates be no lower than the most recent 3 year's average headline CPI growth. If that average CPI growth were negative (which has never happened), the Fed would be required to distribute a portion of its assets directly to the people. These are of course very weak limits, but it would be a start.

    The long-run objective is to eliminate monetary policy by eliminating the dollar. Instead, a gold-silver unit would be used in all transactions. Lending and leverage would still be permitted, but only on a full-reserve basis; that is, all banks must have duration-matched balance sheets. In this scenario, lenders, including lenders to banks, will be taking risks and will have to accept those risks; however, there is no requirement to lend one's capital if one is willing to forego any return on it. If this system makes the US "economically uncompetitive" relative to some other nation that chooses to endure total collapses every few years, I'll take it. For the past 12 years, the US and Japan, two of the most highly leveraged economies, have been hopelessly uncompetitive with everyone and have subjected their citizens to crushing financial repression as financial excesses that benefited primarily bankers and politicians have been slowly (excruciatingly slowly) unwound at taxpayer and saver expense. This system simply does not work. 12 years is a large fraction of an individual's earning lifetime; it is not trivially dismissed as a typical business cycle recession. What has happened here does not need to happen again.
    Nov 10, 2012. 09:12 PM | Likes Like |Link to Comment
  • The fiscal cliff matters: Even if the financial consequences aren't that severe, Josh Brown argues the mere perception of falling off the cliff would seriously harm financial markets. But if the fiscal cliff actually gets fixed, Jamie Dimon thinks the U.S. economy would boom, since the top problem holding it back is the looming tax increases and spending cuts that would kick in at year-end. [View news story]
    It's fine to say that traders are making money. I'm sure many are. But trading is a zero-sum game that does not create value. If the only people who are making money are traders, then soon everyone will be a trader. At that point, what will there be to trade? And, more prosaically, who is going to brew the beer you'll want to drink to celebrate your latest million?

    I have nothing against trading or traders, really. But if policy is encouraging it at the expense of other activities, that's a compelling sign that policy needs to change.
    Nov 10, 2012. 07:46 PM | 2 Likes Like |Link to Comment
  • The fiscal cliff matters: Even if the financial consequences aren't that severe, Josh Brown argues the mere perception of falling off the cliff would seriously harm financial markets. But if the fiscal cliff actually gets fixed, Jamie Dimon thinks the U.S. economy would boom, since the top problem holding it back is the looming tax increases and spending cuts that would kick in at year-end. [View news story]
    Little if anything is deflating. However, globally-traded goods, mainly food and oil, have risen far faster than wages, and will continue to do so. The net effect is that everyone who works for a living has become poorer, and has less money to spend on locally-traded services and goods. This inhibits growth and keeps employment from strengthening. Given the macro money flows, the American worker is subsidising China and the OPEC nations. In a right-thinking America, Treasury debt issuance would be capped and interest rates raised to protect the purchasing power of American wages. Under those circumstances, the foreign Treasury holders would be eating enormous losses due to higher rates and the increased risk of default if the politicians can't control their spending. The value they're getting because that isn't being done has to come from somewhere, and that somewhere is us.

    The policy of holding interest rates artificially low to enable the federal government to borrow large sums of money simply has to be considered a failure if judged against goals of increasing employment, creating real economic growth, or improving the American standard of living. Congress can directly improve the situation by refusing to borrow (cutting spending) and indirectly address it entirely by amending or revoking the Fed's charter. That is the obvious answer here, but of course it's not one you'll ever read about in the MSM because all the big players would lose by it.
    Nov 10, 2012. 07:36 PM | 1 Like Like |Link to Comment
  • The fiscal cliff matters: Even if the financial consequences aren't that severe, Josh Brown argues the mere perception of falling off the cliff would seriously harm financial markets. But if the fiscal cliff actually gets fixed, Jamie Dimon thinks the U.S. economy would boom, since the top problem holding it back is the looming tax increases and spending cuts that would kick in at year-end. [View news story]
    Consider the source. When people speak of "fixing the fiscal cliff", they mean undoing reductions in the growth of federal spending. More federal spending means more debt and a larger role for the federal government in both the economic and non-economic aspects of American life. All of the people arguing that we must "fix the fiscal cliff" benefit from those effects:

    - Bankers' ability to make money is partially proportional to each of the amount of debt in existence and the rate at which debt grows. It matters a great deal to people like Dimon that the world's largest borrower set the tone by continuing to borrow as much as possible. That both allows more creation of other debt and more direct opportunities for the privileged primary dealers to make money.

