What Will Happen Next?

Change is inevitable. Political, social and economic change is often the result of crisis. We examine how our nation and world might change as a result of the crisis

A Mad Max Event Is Possible

By Martin Armstrong

We are at a crossroads. The tree has been cut. Which way will it fall – authoritarian or democracy? We can make a difference.

Step one is understanding what is the problem. At least then we can address a solution with some reasonable game plan.

mad-max

We have a great convergence coming. It is nothing to be afraid of and it is nothing we can ignore. Yes a Mad Max event is possible.

The average person depends upon government tremendously – even those not on welfare. There are pensions and Social Security that people really believe they are “entitled” to and thus these benefits will exist. What happens when they realize they do not?

Socialism has even changed the historic bounds of family. You had 4 to 6 kids for that was your retirement. The kids knew they had the responsibility of taking care of their parents. Today – that’s government’s job. Everything has been changed to depend upon government that never tells the truth and they will defend to the very last drop of your blood.

Marriage-Medeval

Marriages were ARRANGED! The age difference was typically 25% during the 19th century. To sell movies, Hollywood turned lust into love at first sight. They painted the image of happily-ever-after. I spoke with film makers and they all said people did not want to leave a movie feeling depressed. They glorified marriage and set unrealistic standards. Consequently, the age difference collapsed and the divorce rate rose to 60%+ because of unrealistic expectations.

Pensions began as the marriage contract. The man had to first establish himself and then propose. The Dowry was all about ensuring the wife would be secure – the pension. It was not about “love at first sight” yet according to things like Match.COM, 70% of people dating expect love-at-first-sight. So many people have the wrong expectation of marriage and are thus doomed from the start.

Even the Black family was stronger than the white family before welfare. When you paid women not to be married and to have children, you change the family structure. Socialism has significantly altered the behavior of every race all based upon expectations of government.

MA-FeedingBird

Free food changes behavior be it people or animals. Being compassionate is to be human. To give a man a free fish and you feed him for a day. Teach him how to fish and your feed him for a lifetime. Government adopted the first strategy to create dependency upon the political system.

They tell you do not feed the bears in Yellowstone National Park because they then look for free food and no longer hunt. Humans are no different. What happens when government collapses and people are totally unprepared because they never thought government collapses?

Excerpted from Armstrong Economics,

This Might Be Our Next President!

Submitted by Mish’s Global Economic Trend Analysis

On October 24, while campaigning for Martha Coakley for governor of Massachusetts, Hillary Clinton made one of the most absurd political statements in history “Don’t Let Anyone Tell You It’s Corporations and Businesses that Create Jobs.”

Clinton continued, “You know that old theory, trickledown economics. That has been tried, that has failed. It has failed rather spectacularly. One of the things my husband says when people say, ‘What did you bring to Washington?’ He says, ‘I brought arithmetic.’

Wow.

Just in case you think that quote is out of context, here’s a video clip courtesy of Town Hall;

If Hillary wins the Democratic nomination, expect to see that clip, over and over and over. Is she really stupid enough to believe what she said?

I leave it up to the reader to decide, but 100 percent without a doubt, Hillary believes big government, more regulation, and higher taxes are the key ingredients to growth.

Clinton calls trickle down a “spectacular failure”. I propose this 10-item alternative list. I could easily expend the list to 100 items, all of which can be attributed to buckets 1, 2, 3, and 10.

Ten Spectacular Failures

  1. The Fed
  2. Fractional reserve lending
  3. Deficit spending
  4. Central bank manipulation of interest rates
  5. US foreign policy
  6. Warmongering
  7. Nation building
  8. Sanctions
  9. Public unions
  10. Politicians in general

Why The Fed Will End QE On Wednesday

Submitted by Lance Roberts of STA Wealth Management,

This week we will find out the answer to whether the Federal Reserve will end its current quantitative easing program or not. Today is the last open market operation of the current program, and my bet is that it will be the last, for now. Here are my three reasons why I believe this to be the case.

