Brexit: No Good Options

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The Battle of Britain (1940) was one of the most famous and important conflicts in history. The Battle of Brexit is proving no less decisive even if the weapons are financial and political, not kinetic.

The U.K. joined the European Communities in 1973 and that membership was ratified by a U.K. referendum in 1975. Membership divided the right and left in U.K. politics in the late 1970s and 1980s with the left initially opposing membership.

Over time, the left began to favor the concept and it was the right, led by Margaret Thatcher, that voiced opposition. In 1993, the European Communities transformed into the European Union, EU, as a result of the Maastricht Treaty. The U.K. was a full member of the EU and seemed set to remain a member indefinitely.

Jim Rickards in London

Your correspondent on St. James’s Street in London during a recent visit to the U.K. The period 2016–19 has been one of the most politically fraught in U.K. history. A referendum on exiting the EU (“Brexit”) was announced in February 2016 and held in June 2016. Subjects voted to “leave” the EU, but that vote merely started the turmoil and did not resolve anything. Politicians have been arguing over Brexit terms ever since.

While the U.K. joined the EU, it did not join the eurozone of countries that adopted the euro as a common currency. The U.K. rejected the eurozone and maintained its currency as the pound sterling (GBP). Given the size of the U.K. economy (fifth-largest in the world), this made for an awkward relationship with other major EU members including Germany, France and Italy, which all adopted the euro.

Yet the economic benefits of EU membership, including free trade and the “passport” concept (a business licensed in one member country can expand throughout the EU with minimal registration requirements) were undeniable. Both the EU and U.K. prospered as a result.

Still, opposition to EU membership never disappeared in U.K. politics. The right’s concerns were transferred from the Tories to a new U.K. Independence Party (UKIP), which grew in popularity from the 2010s forward. Despite UKIP, Euroskeptics remained a force in Tory politics.

The U.K. held a general election in 2015. Tory leader and Prime Minister David Cameron promised a referendum on leaving the EU as a way to shore up support from the Tories and attract votes from both Euroskeptics and some UKIP members. Cameron’s party won, and in February 2016 he announced the referendum scheduled for June 23, 2016.

Cameron would probably have won the election without the referendum pledge. His decision to hold the referendum was based on his overconfidence that the U.K. as a whole would vote to remain in the EU. This turned out to be one of the greatest miscalculations in the history of U.K. politics.

On June 23, 2016, the U.K. voted to leave the EU by a margin of 52% for leave and 48% to remain. Cameron promptly resigned as prime minister and party leader. He was succeeded by the current prime minister, Theresa May.

Theresa May favored remaining in the EU but promised to fulfill the will of the voters by commencing the negotiations to leave. On March 29, 2017, the U.K. formally notified the EU of its intention to leave under Article 50 of the Treaty on European Union.

May compounded her political difficulties by calling a snap general election scheduled for June 8, 2017. May expected to expand her Tory majority to give her more leverage in the Brexit negotiations. The opposite happened. May lost her majority and had to form a coalition with the Democratic Unionist Party (DUP) of Northern Ireland to remain in power.

However, the DUP favored a “soft Brexit” (leaving the EU relationship mainly intact), which further limited May’s negotiating power. May’s snap election decision was as misguided as Cameron’s referendum decision. Together, the two elections left the U.K. in the worst possible position when it came to Brexit itself and the exit negotiations.

The biggest political problem in the negotiations is that the 2016 referendum offered two choices (“leave” and “remain”), but the political parties have argued over four choices: a “hard Brexit” with no exit plan, a “soft Brexit” that retains features of EU membership, a “no Brexit” that wants to leave things as they are, and a “new referendum” that hopes to undo the results of the 2016 referendum.

All of these choices are highly problematic. A hard Brexit could lead to financial and economic turmoil along with damage to the U.K. economy for years to come. A soft Brexit lacks support from the Euroskeptic hard-liners. The no-Brexit approach is viewed as a betrayal of those who voted to leave and could lead to demonstrations and civil unrest.

The new referendum approach favored by globalists at the Financial Times and Economist is also a betrayal and could shock the political class by producing another “leave” majority, despite expectations to the contrary.

Political differences aside, a four-way division means there is no majority for anything. 

Successive votes in the Parliament have resulted in one plan or the other being defeated, but no single plan gaining support. The U.K. Parliament members have been playing a gigantic game of chicken with the fate of one of the largest economies in the world hanging in the balance.

The Brexit talks between the U.K. and EU have continued for the past two years. Some political posturing was always to be expected. Significant progress has been made. But now the crunch has arrived. The deadline to leave the EU is March 29, 2019, just four days away.

Yet regardless of the outcome, the prospects for the U.K. economy are decidedly negative. Either a hard Brexit or soft Brexit will damage the U.K.’s trading relations with the EU. The U.S. has recently announced its intention to renegotiate its own trading agreements with the U.K. in ways that can only lead to a reduction in U.K. exports to the U.S.

The U.K. itself is caught in the global slowdown from which the only escape seems to be devaluation designed to import inflation, export deflation and stimulate exports. All paths point to a cheaper pound regardless of the specifics of the final Brexit plan.

But we could soon see some real fireworks at a time when the global economy can least afford it.


Jim Rickards
for The Daily Reckoning

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No Good Options

This post No Good Options appeared first on Daily Reckoning.

The U.K. Brexit referendum on whether to remain with or leave the European Union (EU) took place on June 23, 2016. The result was a clear victory for the “leave” forces. But markets were shocked. All the “experts” had predicted voters would elect to stay.

