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Financial Elites Seem Oblivious To Threat Of Economic Calamity

This article was produced by Economy for All, a project of the Independent Media Institute.

Can runaway booms descend into busts absent monetary tightening by the world’s central banks? I pose this question in the wake of an extraordinary exchange on January 22 at Davos between Bloomberg editor-at-large Tom Keene and Bob Prince, co-CIO of Bridgewater Associates, in which the latter posited the notion that “we’ve probably seen the end of the boom-bust cycle.”

It is striking that one of today’s titans of finance has given us what appears to be another version of “this time it’s different,” which the famous investor Sir John Templeton once described as “the four most expensive words in investing.”

My own basic take has been that the U.S. economy over the past three years has been weaker than the underlying quantitative data suggests and that there is ample historical precedent to suggest that credit cycles can end, even in the context of a low interest rate environment, notably via a deterioration in the quality of credit itself, as the great economist Hyman Minsky once explained in his financial instability hypothesis. The truth is that for decades, the U.S.—indeed the entire global economy—has been characterized by an economically unsustainable model in which larger and larger portions of GDP gains have been going to a smaller number of people at the top (who also have a higher propensity to save than people with lower incomes, which means the “trickle-down” effect is minimal to nonexistent). Wage gains also appear to be leveling off, which could have ominous implications for sustainable future growth. Yet many investors like Prince seem to accept today’s buoyant asset bubbles as a given in the absence of a concerted effort by the central banks to “take away the punch bowl just when the party gets going” (in the famous words of former Fed Chairman William McChesney Martin), via higher interest rates.

In the words of Bob Prince (quoted in Doug Noland’s Credit Bubble Bulletin):

Bob Prince…: “2018 I think was a lesson learned. The tightening of central banks all around the world wasn’t intended to cause a downturn—wasn’t intended to cause what it did. But I think lessons were learned from that. And I think it was really a marker that we’ve probably seen the end of the boom-bust cycle.”

Bloomberg’s Tom Keene: “Is it the end of the hedge fund business in modeling portfolios off the guesstimates of what central banks will do?”

Prince: “That won’t play much of a role nearly as it has. You remember the ’80s when we sat and waited for the money supply numbers. We’ve come a long way since then… Now we talk 25 plus [BPS Fed rate increase], 25 minus. We’re not even going to get 25 plus or minus and we got negative yields. That idea of the boom-bust cycle—and that history that we’ve been in for decades—is really driven by shifts in credit and monetary policy. But you’re in a situation now where the Fed is in a box. They can’t tighten, and they can’t ease—nor can other central banks, particularly the reserve currencies. And so where do you go from here? It’s not going to look like it has.”

Prince goes on to acknowledge that “cycles in growth are caused by the boom and bust in credit: Credit expansion, credit contraction,” but makes the assumption that “those expansions and contractions of credit are largely driven by changes in monetary policy.”

That may have been the case for much of the post-World War II period, but if we look back further, there is evidence to suggest that Prince’s hypothesis is another variant of the dangerous “this time it’s different” truism.

Why have so many people gotten this wrong?

The misconception probably stems from a famous statement made in 1997 by the MIT economist Rudi Dornbusch: “None of the U.S. expansions of the past 40 years died in bed of old age; every one was murdered by the Federal Reserve,” and this was more or less true of the U.S. economy from 1946 until the 2000s.

But then economic dynamics changed. Yes, the Federal Reserve raised the Fed funds rate by 400 basis points in the mid-2000s, but it reversed almost all of that move and began opening the floodgates of bailout financing by early May 2008. Nevertheless, the U.S. and global economy fell off a cliff in the second half of that year as global financial fragility erupted into a full-blown global systemic crisis to a degree unseen since the 1930s.

Why was it different that time? The reason is that there had emerged myriad asset bubbles and a related unprecedented rise in private indebtedness in the U.S. and other economies. These supports to cyclical demand expansion were unstable and unsustainable. In other words, these were conditions very similar to those that prevail today.

Hyman Minsky and Irving Fisher described how once the debt “disease” goes metastatic there will come a “Minsky moment” when euphoria gives way to concern and then to panic liquidation and credit revulsion. When that dynamic is in full flower, the Fed is powerless, no matter how much they want to bring the punchbowl back.

The U.S. and much of the global economy still have quasi-bubbleized assets and very high levels of private (and quasi-private) indebtedness. Bob Prince and many of his investment cohorts appear to remain oblivious to the threat of a Minsky/Fisher debt deflation dynamic, which the Fed and the central banking fraternity can do little to stop, if one is to judge from today’s current buoyant stock markets.

