A Republican tax plan built for plutocrats

The reforms going through Congress clearly reflect the party’s priorities

Martin Wolf

How does a political party dedicated to the material interests of the top 0.1 per cent of the income distribution win and hold power in a universal suffrage democracy? That is the challenge confronting the Republican party. The answer it has found is “pluto-populism”. This is a politically successful, but dangerous, strategy. It has brought Donald Trump to the presidency. His failure might bring someone more dangerous, more determined, to power. This matters to the US and, given its power, to the wider world.

The tax bills going through Congress demonstrate the party’s primary objectives. According to the Center on Budget and Policy Priorities, in the House version of the bill, about 45 per cent of the tax reductions in 2027 would go to households with incomes above $500,000 (fewer than 1 per cent of filers) and 38 per cent to households with incomes over $1m (about 0.3 per cent of filers). In the more cautious Senate version, households with incomes below $75,000 would be worse off. This simply is reform for plutocrats. (See charts.)

That is far from all. The bill might also increase the cumulative fiscal deficit by about $1.5tn over the coming decade. Yet, according to the independent and respected Congressional Budget Office, the US fiscal position is already on a deteriorating path, with spending forecast to rise from 21 per cent of gross domestic product in 2017 to 25 per cent in 2028-37. The planned tax cuts would worsen the pressure to cut spending. The outcome desired by the Republicans is to slash spending on nearly all of the non-defence discretionary spending of the federal government, plus its spending on health and social security.

In all, then, this is a determined effort to shift resources from the bottom, middle and even upper middle of the US income distribution towards the very top, combined with big increases in economic insecurity for the great majority.

How, one must ask, has a party with such objectives successfully gained power? In all, we can see three mutually supportive answers to this question.

The first approach is to find intellectuals who argue that everybody will benefit from policies ostensibly benefiting so few. Supply-side economics, with its narrow focus on tax cuts, has been the main theory employed, because it directly justifies tax cuts for the very wealthy. But it is untrue that the tax cuts of the Reagan era unleashed an upsurge in trend US economic growth.

Since the economy is now nearing full employment, the benefits of fiscal stimulus would be especially small.

Supporters of the proposed cuts argue that the reductions in corporation tax will lead to a big rise in business investment. Here are two powerful pieces of contrary evidence: the share of post-tax profits in US GDP has already nearly doubled since the early 2000s, with no beneficial effect on the rate of investment; and the UK has progressively slashed its corporate tax rate from 30 to 19 per cent since 2008 with no identifiable benefit for investment. Lowering the corporate tax rate is merely a windfall for shareholders. If one wanted to raise investment, one would make it fully deductible from tax. The proposed repeal of the estate tax, which is of benefit only to the heirs of the largest 0.2 per cent of estates in the country, really gives the supply-side game away. Who wants to argue that people live longer if death is less taxed?

The second approach is to abuse the law. One way has been to give wealth the overriding role in politics it holds today. Another is to suppress the votes of people likely to vote against plutocratic interests, or even disenfranchise them.

The third approach is to foment cultural and ethnic splits. This is sometimes described as the “Southern strategy”, which shifted the old South from the Democrats to the Republicans, after the former enacted civil rights. Yet this is too limited a view of the strategy. More interesting is the echo of the antebellum South itself. The pre-civil war South was extremely unequal, not just in the population as a whole, which included the slaves, but even among free whites. A standard measure of inequality jumped by 70 per cent among whites between 1774 and 1860. As the academics Peter Lindert and Jeffrey Williamson note, “Any historian looking for the rise of a poor white underclass in the Old South will find it in this evidence.” The 1860 census also shows that the median wealth of the richest 1 per cent of Southerners was more than three times that of the richest 1 per cent of Northerners. Yet the South was also far less dynamic.

The South was a plutocracy. In the civil war, whose stated aim was defence of slavery, close to 300,000 Confederate soldiers died. A majority of these men had no slaves. Yet their racial and cultural fears justified the sacrifice. Ultimately, this mobilisation brought death or defeat upon them all. Nothing better reveals the political potency of identity.

A not dissimilar threat arises for today’s plutocrats. The economics and politics of pluto-populism have stoked cultural, ethnic and nationalist anger in the party’s base. Skilful demagogues are able to exploit this anger for their own purposes. At least Mr Trump remains a servant of the plutocracy. But his former adviser, Steve Bannon, seeks someone to promote rightwing populism shorn of its more blatantly plutocratic elements.