I was among the few to prepare investors for that shock. In the days before the vote, I urged my readers to short the British pound and buy gold. Those who did made huge gains. Some readers even wrote to me to say thanks for paying their kids’ college tuitions for that year — that’s how much money they made.

Why was I so convinced of the outcome that shocked virtually the entire economics profession?

Since the original vote, the U.K. government has been negotiating with the EU about the exact terms and timing of Brexit. But there has been no resolution. And those negotiations are coming to a head because a deadline for final exit with or without negotiated terms is just four days away, March 29.

U.K. Prime Minister Theresa May has been caught between a rock and a hard place. Many members of Parliament are opposed to Brexit and have done nothing to support her in the negotiations with the EU.

Other members of her own party support Brexit but believe May’s compromises in the negotiations leave the U.K. too close to the EU and defeat the purpose of the original referendum.

In other words, that many existing EU regulations and political control would still come from Brussels instead of London. Some of these involve the hot-button issues that led to Brexit in the first place, like immigration.

Also opposing May have been officials in Northern Ireland and Scotland who are strongly anti-Brexit and do not want to see their relations with the EU disrupted.

Between the anti-Brexit forces and the hard-line Brexit forces, May cannot get a majority to support her. I was watching C-SPAN last night and saw footage of May appearing before the House of Commons last Wednesday. Let’s just say the debate was heated.

Meanwhile, the anti-Brexit forces have been trying to undo the original Brexit vote with calls for a new referendum.

Among these uber-globalists is Anatole Kaletsky, a financial analyst and global activist. I debated Kaletsky in Switzerland last year. He was condescending and a bit arrogant, which is what one expects from the globalists. He was also out of touch with popular sentiment, which is why he got it wrong in his original Brexit “remain” forecast.

Kaletsky has been banking on widespread opposition and political stalemate to force another referendum as a way to ratify the final deal. He has been convinced that a new referendum would reject Brexit.

But this is wishful thinking on Kaletsky’s part, the same wishful thinking that caused him to miss Brexit in the first place. But it’s a good lesson in the relentless methods of the globalists, who treat all setbacks as mere pauses in their quest for one world government.

Now we’re just four days away from when Britain is scheduled to leave the EU. The EU has offered two alternative deadlines — one if the U.K. can agree on a deal, and one if they cannot.

If May can convince Parliament to accept her most recent proposal, Britain will have until May 22 to finalize the details. But if she can’t persuade Parliament to accept the deal they’ve already rejected twice, Britain will only have until April 12 to sort out the next steps.

If Britain can’t figure it out by April 12, “the option of a long extension will automatically become impossible,” says Donald Tusk, president of the European Council.

The latest Brexit uncertainty comes at a very bad time. Global growth has hit a wall, and a poorly implemented Brexit could only bring additional head winds to the global economy. And it will spill over into U.S. stocks.

That’s why Brexit could affect you personally, even if you don’t think you have a stake in the outcome.

You might want to stock up on gold and keep your wealth in dollar-denominated assets. You definitely do not want heavy exposure to the British pound, which is set up for a significant fall.


Jim Rickards
for The Daily Reckoning

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Deadly Accurate Recession Warning Flashes

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The flighty birds congregate in the stock market. The wise owls nest in the bond market.

The bond market will let you know where the economy is heading, say the veterans.

It will not be so easily deceived by the Federal Reserve’s false fireworks. With knowing eyes it penetrates the magician’s secrets… and exposes the fraud.

New York Times economics reporter Neil Irwin:

Savvy economic analysts have always known the bond market is the place to look for a real sense of where the economy is going, or at least where the smart money thinks it is going.

Where does the smart money — the owls — think the economy is going?

Answer anon.

But first a glance at the futureless present… and the stock market.

Stocks took a dreadful thumping today.

The Dow Jones plunged 460 blood-soaked points. The S&P dropped 54; the Nasdaq, 196.

Weakened global growth is one explanation widely on offer. Soft factory data out of Germany, in particular.

But come we now to the latest message from the bond market, not unrelated…

AWhat economic future does the smart money presently foresee?

A lean season… and diminished prospects.

Today the bond market blinked an ominous signal…

An inverted yield curve.

The yield curve is simply the difference between short- and long-term interest rates.

Long-term rates normally run higher than short-term rates.

It reflects the structure of time in a healthy market.

The 10-year yield, for example, should run substantially higher than the 2-year yield.

For the reasons we needn’t look far…

Longer-term bond yields should rise in anticipation of higher growth… higher inflation… higher animal spirits.

Inflation eats away at money tied up in bonds… as a moth eats away at a cardigan.

Bond investors therefore demand greater compensation to hold a 10-year Treasury over a 2-year Treasury.

And the further out in the future, the greater the uncertainty. So investors demand to be compensated for taking the long view.

Compensated, that is, for laying off the sparrow at hand… in exchange for the promise of two in the distant bush.

But when short- and long-term yields begin to converge, it is a powerful indication the bond market expects lean times ahead.

The yield curve flattens… and time compresses.

When the long-term yield falls beneath the short-term yield, the yield curve is said to invert.

And in this sense time itself inverts.

Time trips all over itself, staggered and bewildered by a delirium of conflicting signals.

In the wild confusion future and past collide… run right past one another… and end up switching places.

Thus an inverted yield curve wrecks the market structure of time. It rewards pursuit of the bird at hand greater than two in the future.

That is, the short-term bondholder is compensated more than the long-term bondholder.

That is, the short-term bondholder is paid more to sacrifice less… and the long-term bondholder paid less to sacrifice more.

That is, something is dreadfully off.

It suggests an economic winter is coming… when investors expect little growth.

And today a closely monitored section of the Treasury yield curve inverted… for the first time since 2007.

