This one was so good, we're making it public!
In this week's Off the Cuff podcast, Chris and Mish Shedlock discuss:
- The expected but shocking Japanese central bank decision
- Increasing central bank desperation
- How central banks transfer wealth from the masses to the few
- The impact on gold and silver prices
Summary: In this podcast Chris and Mish let their guard down and say a few choice words about the actions of central banks that obviously and seriously harm average people all in the service of assuring that banks and governments can continue to operate as they have in the past.
Chris Martenson: Welcome, Mish, to Off the Cuff. Oh my god, do we have things to talk about today. The futures in the US markets, what did we have? The S&P was down three or four percent, something horrible – four, maybe five percent. And all of a sudden, the Federal Reserve comes out and starts jawboning like crazy. You got Bollard out there saying "oh no, maybe QE4..." And they would start talking it up. And we get this massive increase in the US stock market. But still, QE4 ended yesterday. You knew the central banks had to do something. You knew that the US had done everything it could. It was ending QE, it had jawboned everything up.
Europe had already said that they were only going to be doing a much more limited program of asset backed security purchases. The baton had not really been handed off. And then, what happened today?
Mish Shedlock: The baton was passed off to Japan.
Chris Martenson: Yes.
Mish Shedlock: Unexpected announcement today. I get up. I see the futures soaring. Of course, the dollar is soaring. Gold is down. But the real news here is the Nikkei, up block limit to roughly 1,200 points, 1,160 points or so in regular session. And it is up again now after hours, right, a little bit?
Chris Martenson: Yeah, yep, just roaring. And the Yen is being crushed by this. So Japan came out of the gates and said that they were unhappy, I guess, with all the massive inflation they have already created for their people. They were unhappy with rising import prices that were crushing their savers and retirees. Actually, that was not true. What they were unhappy with was the fact that their banks and their financial elite needed more fuel because those people just always seem to need more. And whom do the central banks really serve? Not the poor people, not the retirees, not the middle-income people, those are just collateral damage and they will throw them under the bus if they have to. And that is what they just did today.
Japan did exactly what the Federal Reserve was doing. And they are saying, "you know what? We are going to do something that we know is going to crush the Yen. But it is okay. It is going to goose the stockmarket. So if you happen to be a stockmarket owner, you are in good shape. But if you are not, if you are one of these people who lives on your retirement account, you just see that your import prices are about to go up again big time" because the Yen lost 2.6 percent today.
Now 2.6 percent does not sound like a lot. This is one of the world’s largest currencies. This is one of the largest, most liquid currencies in the world losing 2.6 percent just like that. Sorry for your losses all you fixed and lower income people in Japan.
Mish Shedlock: One of my two favorite trades did well today, Chris. And the other one got hammered.
Chris Martenson: All right.
Mish Shedlock: My two favorite trades: long the Nikkei and short the Yen as a fair trade. And my other favorite trade is, as you know, gold. And gold was down what, 34 – 35 bucks today. And I was wondering yesterday... and the miners, you can just like see that last rise in gold, the miners did not fall. And I am just sitting there thinking terrific. It looks like another shoe is ready to fall. I did not know what the shoe was. But apparently, someone knew. And what, the Japan Central Bank announced they were going to buy some more equities last week. That probably should have been the clue that they were getting ready to do something.
And the surprising news today on top of it... Well all of this is idiotic. And you and I agree on that. But Japan, the statement today was that Japan was concerned that falling energy prices would hurt their inflation target. So here the worldwide demand for energy is sinking. I mean there is no other way to look at it, right? I do not believe there is any other way to look at it. That is what is behind the drop in crude. A slowdown in China, a slowdown in Europe, and we can debate whether there is one here in the United States or not. But certainly, there is a slowdown in the rest of the world that has hurt energy prices. The one thing that was hurting Japan the most was energy imports with the sinking in. And the concern last week, the alleged concern, like you said, was over rising energy prices. And today, they came out and said "you know what? We lied." Well they did not say "we lied." But they said they are worried that falling energy prices are going to hurt their inflation target of two percent -- amazing. Absolutely amazing.