    - A larger federal government tends to impose regulations that favour large incumbents who have the revenue to support large regulatory compliance teams. This provides barriers to entry and reduces costs for companies doing business nationwide; it protects the largest players from smaller, more innovative competitors. A smaller federal government would be more likely to leave regulatory matters to the states, allowing local and regional competitors to grow and imposing regulatory costs that scale superlinearly with respect to the number of states in which a company does business. It should surprise no one that people like Mr. Dimon and his peers in other huge-scale businesses are anxious to see them "fix the fiscal cliff".

    - A larger and more powerful federal government employs more people, offering more opportunities for public sector unions to grow in size, wealth, and power. It is no surprise that these unions are huge advocates for "fixing the fiscal cliff".

    - The larger and more important the federal government, the more it will do and the more reporters will be needed to cover press conferences, write op-ed pieces, and so on. It should be no surprise that the mainstream media has been sounding a near-continuous alarm over the "fiscal cliff"; regardless of their opinions of what the federal government is doing, the fact that it is doing more means more money in their pockets.

    - Politicians find it easiest to win elections when they have lots of Other People's Money to hand out. Less spending makes it harder to buy votes and harder to get elected. It also means politicians are less important and less powerful. This one's a no-brainer; it should be no surprise that politicians are anxious to "fix the fiscal cliff".

    - Central bankers and government-affiliated economists all hail from the Keynesian-monetarist school, so the potential for anything other than a huge, heavily indebted government would devastate their ideology. It would also put them out of work -- no one employs more economists than the government-central banking complex. Since smaller government means fewer jobs for economists and its success would expose their education as a fraud on the scale of 18th-century medicine, it's no wonder that economists are almost universally in favour of "fixing the fiscal cliff".

    With most of America's largest and most powerful corporations, unions, media outlets, and most mainstream politicians and academics all aligned behind the idea that it's important to "fix the fiscal cliff", it should be no shock that there is such an all-out media blitz aimed at winning over taxpayers to the ideas that (a) the fiscal cliff is dangerous, and (b) fixing it means that they will have to pay more, probably a lot more. What is shocking is that so many people are buying the blitz when basic common sense tells them it's a pack of lies. This may be the largest scam in history.
    Nov 10, 2012. 11:19 AM | 6 Likes Like |Link to Comment
  • The Fed launches its 2013 stress tests with a twist: Following the Fed's initial assessment, tested financial institutions will have an opportunity to adjust downward any planned capital distributions before a final decision is made. This should help avoid any nasty, "ABC bank just failed its stress test" scenarios. [View news story]
    ABC Bank failed its stress test?! Sell! SELL!
    Nov 9, 2012. 04:23 PM | 1 Like Like |Link to Comment
  • A Sober Wake-Up Call The Morning After [View article]
    Charles,

    There are four ways I could deal with your question; the problem is that none of them will change anything about the way you see the world. I could:

    (a) Ignore you. Not constructive, and frankly cowardly. Obviously I won't be choosing this option.

    (b) Respond in a way that suggests compromise. This would be appealing if I didn't actually understand the underlying economics, or wanted to make friends by pretending to agree with a position that is insane.

    (c) Respond in some kind of hand-wavey way with some kind of vague "solution" that somehow agrees that what you are describing is a problem and claims to solve it in some way no one can understand that really makes no sense and has no meaning. This is what politicians do, and what voters let them get away with. Not happening here.

    (d) Answer honestly, which will convince you that I'm a terrible human being who hates everyone else and should die. Because the reality is that there are two main ways human brains are wired: primarily for empathy, and primarily for solving problems. It's apparent that we differ here, have since birth, and always will. There's no reconciling our differences; as long as someone is hurting you will never be satisfied, and as long as a festering problem goes unsolved I never will be.

    So here it is: the reality is that my solution will probably put at least a million federal employees out of work. A decent number of them are old and wealthy enough to simply retire, but most are not, and will have to find other employment to survive. A large fraction of them have no marketable skills. They will have a difficult time finding work, and many of them will exhaust their state unemployment benefits (remember, I'm eliminating the federal handouts) before they do. Perhaps a small number of them will become homeless; a few will probably die of exposure or starvation. We're talking literally a few dozen here, not thousands. But it will certainly happen. I acknowledge that. I do not claim nor accept responsibility for it.