The 10-year Treasury yield slipped beneath the 3-month yield.

This inversion is a near-perfect omen of recession — conceded even by the Federal Reserve.


The 3-month and 10-year spread is the Fed’s preferred measure of the Treasury yield curve as it shows the strongest historical correlation between curve inversion and a forthcoming recession.

President Trump’s chief economic point man Larry Kudlow agrees — keep a weather eye on the 3-month yield versus the 10-year yield:

“It’s actually not 10s to 2s; it’s 10s to 3-month Treasury bills. Very important.”

Sharpening the point to a poignant maximum is analyst “The Fortune Teller”:

“Let me say it loud and clear: The yield curve is telling you that a recession is on its way.”

It is not a warning to be put off or placed behind the clock.

According to Bank of America, an inverted yield curve has preceded recession on seven out of seven occasions over the past 50 years.

Only once did it holler wolf… in the mid-1960s.

An inverted yield curve has also foretold every major stock market calamity for the past 40 years.

As mentioned, the yield curve last inverted in 2007.

2007 — if memory serves — immediately preceded 2008.

Prior to 2007, the yield curve last inverted in 1998. Recession was not far off.

Warns Paul Hickey, co-founder of Bespoke Investment Group:

When it comes to an inverted yield curve, anyone who ignores its economic message should do so at their own peril. 

In graphic detail, the gray bars of recession following a yield curve inversion:


And now, early in 2019…

This doomy portent drifts once again into view…

And given the extreme duration of the current recovery and the still-inflated stock market, the thumping could assume historic grandeur.

“We’re going at least for a 40% decline from the S&P’s top,” warns Otavio Costa, macro analyst at Crescat Capital.

But is an inverted yield curve an immediate menace, a stormcloud overhead?

It is not.

History reveals the dismal effects of an inverted yield curve may not manifest for perhaps 18 months or longer.

Eighteen months would place late 2020 on watch.

Of course recession may fall later — but also earlier. The hour and minute we cannot say.

The gods have denied us the gift of foresight… and the wisdom that attends it.

Unfortunately, the owl of Minerva flies only at dusk…


Brian Maher
Managing editor, The Daily Reckoning

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Exposing the Myth of MMT

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Yesterday I discussed modern monetary theory (MMT) and how it’s become very popular in Democratic circles.

That’s because it allows for much greater government spending without having to raise everyone’s taxes. And everyday citizens could get behind it because it promises to fund lots of programs without seeing their taxes raised.

What’s not to like?

If MMT were just a fringe idea with a few fringe followers, I wouldn’t waste my time or your time on it. But it’s coming your way, so it is important to understand it.

If you missed yesterday’s reckoning, go here for a refresher.

The people who are thinking about MMT, who understand it at least in some superficial way, are the people who are driving the policy debate or running for president.

Many mainstream economists and money managers have attacked MMT, including Fed Chairman Jay Powell, Larry Summers, Paul Krugman, Kenneth Rogoff, Larry Fink, Jeff Gundlach, Jamie Dimon and Ray Dalio.

But much of their criticism is unjustified (see below for more). I’m an opponent of MMT — but for different reasons. As far as I know, I’m the only analyst who’s raised the objections I list below.

Today, I’m going to show you what I believe to be the real problem with MMT.

Again, it’s easy to see why so many politicians on the Democratic side would be such big supporters of MMT.

Some or all of them have come out in support of the following programs:

Free college tuition, student loan forgiveness, Medicare for all, free child care, universal basic income (UBI) and a Green New Deal. Some support them all.

Needless to say, that’s going to cost a lot of money. Just consider the Green New Deal alone.

I’m not going to go through every detail of it. But in essence it would spend trillions of dollars, for example, building high-speed rail. The idea is to cut down dramatically on air travel. It would also convert nearly every single structure in the country to solar power.

I wrote this article from a house that’s running on solar power. But it’s very expensive to put the system in. I have a big system, but it barely covers my house. And every time I look at it, I say, “Oh, we’re going to do this for every house in the country? Good luck with that.”

Some analysts have estimated that the Green New Deal would cost around $97 trillion. That’s trillion, not billion — or nearly five times annual U.S. GDP.

When critics hear that a Green New Deal could potentially cost something like $97 trillion, or proposals for Medicare for all, free tuition, free child care or guaranteed basic income, they say, “That all sounds nice, but we just can’t afford it.”

That’s their main argument — that no matter how desirable these programs might be in theory, we just can’t afford them. Most criticism of MMT falls along those lines.

Even the Keynesians like those I mentioned earlier, who generally favor large amounts of government spending to stimulate the economy, have come out against MMT.

Besides that claim that we can’t afford it, even the Keynesians say MMT would be highly inflationary. If you printed that much money and start handing it out to people, demand would outstrip the output capacity of the economy and you’d get high inflation.

But the MMT advocates have an answer to these objections. They’re not the least bit intimidated by critics who say we can’t afford it.

They say, “Yes, we can, and Modern Monetary Theory proves it. Just print the money and monetize the debt. Japanese debt is 2.5 times the United States’ debt, and China’s is higher than ours.”

They haven’t collapsed, so we can take on far more debt than we have today. Furthermore, QE did not create much inflation. In fact, the Fed would like to see more inflation than it has. It still can’t produce a sustained 2% inflation rate after all these years.

You might think the argument is ridiculous. After all, do we really want to become Japan?

But in important ways, the MMT crowd has the upper hand in the debate.


Jim Rickards
for The Daily Reckoning

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The Real Problem With Modern Monetary Theory

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MMT supporters will point to 2008 and say, “Just look at QE. In 2008, the Federal Reserve Balance sheet was $800 billion. But as a result of QE1, QE2, and QE3, that number went to $4.5 trillion. And the world didn’t end. To the contrary, the stock market went on a huge bull run.We did not have an economic crash. And again, inflation was muted.”