1) Much Smaller Deficit Restricts Treasury Bond Issuance

Over the last few years, the Federal deficit has shrunk markedly as infighting between Republicans and Democrats has restricted government spending to a large degree while taxes were increased across a broad spectrum of American taxpayers. The good news is that the U.S. government is closer than in many years to running a balanced budget, although it is has been more by accident rather than through a logical approach of budgeting and waste reductions. The bad news is that deficit spending has been a major contributor to economic growth in the past and the reduction of such has been a drag on economic growth recently.

The chart below shows the level of federal spending, revenue and the deficit. I have added the Federal Reserve’s balance sheet which has been a major buyer of U.S. debt in recent years.

Deficit-FedBalanceSheet-102714 

One of the reasons the Federal Reserve will allow the current QE program to conclude is because the shrinking deficit is reducing the number of bonds being sold by the Treasury.

“But in the economic recovery phase, the federal deficit commenced shrinking sooner than the Fed commenced tapering. There reached a point at which the Fed was acquiring more than 100% of the net new issuance of US government securities. At that point, the Fed’s buying activity was withdrawing those securities from holders in the US and around the world. Essentially the Fed was bidding up the price and dropping the yield of those Treasury securities, and it was doing so in the long-duration end of the distribution of those securities.

The Fed has taken the duration of its assets from two years prior to the Lehman-AIG crisis all the way out to six years, which is the present estimate. It is hard to visualize the Fed taking that duration out any farther. There are not enough securities left, even if the Fed continues to roll every security reaching maturity into the longest possible available replacement security.”

The chart below illustrates this point.

Fed-Balance-Sheet-Treasury-Issuance-102714 

As you can see, the net change to the Federal Reserve’s balance sheet swelled during each of the quantitative easing programs. The liquidity supplied flowed into the financial markets driving asset prices higher.  Importantly, notice the extreme level of balance sheet expansion during QE 3 which caused assets to surge in 2013. However, since the beginning of 2014, the balance sheet expansion has markedly slowed and along with it the inflation of asset prices.

Importantly, with the Treasury issuing fewer bonds due to reduced funding needs, the Federal Reserve can not keep the current pace of purchases going without the risk of potentially creating a liquidity problem within the credit markets. I am quite sure that the Federal Reserve is aware of this issue which is why, despite many bumps in the market this year, they have continued their pace of reductions without pause.

For investors this is critically important to understand, as shown above, there is a very important correlation between the Fed’s QE programs and the liquidity flows that support asset prices. As that liquidity push is extracted from the financial markets, there will be a corresponding increase in market volatility. “Tapering” is in effect a “tightening” of monetary policy which historically slows the growth rate of asset prices.

2) Not Ending Program Could Send Wrong Message On Economy

Boston Federal Reserve President, Mr. Rosengren, recently stated that: the Fed’s asset purchases have achieved their stated goal, the jobs report for September is already in and his economic forecasts have not changed.

“There has been substantial improvement in labor markets, and as a result I would be pretty comfortable [ending purchases] at the end of the month.”

    “Fed Speak” holds much sway over the markets. After each meeting, as Janet Yellen gives her press conference, market participants are quick to parse her words and place market bets on what they think she is implying. Up to this point, each post-meeting confab has been a reaffirmation that the economy is improving enough to expand without the support of monetary policy. 

    It is very likely that if the Federal Reserve decided to keep its current pace of bond purchases in place it would likely be interpreted that the economy is indeed not as strong as the statistical headlines [20] suggest. Such an interpretation could lead to a repricing of risk, and a sharp decline in asset prices, that would potentially destabilize consumer confidence. This is not the outcome that the Federal Reserve is looking for.

    3) Must Normalize Policy Before Next Recession

    Most importantly, the economy is now more than five years into the current expansion. As shown in the chart below, we are now in the fifth longest economic expansion on record. This sounds great until you realize that has been achieved with the lowest level of economic growth of any post-WWII recovery.

    Historical-Economic-Recoveries-102714 

    While much of the mainstream media, analysts and economists ignore normal economic cycles, it is very likely that we are closer to the next recession than not. This is not a bearish prognostication, but rather just the realization that despite the Fed’s best intentions, normal economic and business cycles have not been repealed.