Chris Martenson: Yeah, and of course, energy prices and inflation, they are trying to measure one thing by getting another. And it is just not correct. Energy prices can go up and can go down; it has nothing to do with the inflation they actually need. So when a central bank says they need inflation, what they are really saying is "look, we have got way too much debt over here on the government books for this to be paid in anything like what we would all call rational terms," right?
So the government can either default on it or try to pay it down. Or, if you are a government, you can try to print your way out from under that. Printing means you are going to go for financial repression, which means you want your savers to have to accept negative real interest rates.
How do you get negative real interest rates? Well you give somebody (make this simple) zero percent on their savings. And then you make inflation something higher than zero. You get a negative real interest rate. And that takes money from everybody who is a saver. It transfers it somewhere though. This is the mystery part of this mechanism. It does not just disappear.
When I lose half my purchasing power in 20 years through low-level inflation, where did my half of my purchasing power go exactly? Well it was transferred. It did not just disappear. That is what the banks want you to go "oh, it just did – we went somewhere. Who could know?" It gets transferred.
So to the people of Japan, your central bank is has just said "we are going to transfer your wealth. And we are transferring it to the holders and issuers of the monstrous mountains of debt that we have got out here. That is our financial industry. And that is your government. And we are going to take your money and purchasing power. And we are transferring it to these people." And that is the game they want.
So when they say "oh, inflation is a little low and we are worried about falling oil prices creating low inflation," what they are saying is "we are worried we are not going to be able to take your money from you as fast as we would like." That is what they are saying. [Laughter]
Mish Shedlock: That is exactly right. And Japan committed today (I do not know if you saw this final piece of the puzzle here) to buying more long-term Japanese treasuries.
Chris Martenson: Yeah.
Mish Shedlock: Long term.
Chris Martenson: Well who else is going to do it?
Mish Shedlock: Exactly, there is no one else to do it. Because of aging demographics, the pension funds in Japan are actually net sellers now and have been. It is not a huge amount yet. But it is going to be pretty soon. And these pension plans are net sellers. They are the ones that have been buying all of these Japanese treasuries. So rats, who is left to buy? Who is left to buy, the bank of last resort, right?
Chris Martenson: No, no, no, no, let me correct that. They are now the bank of only resort.
Mish Shedlock: Yes, yes, yes, yes, yes, that is what it is.
Chris Martenson: The bank of only resort. So here is the thing: We are supposed to believe two separate narratives here from the central banks. One, "hey, look at all this recovery we are getting. Jobs are up. And the Chicago PMI is really high, which means the Purchasing Managers Index is up. So we have all sorts of indications here. Unemployment is dropping. Hey, we want you to believe in this story that everything is okay. But also, we want you to believe that it makes total sense for us every time there is even slight weakness in the market for us to talk more, dump more money in, and otherwise behave as if we are absolutely terrified of anything that might look like reality creeping into our financial markets."
You cannot put both of those pieces together without experiencing cognitive dissonance. One of these two things is not like the other. One of them cannot be – they both cannot be true at the same time, right?
So I look at what Japan’s Central Bank is doing. And I know the central banks have been burning up the bat phones, talking to each other, saying "how we are going to pass this baton?" The United States has an election coming up. So we definitely do not want QEs ending right near an election to throw any doubt unto anything. That is our motivation.
Japan desperately needs to create something other than the circumstances it finds itself in. Europe has the same situation. All of this, and we are supposed to hold a third thing that I do not understand. Mish, in what world do central banks open up the floodgates like Japan just did, and somehow the message is: I have to sell all the gold I can get my hands on. I just have to dump gold.
Mish Shedlock: It is a knee jerk reaction probably to the rising dollar. But yeah, that is the other piece of the cognitive dissonance that does not make a lot of sense in this trade. If anything, a rational approach from gold would have been "my god, look at how screwed up the world economy is that we need to do this."
What is going to happen when Europe does this now? And more importantly, what happens to United States earnings, United States growth, and manufact – something like 40 percent of United States earnings are foreign. I think I have that number right. Maybe you have a better one.