There is yet another way in which global economic growth can slow or even falter this time around, which I have discussed before (in the context of China’s economy): This thesis dates from “a very old idea from business cycle theory prior to the Second World War that private sector over-investment can become so unsustainably high that even without a fiscal/monetary shock, there could be a fall in autonomous investment. Once that begins,” a weakening edifice of highly suspect and marginal lending activity “can lead to a cumulative economic contraction even if interest rates plummet and monetary conditions ease.”

This old idea from the history of economics has largely been forgotten due to changes in the fads and fashions in academic economics. But there are grounds for thinking it is an idea whose time has come once again.

Globally, we have a glut of consumer goods, much of it emanating from China, but given increasingly weakening demand from an economy that is growing more and more skewed to the top 1 percent, we have fewer consumers able to buy it. Moreover, in China itself, modest fiscal stimulus measures undertaken at the end of last year could well be overridden by the onset of the coronavirus, which risks undermining the impact of these recent upticks in infrastructure investment, along with the potential benefits accrued from the cessation of the trade war with the U.S. government.

It follows that the world has a condition of over-investment that is unsustainable. This means there will be less investment to produce additional goods. Much like a rickety building on shaky foundations, therefore, a decline in global autonomous investment threatens to plunge us into a global economic slowdown, independent of actions by the global or national monetary authorities.

Are there any signs of this? Over the past year, global growth “recorded its weakest pace since the global financial crisis a decade ago,” according to the International Monetary Fund. This, despite buoyant risk asset markets, credit and money growth in key economies well in excess of nominal GDP, super-easy monetary policy everywhere, and an end of the fiscal restriction of recent years. Therefore, we cannot attribute this surprising softening to a “murderous Fed” (to paraphrase Dornbusch) or its cohorts in the global central banking fraternity. It is, however, possible to posit that we may be seeing a cresting of excessive global fixed investment, which eventually could cause a global recession. There is no question that our central banks and governments will try to do “whatever it takes” to postpone such a decline.

The point is that, relative to the post-war business cycle patterns in most people’s minds, the end of this global expansion does not need a “murderous Fed.” Excessive risk asset valuations and high indebtedness, even in a world of low prevailing interest rates and unprecedented central bank intervention, can nonetheless lead to negative financial and economic dynamics. And given excessive global capital spending in a world where the warranted rate of growth has now downshifted, an autonomous decline in excessive investment can do the same. Add to this the increasing risks brought about by the spread of the coronavirus, and you’ve got the ingredients for an incipient global economic calamity.

Marshall Auerback is a market analyst and commentator

Trump Tax Cut Saved Billions For Banks That Cut US Jobs

Donald Trump promised the 2017 Republican tax law would create jobs and support the middle class. Instead, six big banks have pocketed an additional $32 billion in savings — while cutting more than 1,000 jobs — over the past couple of years as a result of that law, Bloomberg reported Thursday.

Bloomberg calculated the additional savings from the GOP tax law by looking at the tax rates banks paid before the 2017 law (30 percent) to the rates the banks paid after the law went into effect (between 18 percent and 20 percent). The banks saw an additional $14 billion in profits in 2018, then another $18 billion in additional profits in 2019.

In the meantime, the banks also cut their workforce by a combined 1,200 jobs by the end of 2019.

The six banks include JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.

Much of the savings come on the backs of consumers through credit card debt, according to Ken Leon, director of equity research at CFRA Research. The consumer credit card market is “still a leading growth driver for the consumer bank,” he told the Washington Post.

“Even though consumers are confident, people are still carrying significant debt,” Ted Rossman, an analyst for CreditCards.com, told the Post. “From a bank’s perspective, that is a big moneymaker. From a consumer’s perspective, I would encourage everyone to pay that down.”

While big banks are soaking up excess savings and slashing jobs, many families throughout America have not seen the same types of benefits from the 2017 law.

Two years after the tax bill sailed through Congress without a single vote from Democrats, NPR declared that the law has “failed to deliver on GOP promises.” The outlet reported that more than 60 percent of the tax savings went to the wealthiest 20 percent of Americans, leaving 80 percent of Americans behind.

Rather than the “rocket fuel” Trump promised for the economy, NPR reported that the U.S. economy grew at 2.9 percent- in 2019 in the wake of the tax bill’s passage — the same growth as in 2015, during President Obama’s penultimate year in office.

Further, rather than “pay[ing] for itself,” as Treasury Secretary Steve Mnuchin once claimed, NPR reported that the tax law is responsible for massive increases in the federal deficit. Last year, the deficit topped $1 trillion dollars — exactly as experts had predicted it would as a result of the GOP bill.