    The problem for the Fed is that with the effective interest rate near ZERO, one of their most important monetary tools to offset recessionary drags within the economy has been removed. The chart below shows the history of the Fed’s overnight lending rate as it compares to economic growth, the market and recessions.

    Fed-Funds-Crisis-102714 

    Historically, each time there has been a crisis, or recession, the Fed has responded by dropping the effective Fed funds rates in order to induce borrowing and lending within the economy. As stated, with the rate near zero, the Fed is trapped without an important policy tool if the economy slips into a recession in the near future.

    This is why they have been so vocal about raising short-term interest rates. The Federal Reserve needs to normalize monetary policy before the next recession hits in order to have some “working room” to stem off any potential future crisis. Ironically, there is a case to be made that the Fed’s interest rate policy manipulations are a cause of economic crises and recessions.

    For these reasons, I highly suspect that the Federal Reserve will announce the end of the current “QE” program during their post-FOMC conference on Wednesday. How the markets respond initially will be focused on what she “says,” however, going forward the“lack of liquidity” may become a much more important issue. 

Accounting Firm Runs the Numbers on Climate Change and they’re not good

We’re 20 years away from catastrophe, says PricewaterhouseCoopers.

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PricewaterhouseCoopers, also known as PWC.

With every year that passes, we’re getting further away from averting a human-caused climate disaster. That’s the key message in this year’s "Low Carbon Economy Index," a report released by the accounting giant PricewaterhouseCoopers.

The report highlights an "unmistakable trend": The world’s major economies are increasingly failing to do what’s needed to to limit global warming to 3.6 degrees Fahrenheit above preindustrial levels. That was the target agreed to by countries attending the United Nations’ 2009 climate summit; it represents an effort to avoid some of the most disastrous consequences of runaway warming, including food security threats, coastal inundation, extreme weather events, ecosystem shifts, and widespread species extinction.

To curtail climate change, individual countries have made a variety of pledges to reduce their share of emissions, but taken together, those promises simply aren’t enough. According to the PricewaterhouseCoopers report, "the gap between what we are doing and what we need to do has again grown, for the sixth year running." The report adds that at current rates, we’re headed towards 7.2 degrees Fahrenheit of warming by the end of the century—twice the agreed upon rate. Here’s a breakdown of the paper’s major findings.

carbon intensity

The chart above compares our current efforts to cut "carbon intensity"—measured by calculating the amount of carbon dioxide emitted per million dollars of economic activity—with what’s actually needed to rein in climate change. According to the report, the global economy needs to "decarbonize" by 6.2 percent every year until the end of the century to limit warming to 3.6 degrees Fahrenheit. But carbon intensity fell by only 1.2 percent in 2013.

The report also found that the world is going to blow a hole in its carbon budget—the amount we can burn to keep the world from overheating beyond 3.6 degrees:

carbon budget

The report singles out countries that have done better than others when it comes to cutting carbon intensity. Australia, for example, tops the list of countries that have reduced the amount of carbon dioxide emitted per unit of GDP, mainly due to lower energy demands in a growing economy. But huge countries like the United States, Germany, and India are still adding carbon intensity, year-on-year:

decarbonization

Overall, PricewaterhouseCoopers paints a bleak picture of a world that’s rapidly running out of time; the required effort to curb global emissions will continue to grow each year. "The timeline is also unforgiving. The [Intergovernmental Panel on Climate Change] and others have estimated that global emissions will need to peak around 2020 to meet a 2°C [3.6 degrees F] budget," the report says. "This means that emissions from the developed economies need to be consistently falling, and emissions from major developing countries will also have to start declining from 2020 onwards." G20 nations, for example, will need to cut their annual energy-related emissions by one-third by 2030, and by just over half by 2050. The pressure will be on the world’s governments to come up with a solution to this enormous challenge at the much-anticipated climate talks in Paris next year.

Former Chief Economist Calls For An End To US Dollar Reserve Status

There are few truisms about the world economy, but for decades, one has been the role of the United States dollar as the world’s reserve currency. It’s a core principle of American economic policy. After all, who wouldn’t want their currency to be the one that foreign banks and governments want to hold in reserve?