So the rising dollar is going to hurt those earnings. And I talked about this yesterday on my blog. Already, we are seeing earnings expectations ratcheting down, ratcheting down, and ratcheting down. That is another piece of cognitive dissonance actually. With all these earnings ratcheting down, and down, and down, and the stockmarket goes up... So a whole number of factors here, Chris.
Chris Martenson: But these markets are not trading off fundamentals anymore. So you want to say, okay, fundamentally, gold is down because the dollar is up. In many cases, it trades like the anti-dollar, fine. But that is true for the stock market as well for the reason you mentioned, which is that so much of the S&P 500 earnings are foreign derived. You cannot hedge all of those earnings off, which means that whenever the dollar goes up, your foreign earnings go down. It is just a seesaw, right.
So from a fundamental standpoint, if they said "okay, the dollar is really going higher here. And it could really vault higher. And gold is going to get slammed." That is a fundamental argument, fine. But on that same fundamental basis, the United States stock market ought to be going down, and it is not.
So everything that the central banks seem to need in order to create the appearance of rising wealth, of financial stability, and that gold is not an attractive place to keep your money—all of those things seem to be just coincidentally working out for them. Here is the weird part in the story though is the price of oil.
Mish, for a while, I thought that the price of oil potentially could be going down because the United States with Saudi Arabia was using oil as its weapon to make a real statement against both Iran and most particularly Russia. So all right, if we say that is not the explanation, we do not go down that angle, it is not a geopolitical thing... And by the way, the United States has used the price of oil geopolitically as a weapon often in the past. So it is not unthinkable to think it is happening again. But if it is not, what is oil telling us?
Oil is telling us that the economy is weak. It dovetails with the earning stuff you just mentioned. It dovetails with the growth figures that we see out of so many economies. China slowing, Japan in recession, Europe largely in recession depending on where you look on balance, right around zero, United States growth is weak, oil is going down. All of that fundamentally says "hey, maybe we have weakness going on here in the global economy."
I am looking at oil here with the S&P, hitting all-time highs here, up 17 points at the moment. And oil is down and another one and one-half percent in the United States market and it is under 80 dollars a barrel. Again, cognitive dissonance or can you fundamentally, Mish, line all this up and make sense of it for us?
Mish Shedlock: Oh, let me see here. So oil is going down. And Japan is concerned about oil going down. So they come out with this statement and it gooses the stock market. And oil falls more. [Laughter] What is the reaction of the Bank of Japan going to be to that? "Hey, it did not work. So let us do more of it." Of course, that is what they all do, right, Chris?
Chris Martenson: They do. And Mish, I will tell you. For anybody listening to this that happens to be in Japan or live in Japan or somehow holds savings in Japan, get out. Do not do that. Do not hold your money in the Yen. Your government has been telling you for three years straight that they are out to destroy the Yen. Today was a big movement of destruction for the Yen. And I think they are going to succeed beyond their wildest dreams at some point, Mish. I cannot predict exactly when. But when it happens, what we are going to see is the Yen really start to fall and fall hard. And then what is going to happen?
Well either they really let it just go completely go into a catastrophe zone or they have to defend it. What is the only way that you could really defend, unless you can call up and have your other central bank buddies help you out under the table? The only way that we know for a central bank to defend the currency is to raise its interest rates. What is the one thing – if you have an Achilles heel, what happens when you have six Achilles heels? For Japan, that is rising interest rates. They cannot.
So if Japan gets itself into a situation where they succeed in destroying their currency to a point where they have to defend it, they have gotten themselves to the place where they cannot defend it using what every other country in the world has always had to use, which is to raise their interest rates. Because they could not afford it, the interest costs. They cannot raise rates here without creating an even bigger disaster than the one they have. And they are doing all of this, Mish, simply because they cannot square up to this idea that Japan’s economy is not growing. And it does not need to grow. And it should not grow. Because they are actually losing population on a yearly basis, and the population they do have is also aging every day.
So those two things say "we have a lower consumption based economy. And it is actually going to get smaller. But the banks cannot do smaller." That is the tension that is ratcheting up. And so Japan has just said "oh, the heck with it. We are just going to pile up as much debt per capita as we possibly can until this thing breaks."