Fed chairman Jay Powell has criticized MMT, for example. But its advocates say Powell and other Fed officials hoist themselves on their own petard. That’s because they are the ones who actually proved that MMT works. They point to the fact that the Fed printed close to $4 trillion and nothing bad happened. So it should go ahead and print another $4 trillion.

This is one of the great ironies of the debate. The Fed criticizes MMT, but it was its very own money creation after 2008 that MMT advocates point to as proof that it works.

Their only quibble is that the benefit of all that money creation went to rich investors, the major banks and corporations. The rich simply got richer. MMT advocates say it will simply redirect the money towards the poor, students, everyday Americans, people who need healthcare and childcare. It would basically be QE for the people, instead of the rich.

And it will go into the real economy, where it will boost productivity and finally give us significant growth.

When I first encountered these arguments, I knew they weren’t right. Both my gut feeling and my more rigorous approach to my own theory of money told me MMT was wrong. But I must admit, their arguments were more difficult to answer than I expected. I had a tough time uncovering the logical flaws.

Their points are internally consistent, and they did have a point. After all, the Fed did create all that money and it didn’t produce a calamity. Who’s to say they couldn’t do a lot more of it?

In other words, the Keynesian argument does not hold water when you look at the facts or certainly recent economic history.

Without doing any more serious thinking about it, I probably would have lost a debate with any leading MMT proponent who’s done a lot of work on it, despite “knowing” they were wrong. I couldn’t easily refute their basic arguments.

You can never win a debate if you don’t understand your opponent’s position. Over the past several years I got dragged into endless gold versus bitcoin debates, and I always thought they were silly because gold is gold, and bitcoin is bitcoin. Contrasting them never made sense to me, but that’s what everybody wanted to hear, so I participated in a lot of gold versus bitcoin debates.

I won every debate according to the judges or the audience, but the point being I had to understand bitcoin in order to see its shortcomings. I wasn’t about to debate somebody about bitcoin and get blindsided or embarrassed because I didn’t understand their arguments. I had to become a complete expert on bitcoin to win these debates.

The same applies to MMT. If you’re going to debate somebody on MMT, you’d better know it better than they do or you’re going to lose that debate. It just so happens that I’ll be debating a leading MMT proponent on April 3, in just a few weeks. So I had to immerse myself in it to learn it inside and out.

I knew I had to go beyond the standard arguments that we can’t afford it, that it would explode the deficit, etc. I’m happy to say that I worked out an answer refuting MMT, but it wasn’t easy. It took a lot of hard thinking. Today I’m giving you a preview of what I’ll argue at the upcoming debate.

Here’s what it comes down to…

The real problem with MMT can be traced to its very definition of money. The MMT advocates say they know what money is. Money derives its value from the fact that you need it to pay your taxes. In the U.S. case, money is dollars.

But their definition of money is flawed. In other words, the whole theory is built on quicksand. And this is the point that everyone is missing, including the usual critics. No one else has raised it.

The basis of money, the definition of money, has nothing to do with paying taxes. I can think of a hundred ways to hold money and store wealth where you don’t owe any taxes. Here’s one example…

If you buy a share of stock and stick it in your portfolio for 10 years without selling it, how much do you owe in taxes? Zero. You don’t owe any taxes until you sell it. This is one of the reasons why Warren Buffet is so rich, by the way. He pays very little taxes.

But it’s not just stocks. What if you bought some land instead? You sit on it for 10 years, 20 years, 30 years, and ultimately give it to your kids. They keep it as a family homestead. How much do you owe in income tax? Zero. You don’t owe a nickel until you sell it.

The same applies to gold. You buy it and stick it in a safe for years. If you don’t sell it, you don’t owe taxes on it. That’s my point. In other words, there are innumerable ways to convert money into assets that preserve wealth where you don’t owe any taxes. You don’t have to pay taxes if you have stores of wealth and don’t sell them.

The bottom line is, people have lots of alternatives. They are infinitely resourceful when it comes to getting out of the tax system and preserving wealth without having to pay taxes. So the whole idea that money derives its value from taxation fails. Money is not based on paying taxes at the end of the barrel of a gun.

What is money based on then?

Ultimately, it’s based on trust. We all need to trust in the money we use or else it wouldn’t be of much value. I could offer you seashells as a form of payment, but it’s highly unlikely you’ll accept it. When it comes your turn to buy goods and services, you need to know that someone else will accept your money.

It’s that trust in the system that creates value. That system is very fragile and can be lost. And once lost, it’s almost impossible to regain. That’s why fiat currencies always fail in the long run.

MMT advocates say trust has nothing to do with it, that you need to pay your taxes with money, or else. But look at a place like Venezuela today. It’s one of the worst cases of hyperinflation in the history of the world. I don’t think anybody in Venezuela is worried about paying their taxes. They’re worried about finding food and water so their family doesn’t starve today.

And if they happen to have some local money they’re getting out of it as fast as they can. If they can find gold or dollars or euros, they’re buying it. They’re dumping their currency faster than the government can print it. When confidence is lost, when trust is lost, people get out of rapidly depreciating money as fast as they can.

That’s where the whole modern monetary theory breaks down, at its foundation. It fails because they substitute the threat of violence and jail for what really drives money, which is trust. They don’t understand that. And this trust can be lost very quickly.