The plutocrats are riding on a hungry tiger. The pluto-populism of the Republican elite brought forth Mr Trump. This is not going to be forgotten. If the current tax bills get through, the tensions within the US are almost certain to get worse. Latin American inequality leads to Latin American politics. The US the world once knew is drowning in a tide of unconscionable and apparently unlimited greed. We are all now doomed to live with the unhappy consequences.

ECB’s bond buying lets eurozone politicians off the hook

Higher purchases of French and Italian bonds carries risks as the QE programme is extended

by Ciaran O’Hagan

Any ECB largesse, whether overall or towards one country or another, helps smother the usual volatility in bond prices © Reuters

The European Central Bank last month achieved the exceptional feat of halving its bond purchases without upsetting investor sentiment. One of the reasons is because the ECB is favouring bonds that yield more. At the October meeting, Mario Draghi, the ECB President, promised the bank would continue buying “sizeable quantities” of corporate bonds.

That overweight position in yield is coming at the expense of government bonds, and notably German Bunds, which have the largest country weighting and the lowest yields. Back in 2015, when the ECB first embarked on large purchases of public bonds to funnel more cash into the euro economy, the central bank promised it would buy in relation to the “capital key” of each euro area member state — these weights are similar to national incomes.

Yet it has not worked out quite like that. It is increasingly apparent that the ECB is favouring Italian and French bonds, month after month over the course of 2017.

At September’s ECB press conference, President Draghi said “there are temporary deviations from the capital key. There have been deviations, there will always be deviations from the capital key due to the liquidity conditions due to the fact that we’re going to be as market neutral as possible in our purchases. So if you have very tight liquidity conditions in one market, you just slow down with purchases”.

However, the two markets with the biggest overweights relative to capital key are Italy and France. These are also the two with the biggest amount of bonds outstanding. And, along with German Bunds, they are also the most liquid bond markets in euros.

In September, for example, the ECB purchased almost €1bn more of Italian bonds than strict proportionality would warrant. For France, the gap was even bigger at €1.5bn. The average monthly purchase for both countries in the past six months has been above €1bn each. Maybe the ECB does not consider these overweights to be large, but at the margin they are supporting risk sentiment as they add up.

In the absence of a convincing official explanation, one supposition investors have made is that the ECB has needed to compromise so as to satisfy its other purchase criteria. The ECB imposed upon itself caps on individual bond holdings of up to 33 per cent. In countries with low outstanding amounts relative to GDP, such as Germany, this could be a challenge. Germany is Europe’s biggest economy but its purchasable debt is only about 60 per cent that of Italy. So this could be forcing the ECB into favouring the even bigger issuers.

The more that there is a gap between what the ECB says and what the figures show, the greater the political implications. Some politicians in Italy say they would like to see the ECB buy far more Italian bonds. There have even been calls to purchase them in proportion to national debt, instead of capital key or GDP. Italy is Europe’s biggest bond market and would benefit hugely from such a decision.

But any change in weightings would have large political implications. This would mean that countries that run up larger debts would get more ECB support. Yet any hint of a reward for fiscal profligacy would be anathema in the less indebted countries.

The easiest explanation for what’s going on is that the national central banks and the ECB Board have difficulty agreeing what to do. Mr Draghi’s leitmotif this year has been “flexibility”, a catch-all phrase that could reflect some muddle through behind the scenes, and facilitated by the lack of precise data and transparent rules and practices (for example we still don’t know how much time must elapse before euro area national central banks can step in to buy newly issued bonds or their surrogates).

More fundamentally, the lack of progress towards monetary, fiscal and banking union is complicating the execution of ECB policy. One of the reforms on the table now is for the issuance of joint “Euro area Safe Bonds”. This would help solve the ECB’s dilemma through the creation of true euro area treasury bonds. But greater euro area integration and burden sharing is many years away.

The danger in the meantime is that any ECB largesse, whether overall or towards one country or another, and even after last month’s taper, helps smother the usual volatility in bond prices. Political risk lately has not been reflected in yield moves. If ECB policies contribute to overly low yields, the need for brave economic reforms will remain hidden from the electorate. That is in no one’s interests.

Ciaran O’Hagan is head of Euro Area Rates Research at Société Générale

Nothing Natural About the Natural Rate of Unemployment


US employment

NEW YORK – Why is unemployment so low in countries where inflation remains subdued?

For economists, this is a fundamental question. And when economists confront a fundamental question, fundamental disagreement often follows.