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But new research reveals that what was once a privilege is now a burden, undermining job growth, pumping up budget and trade deficits and inflating financial bubbles. To get the American economy on track, the government needs to drop its commitment to maintaining the dollar’s reserve-currency status.

The reasons are best articulated by Kenneth Austin, a Treasury Department economist, in the latest issue of The Journal of Post Keynesian Economics (needless to say, it’s his opinion, not necessarily the department’s). On the assumption that you don’t have the journal on your coffee table, allow me to summarize.

It is widely recognized that various countries, including China, Singapore and South Korea, suppress the value of their currency relative to the dollar to boost their exports to the United States and reduce its exports to them. They buy lots of dollars, which increases the dollar’s value relative to their own currencies, thus making their exports to us cheaper and our exports to them more expensive.

In 2013, America’s trade deficit was about $475 billion. Its deficit with China alone was $318 billion.

Though Mr. Austin doesn’t say it explicitly, his work shows that, far from being a victim of managed trade, the United States is a willing participant through its efforts to keep the dollar as the world’s most prominent reserve currency.

When a country wants to boost its exports by making them cheaper using the aforementioned process, its central bank accumulates currency from countries that issue reserves. To support this process, these countries suppress their consumption and boost their national savings. Since global accounts must balance, when “currency accumulators” save more and consume less than they produce, other countries — “currency issuers,” like the United States — must save less and consume more than they produce (i.e., run trade deficits).

This means that Americans alone do not determine their rates of savings and consumption. Think of an open, global economy as having one huge, aggregated amount of income that must all be consumed, saved or invested. That means individual countries must adjust to one another. If trade-surplus countries suppress their own consumption and use their excess savings to accumulate dollars, trade-deficit countries must absorb those excess savings to finance their excess consumption or investment.

Note that as long as the dollar is the reserve currency, America’s trade deficit can worsen even when we’re not directly in on the trade. Suppose South Korea runs a surplus with Brazil. By storing its surplus export revenues in Treasury bonds, South Korea nudges up the relative value of the dollar against our competitors’ currencies, and our trade deficit increases, even though the original transaction had nothing to do with the United States.

This isn’t just a matter of one academic writing one article. Mr. Austin’s analysis builds off work by the economist Michael Pettis and, notably, by the former Federal Reserve chairman Ben S. Bernanke.

A result of this dance, as seen throughout the tepid recovery from the Great Recession, is insufficient domestic demand in America’s own labor market. Mr. Austin argues convincingly that the correct metric for estimating the cost in jobs is the dollar value of reserve sales to foreign buyers. By his estimation, that amounted to six million jobs in 2008, and these would tend to be the sort of high-wage manufacturing jobs that are most vulnerable to changes in exports.

Dethroning “king dollar” would be easier than people think. America could, for example, enforce rules to prevent other countries from accumulating too much of our currency. In fact, others do just that precisely to avoid exporting jobs. The most recent example is Japan’s intervention to hold down the value of the yen when central banks in Asia and Latin America started buying Japanese debt.

Of course, if fewer people demanded dollars, interest rates – i.e., what America would pay people to hold its debt – might rise, especially if stronger domestic manufacturers demanded more investment. But there’s no clear empirical, negative relationship between interest rates and trade deficits, and in the long run, as Mr. Pettis observes, “Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than countries with large current account deficits, which are handicapped by slower growth and higher debt.”

Others worry that higher import prices would increase inflation. But consider the results when we “pay” to keep price growth so low through artificially cheap exports and large trade deficits: weakened manufacturing, wage stagnation (even with low inflation) and deficits and bubbles to offset the imbalanced trade.

But while more balanced trade might raise prices, there’s no reason it should persistently increase the inflation rate. We might settle into a norm of 2 to 3 percent inflation, versus the current 1 to 2 percent. But that’s a price worth paying for more and higher-quality jobs, more stable recoveries and a revitalized manufacturing sector. The privilege of having the world’s reserve currency is one America can no longer afford.

Authored by Jared Bernstein, originally posted Op-Ed at The NY Times,