MMT advocates also seem to think inflation can be dialed back or tweaked at will. Maybe they’ll say we’ll only spend $90 million on a Green New Deal instead of $97 trillion. They think they can dial it down. But they can’t. Once inflationary expectations set in, they take on a life of their own. It’s a non-linear system.

It’s like moving the control rod in a nuclear reactor. If you get it wrong by just a little you can melt the reactor down and kill a million people. It’s a non-linear system.

So, my point is that MMT advocates misunderstand what money is. Money is not about coercion, it’s about trust. They don’t understand that there are plenty of non-taxable alternatives people can resort to. They misunderstand what inflation is. Inflation is not a linear phenomenon, but a non-linear phenomenon that can spiral out of control before you can do anything about it.

And I use Venezuela as my case study, not QE. So, the point being they don’t understand money. This is what I’ll argue at my upcoming debate.

I expect to win.


Jim Rickards
for The Daily Reckoning

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A Recipe for Massive Government Spending

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I try to avoid partisan politics in my analysis. And I never try to tell people how to vote or what they should think. I trust my readers to make their own judgments. But sometimes I can’t avoid partisan politics because they can have a major impact on markets and the economy.

Leading Democratic presidential hopefuls Elizabeth Warren, Kamala Harris and Bernie Sanders have expressed desires to increase income taxes to 70% or even 90% on the rich, impose “wealth taxes” on their net worth and impose estate taxes that are equally onerous when they die.

The result would be that working people would pay state and local income tax on their wages, super-high income taxes on interest and dividends and annual wealth taxes and whatever was left over would be confiscated when they die.

In case you think these proposals are too extreme to become law, you might want to check out the polls. Recent polls show 74% of registered voters support a 2% annual wealth tax on those with $50 million of assets and 3% on those with $1 billion of assets.

Don’t assume you’re exempt just because your annual income is lower. Those tax thresholds are on wealth, not income, and could include stocks, bonds, business equity and intangible business equity for doctors, dentists and lawyers.

Another poll shows 59% of voters support the 70% income tax rate proposed by Rep. Alexandria Ocasio-Cortez (D-New York). Politicians go where the votes are. Right now, the votes are in favor of much higher taxes on you.

The history of these taxes is that the rates start low and the thresholds start high, but it’s just a matter of time before rates rise, thresholds drop and everyone is handing over their wealth.

But taxes become very unpopular when too many people get clipped. And politicians are very sensitive to that. Now some Democrats are calling for a system that would allow them to spend much, much more money on social programs without appreciably raising taxes. For politicians, it’s a dream come true — if it could work.

The leading Democratic candidates for president and numerous members of Congress have come out in favor of Medicare for All, free child care, fee tuition, a guaranteed basic income even for those unwilling to work and a Green New Deal that will require all Americans to give up their cars, stop flying in planes and rebuild most commercial buildings and residences from the ground up to use renewable energy sources only.

The costs of these programs are estimated at $75–95 trillion over the next 10 years. To put those costs in perspective, $20 trillion represents the entire U.S. GDP and $22 trillion is the national debt.

It used to be easy to knock these ideas down with a simple rebuttal that the U.S. couldn’t afford it. If we raised taxes, it would kill the economy. If we printed the money, it would cause inflation. Those types of objections are still heard from mainstream economists and policymakers, including Fed Chair Jay Powell.

But now the big spenders have a simple answer to the complaint that we can’t afford it. Their answer is, “Yes, we can!” That’s because of a new school of thought called Modern Monetary Theory, or MMT.

Daily Reckoning managing editor Brian Maher previously discussed MMT here and here.

This theory says that the U.S. can spend as much as it wants and run the deficit as high as we want because the Fed can monetize any Treasury debt by printing money and holding the debt on its balance sheet until maturity, at which time it can be rolled over with new debt.

What’s the problem?

Bernanke printed $4 trillion from 2008–2014 to bail out the banks and help Wall Street keep their big bonuses. There was no inflation. So why not print $10 trillion or more to try out these new programs?

There are serious problems with MMT (not the ones Jay Powell and mainstream voices point to). But very few analysts can really see the flaws. I’ll be in an MMT debate with a leading proponent in a few weeks, where I will point out what I believe to be the biggest flaws with MMT. To my knowledge, no one else has raised them.

For now, get used to the rise of MMT. It will be a central feature of the 2020 election campaign. The disastrous consequences are a little further down the road.

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The Government’s Greatest Con Job

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Yesterday we documented our personal frustrations with contemporary technology.

Today we file a protest against contemporary money.

We begin with the “evolution” of United States currency…

We refer you to this $10 bank note, dated 1928:

10 Dollar Bill

In those antique days, a fellow could march into a bank, hand the clerk a slip of paper as illustrated above and demand the denominated amount in gold coin.

The system imposed a hard discipline upon banks… and held inflation in checkmate.

Federal Reserve banks were required to keep a 35% reserve of “gold or lawful money” on hand, lest they make a liar of the United States Treasury secretary — in this case the Hon. Andrew William Mellon.

In effect, the private citizen bound the banking system in golden handcuffs.

But one Great Depression, one New Deal and one world war later… we come now to a 1950 $10 bank note:

10 Dollar Bill

In appearance it is nearly a perfect twin to the 1928 model — with one infinitely telling exception.

Can you sniff it out?

The 1928 note bears this inscription:

“Redeemable in gold on demand at the United States Treasury or in gold or lawful money at any Federal Reserve Bank.”

But reads the 1950 version:

“This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury, or at any Federal Reserve Bank.”

The fine print disguises a vast swindle: The gold provision was stricken from the record.

The bankers had broken free of their golden handcuffs… and no longer could a private citizen bring them to honest account.

But what about “lawful money”? What is it?