I was one of the rebel economists of the 1960s who rejected the macroeconomics we were taught in the 1950s – the “Keynesian” theory developed by J.R. Hicks, A.W. Phillips and James Tobin, according to which aggregate demand drove everything. High unemployment was caused only by deficient demand, and low unemployment only by abnormally high demand.

This bothered us, because the basic economic theory we were taught – the theory built by Alfred Marshall, Knut Wicksell, and Robert Solow – said everything was driven by structural forces. Faster technological progress and a greater preference to work or to save were to be welcomed, because they would boost the supply of labor and capital – and thus employment and investment. But the Keynesians maintained that structural forces were bad, because they cost people their jobs, unless policymakers manufactured enough demand to match the increase in supply.

A conclusion we drew was that, at the very least, the path of an economy, measured by conventional macroeconomic variables of unemployment, inflation, and output growth, is not fully determined by aggregate demand. Structural forces matter. Keynesians’ claim that “demand” is all-powerful – that it alone increases employment and thus investment and even growth – was groundless. Yet they continue to repeat it.

The structuralist perspective on macroeconomic behavior led to the concept that came to be called the “natural” rate of unemployment, borrowing from the notion, which arose in Europe during the interwar years, of a “natural” interest rate. Yet the term “natural” was misleading.

The basic idea of the structuralist approach is that while market forces are always fluctuating, the unemployment rate actually has a homing tendency. If it is, say, below its “natural” level, it will rise toward this level – and the rate of inflation will pick up. (Of course, a fresh shock to demand could send unemployment back up and reduce inflation; but the “natural rate” always exerts its centripetal force.)

But there is a complication I have long emphasized. The “natural rate” itself may be pushed up or pulled down by structural shifts. Moreover, shifts in human attitudes and norms may also have an impact.

Yet a curious development has posed a challenge to this view. America and the eurozone are in the midst of a boom. In America, unemployment has reached very low levels and shows no sign of rising back to its former natural rate – whatever its new level may be. With no more evidence than that, a structuralist model would predict an inflation rate that is already elevated and rising – and the inflation rate is not running high, even though the US Federal Reserve has flooded the economy with liquidity. In the eurozone, too, unemployment is falling, yet inflation rates are still low there, too.

What explains the paradox of low unemployment despite low inflation (or vice versa)? So far, economists – structuralists as well as diehard Keynesians – have been stumped. The answer must be that the “natural rate” is not a constant of nature, like the speed of light. Certainly, it could be moved by structural forces, whether technological or demographic.

It is possible, for example, that demographic trends are slowing wage growth and reducing the natural rate. From the 1970s to the late 2000s, demography was essentially a dormant issue.

Now, the baby boomers are retiring from relatively high-wage jobs while young people, who start at relatively low wages, are still pouring in to the labor market. This slows the growth of wage rates at a given unemployment rate, leading to lower unemployment at a given rate of wage growth.

More interesting is the possible effect of people’s values and attitudes, and their hopes and fears about the unknown and unknowable, on the natural rate. Here we are entering terra incognita.

For me, a compelling hypothesis is that workers, shaken by the 2008 financial crisis and the deep recession that resulted, have grown afraid to demand promotions or to search for better-paying employers – despite the ease of finding work in the recently tight labor market. A corollary hypothesis is that employers, disturbed by the extremely slow growth of productivity, especially in the past ten years, have grown leery of granting pay raises – despite the return of demand to pre-crisis proportions.

I have also argued, based on a model of mine, that as the return of a strong dollar by early 2015 threatened to inundate American markets with imports, firms became scared to supply more output at the same price. Or else they supplied the same output as before at reduced prices.

And they refused to raise employees’ wages. In short, more competition created “super-employment” – low unemployment and low inflation.

All this does not mean there is no natural unemployment rate, only that there is nothing natural about it. There never was.

If There Is a Bubble, It’s in Bitcoin

The cryptocurrency has gone berserk this year and has all the elements of extreme optimism

By Aaron Back

Blockchain has the potential to change how commerce is conducted. But, just like during the dot com bubble, that doesn’t make all or even most of today’s blockchain players smart investments. Photo: Michal Fludra/Zuma Press 

If the markets are at a top, bitcoin has scaled the highest peak.

Past episodes of market euphoria have often been marked by extreme optimism over new technologies. In the 1920s it was automobiles and radio. In the late 1990s it was the internet.

Today the innovations fueling investor dreams include video streaming and electric cars. But none has inspired as much zeal as blockchain, the distributed ledger technology underpinning bitcoin and other digital currencies.