If you have money in Japan, do not hold it in currency. Do not think of money as wealth. Get whatever cash you've got and make sure you are holding real wealth. And if you have to hold cash personally, I would hold it in any other currency I could get my hands on.
Mish Shedlock: Exactly, and I got an interesting call yesterday actually out of the blue. Someone from News Week called me up. And she wanted to talk about income inequality and the causes of it. And I kindly pointed her in the same direction that you would have. Central banks are the main – who does the stockmarket really benefit? It is going to be benefiting the chief executive officers by stock auctions. It is going to benefit (we talked about this before) people with first access to money. That is what QE was all about. It benefited those that held assets.
Well who holds assets? It is not the common guy on the street that is benefiting from this stock market rally at all. It is the central bankers. It is government via taxation. It is rising home prices. There are more property taxes, more sales taxes. When inflation is up, the average guy on the street is getting killed.
And I am explaining this to this woman. And she goes "wow." And I tell her more. And she goes "wow." And I think she "wow" about four times. And then finally, she said "this conversation is a lot different than the one I had with the four other people that I called." And I said "yeah, I do not doubt that."
A couple points she started challenging me on what I was saying. And the conversation was supposed to last just five minutes. It went on for probably like 40. And I do not know what is going to come out of it. There is no guarantee there is going to be a mention of my name or she is going to use anything she said. But I am going to be watching. And, of course, they always tell you that "well if we use your article, we will send you a copy." But they never do. But anyway, I am going to be looking for this in News Week to see if they quoted me at all, how much, and what the other people said.
But here we are. I was explaining just exactly what is going on here right now. And people are bitching left and right about income inequality and we have to do something about it. Well, they are making it worse, are they not, Chris?
Chris Martenson: Well this is the thing. I had this article that came out in Market Watch. It actually got really wide coverage last week, which was on this subject. And I talked about how the Federal Reserve is throwing granny under the bus, right?
The mechanism most people do not understand, when the Fed prints money, it prints real purchasing power. But you cannot actually print real purchasing power out of nothing. Because real purchasing power requires real people to do real things. So when the Fed creates money and it gives that to the government or uses it to buy mortgaged backed securities and the company that receives the cash from that goes and buys something else. That is real cash. Yeah, I get that.
But the mystery part is that people do not understand this next part of it, which is that you cannot print real purchasing power out of thin air. All you can do when they do that is take it from somewhere else. So the question is where is it coming from?
Well it could not be more obvious. Look at what is happening to the middle class. It is being destroyed. You look at real wages over time. That is even using the falsified consumer price index to hold it down. Real wages are negative even using the consumer price index. Steeply negative if you use some other number.
Poor people, we look at rising food stamp usage. All of the people who are working as hard as they can at the middle and lower middle class levels, all their wealth is being syphoned off and stolen. And you do not have to be a genius to figure out well where did it go because this is a transitive rule in economics, right? It is like we could just say this is an accounting identity. If wealth is being given to one group of people, the only question is where did it come from? So we need to know where did it come from and where did it go?
Well where it came from is from the lower classes, the savers, and all that. Where did it go? Just look at the growing wealth gap numbers. But I am surprised. These people like this journalist that get confused. They're like "how is it the wealthy are getting so much wealthier?" Well, it is not hard. Because you know what we have, Mish? We have the worst financial education, the worst economic education in this country. They never ever (and I know why) tell us the real story about how the system works. They keep it completely hidden.
But the good news is we have this thing called the Internet today. And there are these things called books. And if people want to, they can financially educate themselves. It is not hard. Figure out what the game is. But boy, once you look at that game, if it does not make you mad, I do not think you are really paying attention. If I am in Japan, I am mad.
In fact, I am mad for the people of Japan. And I am also mad because of what my central bank is doing to me and my country. And I am mad for how these bankers are doing this to the whole world because they are just fundamentally acting as if they know better than anybody else who should have the wealth and who should not have the wealth. Because that is what they do when they do what they do, right? They take wealth from one place, give it to another place, and say "you guys should not have it and you guys should." And I do not think they are smart enough. And I do not trust them.