In 1947, a certain gentleman — A.F. Davis by name — dispatched the following note to the United States Treasury, accompanied by a $10 note:

I am sending you herewith via registered mail one $10 Federal Reserve note. On this note is inscribed the following:

“This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury, or at any Federal Reserve bank.”

In accordance with this statement, will you send me $10.00 in lawful money?

The acting treasurer, M.E. Slindee, responded after this fashion:

Dear Mr. Davis,

Receipt is acknowledged of your letter of Dec. 9 with enclosure of one ten-dollar ($10.) Federal Reserve note.

In compliance with your request, two five-dollar United States notes are transmitted herewith.

And so Mr. Slindee began chasing his tail — what the logicians call circular reasoning.

In exchange for his $10 note, Mr. Davis was mailed two $5 bills bearing the same pledge to redeem in lawful money.

But this Davis fellow would not be so easily shooed away.

He returned one of the $5 bills, once again demanding lawful money in exchange:

Finally Mr. Slindee threw up the sponge:

Dear Mr. Davis:

… You are advised that the term “lawful money” has not been defined in federal legislation. It first came to use prior to 1933 when some United States currency was not legal tender but could be held by national banking associations as lawful money reserves.  

Since the act of May 12, 1933, as amended by the Joint Resolution of June 5, 1933, makes all coins and currency of the United States legal tender and the Joint Resolution of Aug. 27, 1935, provides for the exchange of United States coin or currency for other types of such coin or currency, the term “lawful money” no longer has such special significance.

The $5 United States note received with your letter of Dec. 23 is returned herewith.

Beginning in 1963, all promises to redeem in lawful money were stricken from United States currency.

Here, in graphic detail, the devolution of American money:


Say what you will of paper money. But in one sense it is redeemable — if you’ll forgive the expression in the present context.

It in tangible. You can hold it in your hand, in your wallet, in your mattress.

It cannot be erased at the stroke of a key.

It is also anonymous. Once out of your hands, it leaves no trace.

None of these happy virtues apply to digital money…

Digital money has no tangible existence. It can disappear at a keystroke. The bank can freeze you out of it. And every transaction goes on your permanent record.

What is more, digital money removes all natural checks.

Even paper money files a claim on Earth’s resources — it is constituted of cotton and linen.


Digital money is the type of money bound to get itself into trouble.

Wispy as fog, slippery as oil, it is conjured into existence… as if by the magician’s wand.

And it can get around the world at electronic speeds.

It is also the ideal money for a government swollen to ghastly dimensions — its issue being unlimited in theory.

If paper money invites abuse… what about digital money?

Thus we speak our piece for lawful money — even paper money.


Brian Maher
Managing editor, The Daily Reckoning

The post The Government’s Greatest Con Job appeared first on Daily Reckoning.

Can Technology Save Us?

This post Can Technology Save Us? appeared first on Daily Reckoning.

The economy has been trapped in a one-step-forward, two-steps-back cycle nearly a decade running.

One door opens, two slam shut.

A ray of sun cracks through, the overcast patches the hole.

Rapidly advancing technology offers a way out, its drummers claim.

They insist automation, robotics and artificial intelligence (AI) will soon catapult the economic system into vastly more productive realms.

By 2030 alone, they believe it could yield an additional $16 trillion to global GDP.

They further claim 40–50% of human occupations will be subject to automation over the next 15–20 years.

These are not limited to trucking, taxi driving or manufacturing and construction.

To these we must add white-collared jobs in law, finance, medicine, accounting, etc.

What will become of the attorney at law, we wonder — and the human conductor of the ambulance he chases?

We are unconvinced automation will proceed at the projected gallop.

But let us suspend all assumption for the moment… and drive on to the inevitable question:

What happens when robots acquire the brains to perform nearly all human labor?

Economist Joseph Schumpeter (1883–1950) put the term “creative destruction” into general circulation.

For Schumpeter, capitalism was the “perennial gale” of creative destruction.

Capitalism blows away the old and inefficient. In comes the new and improved.

Because of capitalism’s perennial gale, today’s serf lives more royally than yesteryear’s king.

Explains economist Richard Rahn of the Cato Institute:

The average low-income American, who makes $25,000 per year, lives in a home that has air conditioning, a color TV and a dishwasher, owns an automobile and eats more calories than he should from an immense variety of food…

Louis XIV lived in constant fear of dying from smallpox and many other diseases that are now cured quickly by antibiotics. His palace at Versailles had 700 rooms but no bathrooms (hence he rarely bathed), and no central heating or air conditioning.

Here is progress itself. All because capitalism’s creative gales flattened everything in sight.

The obvious benefits of capitalism are why most focus on the “creative” side of the ledger.

But what about the equally critical “destruction” side?

Innovation and technology have always allowed humans to mine fresh sources of productive employment.

The 19th-century farmer became the 20th-century factory worker… became the 21st-century computer programmer.

But an omnipotent robot would likely spell the end of the human laborer.

A robotic brute that can drive home a rivet is one thing.

But a genius robot that could do anything a human can do — only better — is yet another.

This robot would tower above the human as the human towers above the beasts of the field.

An Aristotle, a da Vinci, an Einstein would be a dunce next to it.

What human ability would lie beyond this unnatural beast?

Artistic expression?

A 900-IQ robot might run its circles around the human antique, you say.

But it could not appreciate beauty — much less express it.

The robot has a brain… but no soul.

No, the kingdom of the arts belongs to man alone.

Well, please introduce yourself to Aiva…

Aiva is a computerized composer.

Programmers had it soak in the music of Bach, Beethoven, Mozart and other colossi of the classical canon.

Based on the inputs, it taught itself to compose original music.