    The reality is that there is a market for labour. Each of us brings certain skills and experience to that market, and the greater the demand for what we offer, the better the employment opportunities available to us. Many of the federal employees today offer nothing that contributes to production. In some ways, this is not their fault: they have been raised and educated in a system that equates government service with productive employment. It is our parents' generation that has failed them and led them down a path of believing that joining a government employee union is the path to lifelong prosperity regardless of their skills or abilities. Unfortunately for them, the world doesn't work that way. Those who do not produce, cannot consume. Many of them will not find work, and the DC area will be especially devastated. It is reasonable to assume that the knock-on effects in that region will cancel out the effects of those who simply choose to retire. There will be a lot of very useless people with no money and no jobs. My plan offers them nothing. Remember, I'm not running for office, nor am I trying to feel every individual's pain; I'm proposing a solution to a problem that will destroy us all if not addressed. The fact is that these people are economically useless. There is nowhere close to the demand for government services that would be suggested by their vast numbers. There is plenty of demand for handouts, of course; who wouldn't want one? And every handout needs administrators. But we cannot afford the handouts any longer; if we were more honest and less empathetic, we would admit that we never could. The world simply doesn't need so many bureaucrats.

    There are, of course, various things that local governments can and perhaps even should do to address this problem. Economically useless people need retraining. They need to learn skills that are in demand and will get them work. Among our best institutions, and our most undervalued, in this regard are our city and community colleges. Pride will often stop a once highly paid but worthless bureaucrat from plunking down $21 for a course in welding, but it won't stop these institutions from offering it. There are plenty of useful skills that one can learn for very little money even in the absence of any federal subsidies. A politician would offer to replace 2% of the eliminated spending with subsidies for displaced bureaucrats, but the realist in me knows few of them will avail themselves of them anyway. A lifetime of entitlement dies hard.

    Most of these people will eventually go back to work in menial jobs, once they've exhausted their remaining handouts and whatever pitiful savings (why should I save? the dollar just loses value anyway, and social security and my fat pension will provide for me...) they may have. They will be victims of a system that any sensible person could and should have seen could never work, but that for a while most of a nation somehow managed to believe in. That sucks, and it's not fair. But it's still far better than the rest of us paying for mistakes made when we weren't even born, mistakes that are so painfully obvious they make us ashamed to be Americans. As sad as it is to break unkeepable promises to the few, it would be an egregious injustice to force the rest of us to die trying to keep them.

    There are no winners here, only hundreds of millions of would-be losers who can escape that fate if our leaders take decisive action. It's the right thing to do. In fact, it's the only choice. I'm sorry that it makes you feel bad about those who will find the promises made to them broken. It was wrong to make those promises, and the only thing more wrong than breaking them now is to continue to pretend that we can honour them. We cannot. Perhaps you'll want to make a bigger donation to your favourite charity this year if that makes you feel better about it. That's really all anyone can do.

    Like I said, I'm not running for office. This is what it actually means to make "the tough decisions" that the people who do run for office always talk about but don't understand. A few of us do, and the rest of you call us unsympathetic assholes for it. We're not. We just know when it's time to accept that what you're doing isn't working and that we need to cut our losses while we still can. There's no lipstick that can make this pig pretty, and I'm not going to tell you otherwise. That's where we are, and everything I described is what we need to do. If you can't accept the inevitable consequences, I hope you're prepared for the far worse fate that awaits us on our current path.
    Nov 8, 2012. 12:16 AM | 3 Likes Like |Link to Comment
  • A Sober Wake-Up Call The Morning After [View article]
    "Interesting. I truly believe that Obama is a socialist. I am a libertarian. I support him on the social issues but disagree with his economic policies. Don't be so sensitive."

    Best comment ever. Thank you. Why can't we get rid of the 300 million or so Americans who don't get this?
    Nov 7, 2012. 11:47 PM | Likes Like |Link to Comment
  • A Sober Wake-Up Call The Morning After [View article]
    Compromise is what got us where we are. Now is the time for zero compromise. The bitterness comes from the fact that we are right; the policies of confiscation have failed and we need something qualitatively different. If the looters want to loot, let them loot each other.
    Nov 7, 2012. 11:46 PM | 1 Like Like |Link to Comment
  • A Sober Wake-Up Call The Morning After [View article]
    Your article reflects the very popular but profoundly wrong assessment of the situation that "something must be done" and that doing "something" is the leadership challenge the politicians face. Nothing could be further from the truth. The challenge they face is having the discipline to do nothing, or if they do something, to do something that doesn't increase future deficits (i.e., simply move budget around, or eliminate tax increases in favour of more reductions in spending growth). Current law reflects the correct but apparently fleeting recognition that there is some unknown but very real limit to how much the public debt can be permitted to grow. It also reflects the fact that so-called "stimulus spending" does little or nothing to improve economic conditions, as it consists primarily of handouts to the idle and giveaways to political cronies and corporate friends.