How many U.S. dollars one bitcoin buys

As in those previous market bubbles, the underlying technological revolution is real.

Blockchain has the potential to change how commerce is conducted by cutting out financial intermediaries. But, just like during the dot com bubble, that doesn’t make all or even most of today’s blockchain players smart investments.

Bitcoin itself has risen more than 700% this year, powering through multiple sharp corrections.

The currency is still seldom used to buy actual goods or services, making it for now almost entirely a vehicle for speculation.

The current investing nirvana is under attack as central banks scale back stimulus in a world filled with money. Heard on the Street walks through the risks and likely scenarios for markets in the coming months.

Even more worrying has been the wave of initial coin offerings, in which start-up companies issue new digital currencies to investors. There have been more than 160 coin offerings this year, collectively raising more than $3 billion, according to research firm Coindesk. Deals have garnered endorsements from celebrities such as Paris Hilton and Floyd Mayweather.

The coins typically work like tokens exchangeable for the startup’s future goods or services, but in some cases the offering firms give little or no information as to how they will use the proceeds or what the coins will be good for. This sparked a recent warning from Securities and Exchange Commission Chairman Jay Clayton that many offerings are susceptible to manipulation or fraud.

Schemes to lure credulous investors also tend to proliferate near market tops. Investors should proceed with caution.

Credit Trades Du Jour: Exotic, ‘Nonlinear’ and Private

Investor thirst for yield fueling market in private, structured, bondlike deals

By Paul J. Davies

Investment Banks and market revenues by source

The hunt for yield is taking Wall Street and investors into exotic territory—and that means an appetite for credit assets that are private, not easily tradable and often complex.

Putting together deals in what some dub “nonlinear finance” is a growth business for investment banks’ big bond-trading arms and is helping clear unwanted assets off some balance sheets. However, such private deals, which aren’t publicly traded and don’t have public credit ratings, are a challenge for regulators keeping track of the growth of shadow banking and to understand whether such activity is driven by regulation—or its avoidance.

“Nonlinear finance” deals aren’t new, but it is heating up as banks, such as Goldman Sachs, hire specialists and commit balance-sheet capacity to feed investor demand. Photo: brendan mcdermid/Reuters 

The business isn’t new, but it is heating up as banks hire specialists and commit balance-sheet capacity to feed investor demand. Goldman Sachs said in September that it could double its financing of “bespoke collateral” by giving its fixed-income trading arm an extra $5 billion worth of balance-sheet capacity. This would bring in at least an extra $100 million of revenue, which likely only counts the net interest income Goldman would earn on debt it keeps and not all the other deal fees involved.

Deutsche Bank is a market leader in this business earning roughly €400 million each quarter from all the financing linked to fixed-income trading including nonlinear trade, while others such as Credit Suisse or BNP Paribas are more focused on certain products or regions.

So what is this business? It starts with lending to private-equity or hedge fund clients who want to buy an assets that are hard to value, hard to sell, or low quality. Such assets can’t be financed in markets by fixed-income trading arms in the traditional way that liquid, high-quality are.

The hot assets right now include pools of European bad loans, other private loans, large property deals especially in the U.S., and things like infrastructure assets in emerging markets. Some come from weaker banks’ balance sheets, but many are being found by investment bankers, or the hedge funds and private-equity firms who anchor the deals. Investor demand for such assets is outstripping investment banks’ ability to find the assets right now, according to one banker in the field.

Banks slice the financing into tranches. The riskiest equity slice is owned by the anchor hedge fund or private-equity firm and gets the biggest payoff if the assets perform well. The safest slice pays steady coupons and gets paid first.

Break-down of fixed income and equity financing revenues for investment Banks

Banks make money from both interest and fees. They charge for their structured-credit experts who put the deals together, for selling some or all of the senior debt itself, and for derivatives trades, to hedge currency risk, for example. The banks can choose to keep some slice of the debt they create and earn net interest of typically 2% annually, or sell it all to insurers, pension funds or other banks who want safer senior-secured debt that pays a juicier yield than is available in public markets.

These kinds of deals look a lot like securitizations—the process behind mortgage-backed bonds.

But private structured credit like this business avoids rules drawn up after the last crisis that say banks must retain some exposure in any securitization.

According to one European bank executive, banks can sell almost any kind of private senior-secured debt to investors right now and his bank is giving up interest income because investors are willing to pay more for it.