Its music is indistinguishable from a carbon-based professional’s.

Its tunes have been featured in cinematic soundtracks, advertisements and computer games.

Will the next Mozart be a computer?

Not even the oldest profession is safe from robotic competition — but let it pass for now.

Moreover, Schumpeter’s creatively destructive gales tear apart the social fabric …

Capitalism puts out its tongue at tradition.

It uproots communities. It swings the human being around hairpin turns of social and technological change… like a dizzied fly upon a wheel.

Within a generation, the centuries-old farming community is given over to the assembly line and the punch clock.

A generation later the factory goes dark as creative destruction blows the jobs clear to China… or Vietnam… or wherever labor is cheapest.

And Americans must constantly upend their families to follow the jobs — which pries apart the bonds of community.

And advancing technology makes today’s job obsolete tomorrow.

Not everyone can take up new lines.

Many are simply left behind, broken… and can never catch up.

The river of progress carries forward, as it must.

And yes — it must.

Do you reject progress?

Then the inventor of the wheel you must set down as a colossal villain.

If justice held, Ford should have been flattened by an auto, Franklin fried in an electric chair.

We disagree, with the highest respect.

But let us at least recognize…

The advancing river of progress sometimes takes the human note with it.

And not all change is progress…


Brian Maher
Managing editor, The Daily Reckoning

The post Can Technology Save Us? appeared first on Daily Reckoning.

REVEALED: The True Inflation Rate

This post REVEALED: The True Inflation Rate appeared first on Daily Reckoning.

The Federal Reserve has pursued its 2% inflation target with a monomaniacal determination… like a mad dog worrying a bone.

But it has largely been a juiceless pursuit… “as elusive as sheet lightning playing among June clouds.”

Inflation has bubbled a bit here, gurgled a bit there. But to limited general effect.

Headline inflation (including food and energy) sank from 2.9% last June… to 1.6% in January.

It is true that core inflation — excluding food and energy — runs somewhat warmer at 2.2%, annualized.

But the oven is nonetheless set to low temperature.

Experts dispute the causes — depressed worker wages obtaining from globalization, “secular stagnation,” a global “savings glut,” the astrological misalignment of stars and planets, etc.

Some accounts carry a greater plausibility than others.

We presently incline toward the astrological theory — but we are far from convinced.

Meantime, the February inflation numbers are due out tomorrow.

We expect no sharp departure from existing trends.

And they will likely offer the Federal Reserve additional justification to hold rates steady.

Here we speak of official inflation measures.

But is actual inflation vastly higher?

Yes, the Federal Reserve’s 2% sustained inflation hopelessly eludes it.

Yet assets such as stocks, bonds and real estate have been the scenes of dramatic inflation over the past decade.

The S&P — to take one example — has increased over 300% alone.

And therein hangs an epic tale…

Household net worth in these United States has increased some 73% since the Great Recession.

And Americans’ financial assets totaled over $85 trillion at the end of 2018.

Traditional inflation models exclude these asset prices.

But what if they were included?

The Federal Reserve’s New York headquarters hatched a model for that express purpose:

The “underlying inflation gauge,” or UIG.

This UIG incorporates not only consumer prices — but producer prices, commodity prices and financial asset prices.

Thus it promises a true inflation reading.

Claims the New York Fed:

The UIG proved especially useful in detecting turning points in trend inflation and has shown higher forecast accuracy compared with core inflation measures.

If we gauge inflation by this comprehensive model… the true rate of inflation substantially exceeds the Federal Reserve’s 2% target.

What is the true inflation rate as indicated by the UIG?

Roughly 3%.

From 3.06% in December, it slipped to 2.99% in January.

The true inflation rate nonetheless exceeds the core rate by nearly one full percentage point.

The lesson, plain as eggs:

Inflation lives and thrives. But largely in assets.

And the Federal Reserve could have begun raising interest rates as far back as Bernanke.

Danielle DiMartino Booth, former aide to ex-Dallas Fed President Richard Fisher:

Had the Fed been using a 2% target based on the UIG, [former chairs] Janet Yellen and Ben Bernanke would have been compelled to raise interest rates much earlier than they did. 

Sharpening the point is Joseph G. Carson, former global director of economic research at AllianceBernstein:

The UIG carries [an important message] to policymakers: The obsessive fears of economywide inflation being too low is misguided; monetary stimulus in recent years was not needed.

Obsessive fears of low inflation are misguided? Monetary stimulus in recent years was not needed?

This Carson heaves up strange and dangerous heresies.

The Paul Krugmans of this world will set him down as an agent of the Old Boy himself… and an enemy of civilization.

As well claim that Noah’s Ark did not house all the world’s species in duplicate… that George Washington did not fell the cherry tree…

Or worse — that gold is money.

But what if the UGI is correct?

Were decades of loose monetary policy an epic blunder?

Analyst John Rubino of

The really frustrating part of this story is that had central banks viewed stocks, bonds and real estate as part of the “cost of living” all along, the past three decades’ booms and busts might have been avoided because monetary policy would have tightened several years earlier, moderating each cycle’s volatility.

But if the actual inflation rate runs to 3%… what does it portend for the economy?

When this underlying inflation gauge crossed 3%, Zero Hedge reminds us, recession and bear markets often follow.

At 2.99%, it is currently hard against the 3% threshold.

So here we welcome our old colleague Catch-22 to the proceedings…

If the Federal Reserve resumes rate hikes at this late point, it would likely trigger a major stock market sell-off.

But if it does not raise rates, the true inflation rate will once again exceed the critical 3% mark, inviting recession… and a market sell-off.

Thus the Fed appears damned if it raises rates — and damned if it doesn’t.