Big banks and other major companies have tried to play off the tax law’s benefits as a boon to the American worker regardless. In the immediate aftermath of the bill becoming law, many private companies issued press releases touting bonuses for their workers. However, the total bonuses workers received in 2018, compared to the year before, was just one cent more, according to the Economic Policy Institute.

In 2019, the Wall Street Journal reported that additional bonuses for workers “appear to largely have been a one-time windfall,” with companies no longer handing out similar bonuses in the second year the law was in effect.

Published with permission of The American Independent Foundation.

Inside The German Bank That Loaned Trump $2 Billion

Reprinted with permission from Alternet

Just try phoning Trump’s private banker Rosemary T. Vrablic at Deutsche Bank’s U.S. headquarters in Manhattan. Back in 2017, before too many bankers involved with Deutsche Bank started turning up dead, Trump once dared reporters to call her, saying she was the “the head” of the bank and “the boss.”

The good news is that Vrablic, 58, is alive. That is not something to take for granted when you look at two dead Deutsche Bank executives with ties to Trump, Russia and possibly at dead pedophile money man Jeffrey Epstein. One banker was found hanged in 2014 and one in November.

Vrablic’s office picked up right away when this reporter called following the Supreme Court’s decision on Dec. 13 to take up Trump’s argument that he be allowed to shield disclosure of his financial information from Congress and the New York attorney general.

Not surprisingly, the woman who answered the phone in Vrablic’s office refused to identify herself. Nor would she put Vrablic on to answer questions about Trump.

She sounded flabbergasted that anyone from the public, much less the media, would be calling someone who is, for the most part, a mystery woman. And that is despite her role in approving about $300 million in allegedly suspect loans to Trump. That arrangement will be part of a quite likely historic oral argument by the Supreme Court in March with a planned June decision.

Refusing to transfer the call to a corporate spokesperson, the person who answered the phone tried to imply that Vrablic no longer worked there. Then she agreed to take a message that was never returned.

‘Global Laundromat’

Deutsche Bank lent Trump millions after he defaulted on loans they already gave him and after he once sued them in 2008. Known derisively as a “global laundromat,” the bank is facing U.S. and British legal actions over its role in a $20 billion Russian money-laundering scheme. Two Congressional committees want the bank to release 10-plus years of records involving Trump and his three oldest children as Congress probes Russian money laundering and possible foreign influence involving Trump. White House lawyers have fought the committees tenaciously.

It’s hoped that the Supreme Court’s verdict will end years-long efforts on the part of U.S. officials to glean the truth about Trump’s finances. Especially at issue is whether Russians interfered in the 2016 election and if that meddling was powered by Russian money funneled to Trump through the giant, scandal-ridden German bank.

Teller to Managing Director

Vrablic, a one-time bank teller turned Deutsche Bank private wealth managing director, was Trump’s liaison at the bank. She sat in a hoodie in the VIP section at the Trump inauguration.

Trump borrowed more than $2 billion in the past two decades. Many allege the loans could hold the key to Russian funding of Trump.

Hired in 2006 with celebratory ads in The New York Times and a sweet deal guaranteeing her $3 million a year, Vrablic’s work raised the bank’s public profile–at first in a good way. Now the opposite is true.

Trump burned through his relationships with bank investment and commercial real estate departments because of his constant defaults and failures. Then Vrablic stepped up in 2010.

The Kushner Network

Trump’s daughter Ivanka had just married Jared Kushner, who was a longtime client of Vrablic along with his mother Seryl. Ivanka steered Vrablic in the private bank sector of Deutsche Bank her father’s way. It turned out to be the financial lifeline crucial in helping him win the election.

People at Vrablic’s level in the banking world, even when they are swept up in such international scandals, are rarely household names unless they die suddenly… read suspiciously. Even then, they are familiar to only the most inside-baseball financial journalists. They are never part of the daily Trump-Schiff-Pelosi-Schumer-AOC-Nunes-McConnell etc. political narrative though their influence is often greater.

Their deaths often remain murky. Supposed details take on a life of their own on conspiracy websites but the actual truth remains frustratingly out of reach – a bit like Jeffrey Epstein’s alleged jail suicide.

A Pair of Suicides

Thomas Bowers, 55, Vrablic’s former boss, ran the private wealth division of Deutsche Bank and oversaw loans to Trump and reportedly to Epstein until he left the bank, reportedly in 2015. It is said he hanged himself at his Malibu home on Nov. 19.

His death was first reported in a tweet by David Enrich of The New York Times, one of the foremost experts on Deutsche Bank. Dark Towers: Deutsche Bank, Donald Trump and an Epic Trail of Destruction, an upcoming book by Enrich, focuses in part on the sudden death of William Broeksmit, a senior Deutsche Bank executive.