Industry revenue in this patch rose by nearly a quarter in 2016 and was stronger again in the first half of 2017, according to Coalition, the research firm, which calls the business fixed income nonlinear financing, to distinguish it from traditional market-based, or linear, financing. It isn’t easy to spot, but for some banks this business is supporting revenues in hard-pressed fixed-income divisions.

These hard-to-value assets can cause losses and spread fear when markets turn. Regulators need to be sure they know how much business is being done and where the risks are going.

The Roots of Central Asian Rage

By Jacob L.  Shapiro

Three things happened Nov. 2 that may not appear related on the surface but that are intimately linked. First, in the Middle East, the Syrian army and its allies advanced quickly in the direction of the Islamic State-held city of Abu Kamal on the Syria-Iraq border, and are now within 30 miles (50 kilometers) of the city, according to Syrian state media. Second, in Kazakhstan, Kazinform news agency released the names of four distressed Kazakh banks that had received a government bailout to the tune of $1.2 billion in October. And finally, in the U.S., a 29-year-old Uzbek native was charged in a federal courthouse in Manhattan with providing material support to terrorists and using a motor vehicle to kill at least eight people.

Back to Its Roots

Let’s begin with the Islamic State. IS still controls a few areas in Syria and Iraq, but for all intents and purposes the larger battle is over. The Islamic State as a territorial entity has been defeated. This will be trumpeted as a major victory over the forces of Islamist extremism, and on a certain level it is – dismantling the Islamic State’s short-lived caliphate is not a small matter. In addition to terminating a potent recruiting tool for the movement, it eliminates the chance in the near term of a fundamentalist Sunni Islamist state rising in the heart of the Middle East.

But it is more complicated than this. IS “lost” its caliphate in the sense that it was outnumbered and outgunned by myriad forces around it – U.S.-backed Syrian Kurds, Russian-backed Syrian army forces, the Lebanese Shiite militant group Hezbollah, Iranian Revolutionary Guard soldiers and others. But IS never suffered a catastrophic defeat on the battlefield. Time and time again, IS preferred to withdraw from indefensible positions to continue to wage its battles elsewhere. The reason Syrian army forces are advancing so quickly is not because they are routing the enemy but because the enemy is declining battle.
Syria war islamic state
Syrians walk through a street in the desert town of al Qaryatain on Oct. 29, 2017, after regime forces retook it from Islamic State fighters. LOUAI BESHARA/AFP/Getty Images

This is a change in IS behavior that bears some explaining. In the past, the Islamic State did not simply cut and run. IS made long and determined stands in both Mosul and Raqqa. Remember that IS conquered Mosul in just two weeks in 2014, while it took U.S-backed Iraqi security forces over nine months to retake the city. U.S.-backed Syrian Kurds began their assault on Raqqa in June, and it took them over four months to complete the conquest, despite immensely superior firepower and numbers. IS had a purpose in making stands at certain cities, just as it has a purpose now in retreating in the face of an enemy it cannot defeat.

The purpose of the IS stands in Mosul and Raqqa were to give IS what it needed most to mount an effective retreat: time. The Islamic State bought time for its leaders to disperse, for its economic resources to be moved and for its rank-and-file fighters to blend back into the civilian population. A small rearguard of the faithful was left to slow down the encroaching forces as much as possible, but most of the fighters who brought IS to power have not been eliminated so much as they have been driven back underground. In a certain sense, IS was forced to give up its caliphate. But in another sense, IS gave up its caliphate to return to its roots as a Sunni Islamist insurgency and to fight another day.

A Deeper Problem

One of the regions that will be most threatened by the Islamic State’s return to its roots is Central Asia. It is part of the Islamic world and has been for centuries. Islam has defined everything from family life to culture, but religion has been tightly controlled in this part of the world for almost a century. All the Central Asian states were part of the Soviet Union during the Cold War. There was no room for Islam in the Stalinist state, and that meant Islam in Central Asia had to be repressed. The Soviet Union collapsed in 1991, but the Soviet style of governance has lived on; most of the Central Asian states feature authoritarian regimes based on an individual dictator or a ruling clan.

This is what makes distressed banks in Kazakhstan so important. Kazakhstan’s gross domestic product has grown by 4 percent in recent quarters, but even so, the Kazakh economy is struggling mightily right now. Besides its banking issues, Kazakhstan in recent months has been beset by inflation, rising food prices and gasoline shortages, among other issues. It would be bad enough if the region’s largest country was buckling under economic stress, but it goes even deeper than that. The economic problems Kazakhstan is experiencing are not specific to Kazakhstan: The entire region is in an economic malaise. And that is doubly important in a place like Central Asia, where authoritarian governments have used money to maintain political power. The ability to provide economic progress also helps keep the population pliant. Lose the ability to do that, and the system could come apart at the seams.