Mish Shedlock: Oh, they are not smart enough. I do not trust them. I told this woman on News Week, or actually she said to me, "You mean we should not have a central bank. Well how can we deal without it?" And I said "look at the rising bubbles that we have had over time just in the last what – 14 years? We had a bubble boom and bust in 2000. We had another one in 2007, 2008, 2009, and here we are seven years later."
I said "the only reason why people do not see this bubble here right now is because it has not busted yet." And I said, "I guarantee you it will." I also said "I cannot put a timeframe on it." We have tried to do this before. I have tried to put a timeframe on this before. Every time (and we have talked about this) it looks like it is going down, they step in and manage to blow an even bigger bubble out of it. And we are seeing it today, right now. S&P close to a new high or it has hit a new high today, absolutely amazing here. And they want to keep this going.
They do not even see the bubble. They did not see the housing bubble, even in the late stages in 2007. Bernanke did not see it. They did not see the dot com bubble in 2000. In fact, Greenspan warned in what, 1996, of irrational exuberance.
Well by the time 2000 came around, he became a big believer. He called it the "productivity miracle" and thought it was going to keep going on. So he became a believer in his own bullshit. That is what happened. It is happening again here right now. Meanwhile, Yellen, screaming about income inequality. And these guys do not even realize they are the primary central force behind it.
Chris Martenson: Yeah, absolutely. And when I see the coordinated actions of the central banks right now, this is just we are – Mish, we are getting to what we will call the end stage of this particular story. And by the way, there could be more steps. And I have always been looking for a final blowoff top that really tells you that we are just about to shift this story into its next phase, which for me is financial crisis in an accident, which in the big picture is simply this: Since 2008, the developed world has gone from about 69 trillion to over 100 trillion dollars of debt, right. We poured on another 30 trillion dollars in debt. That is great. How much world economy in the developed worlds did we pour on, about one-tenth of that much.
So we are creating debt now at roughly ten units for every one unit of new economic activity. And the central banks are acting as if they were unaware of the fact that it used to be 1.5 units of debt to get a new unit of gross domestic product. That we are down to somewhere in the vicinity of ten. And that this trend has been going on for 30 years. And it is headed in the wrong direction. And they are acting as if it will not be a problem if that number goes from 10:1 to 20:1 to 100:1 to 1 million:1. They do not care, because the central banks need more debt in the system.
They do not need it because it is good for you. They do not need it because it is good for the environment. They do not need it because it is good for anything except for the system of money that they are in charge of overseeing.
That is fine. Let them play their little games like that. But what they are doing really is running one of the largest experiments on humans that have ever been conducted.
I hope somebody is videotaping this. And they can take notes, compare, and study this because this is just an experiment. And to me, it seems completely obvious that the trajectory of saying "we are going to go from 1.5 units of debt to 10 units of debt" is terrifying because —I ascribe to various pieces of economic thinking, but the piece I always loved from the Austrian School, from von Mises, is around the idea that you either voluntarily abandon a credit cycle or you face the destruction of the currency or, in this case, currencies involved.
What worries me is that Japan, Europe, and the United States are acting as a unified central bank and doing whatever it takes to make sure they can keep the credit expansion going. And they have never once publicly stepped back and said "was it a good idea to be growing credit faster than the underlying economy? Maybe not. And by the way, where are the resources going to come from to create this new bigger world?" They are not doing that.
So I look at what Japan did today and I say, "oh my god. They are just locked into a paradigm so deeply that they do not know how do anything else but more of that paradigm." And honestly, by now, I think it is time for a little introspection. And they seem to be unable to do that.
Mish Shedlock: Absolutely. With that Chris, I think this is one of our best podcasts ever here. And it's actually fortuitous—normally, we are on Wednesday, and here we are on Friday, by accident, and stunning news to talk about today. And wow, what news it was. I think the final note here is: if you are in the Yen, get the hell out of it.
Chris Martenson: Absolutely. Thank you so much for your time today, Mish.
Mish Shedlock: Oh, it is a pleasure to be on.