But either way… damned.


Brian Maher
Managing editor, The Daily Reckoning

The post REVEALED: The True Inflation Rate appeared first on Daily Reckoning.

The Worst Jobs Report Since 2017

This post The Worst Jobs Report Since 2017 appeared first on Daily Reckoning.

The big story today is the February jobs report.

In the parlance of the trade, it was a “miss.” And not by a jot, not by a tittle, not by a whisker.

Economists as a whole divined the economy would add 175,000 jobs last month.

What was the actual number?

A mere 20,000 — miles and miles beneath expectations — and the worst monthly showing since September 2017.

Consider: The United States economy has averaged over 200,000 new jobs 12 months running.

Among the report’s “highlights”:

Manufacturing jobs fell 8,000 below estimate. Retail jobs disappointed to the sour tune of 6,100. Construction jobs fell a full 31,000 short of the glory.

Today’s report sent stocks into red numbers for the fifth straight day — despite a late uprising.

The Dow Jones closed the day down 23 points. The S&P lost 6, the Nasdaq 13.

But markets should take heart…

Bad News Is Good News for Stocks

Today’s unemployment report means Jerome Powell will not be raising interest rates soon.

In fact, we suspect Mr. Powell is inwardly pleased today.

The report gives him every excuse to hold — or even cut rates.

And the president will stop battering him about interest rates.

Affirms Mark Hamrick, senior economic analyst for

“All of this shows the Federal Reserve can continue to wait before raising interest rates, if at all this year.”

Today fed funds futures are in fact giving a 25% chance of a rate cut by next January — up 5% from yesterday.

What precisely does this morning’s grim report portend for the American economy?

“The sharp slowdown in payroll employment growth in February provides further evidence that economic growth has slowed in the first quarter,” says Michael Pearce, senior U.S. economist at Capital Economics.

“This is a disappointing report,” moans Carl Tannenbaum, chief economist of Northern Trust, adding:

“I don’t think there’s any way to sugarcoat it.”

But that does not mean the rah-rah men did not try…

Mother Nature and Uncle Sam Are to Blame

It was the month’s lousy weather, they bellow. Of course construction jobs are down. And do not forget about the government shutdown.

On hand with his sack of sugar was professional optimist Larry Kudlow, the president’s economic point man.

“Fluky,” is how he describes this morning’s report:

I think you have timing issues with respect to the government shutdown, winter seasonal issues. I think it’s very fluky. I wouldn’t pay any attention to it to be honest with you.

“I think the federal shutdown and the weather are playing games with the numbers,” adds Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

Just so.

We are in no position to question a director of the United States National Economic Council… or a chief investment officer at Independent Advisor Alliance.


The professional men had forecast 175,000 jobs.

Were they not aware of the lousy weather… the government shutdown… and all the temporary hobgoblins tormenting February’s employment market?

What is the point of having experts?

Mr. Jonathan Doe or Mrs. Jane Doe could scarcely botch things so badly.

And if the number did come ringing in at 175,000 — depend on it — the same experts would seize upon it as proof of a raging economy.

We wonder when they will be exhausted of excuses.

Nearly 10 years running, disappointing economic data have resulted from the weather. Or this temporary malady. Or that brief detour.

It has been a permanent chasing of rainbows.

Yet there has been no pot of gold at rainbow’s end.

Perhaps today’s woeful unemployment says what it means and means what it says…

The “New Normal”

The economy is staggering to a crawl.

GDP growth peaked at 4.2% in last year’s second quarter.

The quarters following turned in 3.4%… and 2.6%.

After today’s botchwork you must dose any expert prognostication with heaping amounts of table salt.

But Goldman now projects 0.9% Q1 GDP growth.

The Federal Reserve’s New York garrison has it at 0.88%.

Its Atlanta branch now estimates Q1 growth of merely 0.5%.

Meantime, the New York Fed’s No. 1 man says he expects 2019 GDP to print just 2%.

But the same John Williams is neither concerned… nor surprised.

Diminished growth is merely the “new normal”:

I know this talk of slowing growth is causing uncertainty, some hand-wringing and even fear of recession. But slower growth shouldn’t necessarily come as a surprise. Instead, it’s the “new normal” we should expect.

But with the highest respect to Mr. Williams… why shouldn’t we expect more?

Plenty of Bang, Not Much Buck

The United States government has borrowed in excess of $10 trillion over the prior decade.

$10 trillion is plenty handsome.

Yet that $10 trillion of debt yielded only $3 trillion of real GDP.

To hone in closer, the nation’s debt increases roughly $100 billion per month.

But GDP only increases some $40 billion per month.

We are getting plenty of buck, that is. But not much bang.

The nation’s debt-to-GDP ratio already exceeds 100% — its highest since WWII.

But where are the Nazis? Where are the Japanese?

What Manhattan Project is the United States government financing?

The standard formula says deficits should decline during economic expansions. Come the inevitable recession, the government then has a full war chest to throw at it.

But a decade into the current expansion… the Treasury is depleted.

And the debt-to-GDP ratio is projected at 115% within three years.

Meantime, the Federal Reserve expects long-term GDP growth of 1.9%.

It is a grim calculus.

So Far, So Good

Yet the president of the New York branch of the Federal Reserve is unconcerned.

We are reminded of the blind fellow who falls off the 100-story building.

“So far, so good,” he assures himself 80 floors down.

We suspect the United States is 80 floors down. Or perhaps 73. Or 68.

Either way, the pavement is coming up fast…


Brian Maher
Managing editor, The Daily Reckoning

The post The Worst Jobs Report Since 2017 appeared first on Daily Reckoning.