Broeksmit, a man who “knew too much,” according to Enrich, was found hanging in his London home in 2014. Enrich calls it a “mysterious suicide.”

Enrich previewed the deeply weird story of the whistleblower in the Broeksmit case, who turns out to be the troubled but possibly believable stepson of Broeksmit, in a New York Times Magazine story in October. So far, though, he has done no more than tweet about Bowers, first to announce his death, then to deny “rumors” that Bowers had been Epstein’s banker.

The Epstein Connection

Enrich said on Twitter that Bowers left Deutsche Bank in 2013, prior to Epstein becoming a client. Deutsche Bank would not comment on Bowers and other reports say Bowers left Deutsche Bank in 2015 when Epstein was already a customer.

Epstein, of course, allegedly committed suicide while in jail in August. One of Estonia’s leading bankers, Aivar Rehe, apparently committed suicide in September in Tallinn. Rehe ran Danske Bank which was used by clients in Russia and Eastern Europe to launder billions of dirty dollars. At the time of the Rehe death, Frankfurt prosecutors were eyeballing Deutsche Bank for its part in doing business with suspicious American customers, The New York Times reported.

The Democratic-controlled House Financial Services and Intelligence Committees issued subpoenas to Deutsche Bank in April for the records. In turn, Trump sued the bank to prevent it from complying. It’s believed that the bank has documents that would show on how Trump made his money, who he partnered with and extensive details of what he borrowed and resulting transactions.

The subpoenas also included demands for information about suspicious activity in Trump’s Deutsche Bank accounts.

Trump’s Lender of Last Resort

Starting in the late 1990s, Trump had become such a bad credit risk, either repeatedly defaulting on loans or declaring bankruptcy, that no U.S. banks would do business with him.

Deutsche Bank, which badly wanted to expand internationally, especially into the United States, saw an opportunity with Trump and became his chief creditor, despite his rank financial past.

Anti-money-laundering investigators at Deutsche Bank flagged “multiple transactions” involving accounts controlled by Trump and Jared Kushner in 2016 and 2017 and alerted bank executives who apparently ignored the intel, The New York Times reported in May.

“You present them with everything, and you give them a recommendation, and nothing happens,” Tammy McFadden, a former Deutsche Bank anti-money laundering specialist who reviewed some of the transactions told the Times.

“It’s the D.B. way. They are prone to discounting everything.”

Additional reporting by Matthew Reagan and Anna Sasser, Occidental College, Los Angeles

Volcker Blasted ‘Nihilistic’ Trumpism In Final Testament

Reprinted with permission from Alternet

Paul Volcker, who was 92 when he died in New York City on Sunday, December 8, was an economic policy adviser under both Democratic and Republican presidents. The New Jersey native served as chairman of the Federal Reserve under President Jimmy Carter from 1979-1981 and President Ronald Reagan from 1981-1987 and headed the Economic Recovery Advisory Board under President Barack Obama from 2009-2011. But one U.S. president Volcker was not fond of was Donald Trump, and CNBC’s Jeff Cox reports that three months before he died, Volcker wrote a “scathing critique” of Trumpism.

Keeping At It: The Quest for Sound Money and Good Government, Cox notes, comes at the end of a paperback release of Volcker’s autography — and in that afterword, the one-time Fed chair expresses very negative views on Trump’s policies. Volcker writes, “Nihilistic forces are dismantling policies to protect our air, water and climate. And they seek to discredit the pillars of our democracy: voting rights and fair elections, the rule of law, the free press, the separation of powers, the belief in science, and the concept of truth itself.”

Volcker was also quite critical of Trump’s attacks on the Federal Reserve.

Trump hasn’t hesitated to rail against Fed Chairman Jerome Powell, denouncing him as “clueless” and arguing that Powell should be much more aggressive about cutting interest rates. Although Powell has lowered interest rates more than once in 2019 — making federally insured financial products like certificates of deposit less profitable for savers — Trump has insisted that he hasn’t lowered them enough.

Volcker, in September, wrote, “Not since just after the Second World War have we seen a president so openly seek to dictate policy to the Fed. That is a matter of great concern, given that the central bank is one of our key governmental institutions, carefully designed to be free of purely partisan attacks.”

According to Volcker, Trump has done a lot to undermine confidence in the United States around the world.

“Seventy-five years ago, Americans rose to the challenge of vanquishing tyranny overseas,” Volcker wrote. “We joined with our allies, keenly recognizing the need to defend and sustain our hard-won democratic freedoms. Today’s generation faces a different but equally existential test. How we respond will determine the future of our own democracy and, ultimately, of the planet itself.”

Photo Credit: Ralph Aswang Photography