    More importantly, none of this reduces the most significant drag on economic growth, which is the continued strangulation of the middle class through monetary policy. By increasing the nominal prices of essential globally-traded goods while devaluing savings, the policy regime in place could hardly be more effective at reducing discretionary income. It is out of that discretionary income that most locally-provided services are purchased, putting Americans to work. By holding interest rates artificially low to support increased government borrowing, policymakers are crushing real demand growth while attempting to replace it with more debt-funded government spending, the essence of central planning. The data have issued their verdict on this approach and it is a damning one.

    The widespread misperception of this so-called fiscal cliff is as dangerous as the misguided theories of central banking academics. Any new legislation must preserve or improve the net fiscal effects of the existing. It is reasonable to acknowledge that the distribution of budgeted funds in sequestration is suboptimal (indeed, it was made deliberately so as a challenge to future leadership) and reallocate them appropriately. It may also be reasonable to recognise that the proposed tax increases are undesirable and to replace some or all of them with further reductions in spending growth. What is not reasonable is to abandon the already frankly flimsy and inadequate commitment to deficit growth reduction that the existing legislation represents. But even more important is to not allow the academics, virtually all of whom have been educated and trained in a system of economic theory that is grounded in Marxism and its American application in the New Deal, to divert public attention away from the crippling monetary policy they have instituted. Their claims that monetary policy can do nothing more to stimulate growth and that higher government spending is needed are simply nonsense. It is their very system of central planning, wealth redistribution, and the destruction of the middle class that has led us to where we are. It will be the removal of that policy regime that eventually leads to a meaningful recovery, if one is ever to occur. Both Japan's and our own experience have proven beyond any shadow of a doubt that ZIRP, QE, and massive government indebtedness:

    - do not stimulate demand for locally-produced goods and services
    - do not increase employment
    - do not create price inflation in locally-traded goods and services
    - do not improve the standard of living
    - do reduce the quality of life for retired people
    - do increase unemployment by forcing people to work who would otherwise prefer to retire but cannot
    - do increase the prices of globally-traded goods such as food and oil that represent a growing share of the cost of living
    - do increase opportunities for dependency and corruption
    - do not create economic growth

    The verdict is clear, and so is the challenge before our leaders. They must further reduce government spending, increase taxes if the necessary spending reductions are politically unobtainable, and most importantly of all replace the monetary policymakers with ones who understand the central planning, redistribution, and costlier food and oil are the primary cause of our economic weakness. Interest rates must be raised to positive real levels, probably in the 4-5% range. The dollar must be allowed to be a store of value. It must be possible for prudent savers and investors to retire at a decent age. And hardworking people must be given the opportunity to find markets for their services. That, not reversing a small and tentative first step toward fiscal sanity, is the real challenge before our leadership. Let us hope they understand it well enough to begin. At present, articles like this one which are everywhere these days serve only to mislead both leaders and their constituents into demanding a redoubling of their commitment to a system that is inherently hopeless and cannot possibly achieve the results most people believe they want.
    Nov 7, 2012. 10:53 AM | 4 Likes Like |Link to Comment
  • India's government has revoked the patent on Roche's (RHHBY.OB) expensive Pegasys drug for hepatitis C, part of a series of revocations for multinational drug companies' expensive treatments in the country. India's drug market is expected to grow to $74B in 2020 from $11B last year. [View news story]
    money, I posted an answer here, but the Chinese army of comment board prowlers had it removed because it called out China for what they are, which they of course consider insulting and/or abusive even though my post was absolutely on the topic of international trade and directly relevant. You can probably guess what I think. And this behaviour is not at all unusual; they have millions of people who simply crawl message boards everywhere and immediately report as abusive anything less than complimentary toward China. What's scary is that editors allow them to get away with it. Suffice it to say, their actions simply provide confirmation of my opinion of their strategy.
    Nov 5, 2012. 12:57 AM | Likes Like |Link to Comment
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