The problem, however, is not just economic. It is also political. We have already seen what happens when predominantly Muslim countries with arbitrarily drawn borders are ruled by secular dictators. That is the story of the Middle East in a nutshell – and it is the story of Central Asia as well. The main differences between the two regions’ histories are cosmetic: In Central Asia, it was the Russians, not the British or the French, who drew the borders, and the people are mostly Turkic, not Arab. The Soviets kept a much tighter leash on Central Asia than the British and French did on their colonial mandates. But Russian power is a pale imitation of Soviet power, and Russia must now rely on others to contain Central Asia’s potential problems. The forces it relies on are the political regimes governing these countries. In practical terms, this has meant that these regimes keep a tight lid on Islam, fearing it could become a countervailing political ideology that can rally the people against them.

This is where the pitfalls of globalization become suddenly and tragically apparent.

Besides energy, one of Central Asia’s most consequential exports is radicalized Islamists. New York City was the target this week, but this is not a uniquely American problem. In April, 15 people were killed and 45 were injured when an explosive device went off in a metro station in St. Petersburg, Russia. The suspected attacker was an ethnic Uzbek who was a Russian citizen born in Kyrgyzstan. In January, 39 people died and 65 were wounded when a gunman opened fire in a nightclub in Istanbul. The suspected perpetrator was an Uzbek national. And since the war in Syria began, many from Central Asia have left their home countries to join the fighting. Some have joined the Islamic State, while others have formed their own ethnic-based jihadist outfits. That a radicalized Uzbek would commit an act of terrorism in New York is not an anomaly; the anomaly is that such attacks don’t happen more often.

The Muslim world is not confined to the Middle East. There are almost 2 billion Muslims in the world, and now that the Islamic State’s dreams of establishing a caliphate in Syria and Iraq have been dashed, it will look for new areas in which to expand. We’ve already seen IS branch out into Southeast Asia and Africa, and also take aim at other Middle Eastern countries like Egypt and Saudi Arabia. Proponents of IS ideology will look for other fertile grounds now as well, and they will find them in pockets throughout the world: in the U.S., in Europe, in Russia and even in China.

But perhaps no part of the world is more vulnerable or has contributed more to this phenomenon than has Central Asia. In places like St. Petersburg, New York and Paris, the goal of Islamist terrorism is to terrify. In places like Central Asia, the goal is political revolution. That means Central Asian states will continue to crack down on Islamists with a vengeance – and the world will continue to reap what those states sow.

"Not Clear What That Means"

Doug Nolan
November 15 – Bloomberg (Nishant Kumar and Suzy Waite): “Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved. ‘Have we learned our lesson? It depends what the lesson was…’ Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market ‘could have been dealt with differently.’ And in the ‘so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.’ ‘If you took all of the obvious problems from the financial crisis, we kind of solved none of them,’ Einhorn said… Instead, the world ‘went the bailout route.’ ‘We sweep as much under the rug as we can and move on as quickly as we can,’ he said.”

October 12 – ANSA: “European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It's not clear what that means’.”

Once you provide a benefit it’s just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.

When I read David Einhorn’s above analysis, my thoughts returned to Ben Bernanke’s comment last month regarding distorted markets: “It’s Not Clear What That Means.” Einhorn attended one of those paid dinners with Bernanke back in 2014, and then shared thoughts on Bloomberg television: “I got to ask him all these questions that had been on my mind for a very long period of time. And then on the other side, it was, like, sort of frightening, because the answers weren’t any better than I thought that they might be.” A successful hedge fund manager such a Mr. Einhorn is keen to decipher market distortions. Dr. Bernanke was keen to benefit markets – to inflate them.

During the mortgage finance Bubble period, I often referred to “The Moneyness of Credit” and “Wall Street Alchemy.” Various risk intermediation processes were basically transforming endless (increasingly) risky loans into perceived safe and liquid money-like instruments. 
Throughout history, insatiable demand for money creates great power and peril. I can’t conceptualize a more far-reaching market distortion than conferring money attributes to risky financial instruments. Pandora’s Box. For a while now, I’ve been astounded that the Federal Reserve has no issue with epic market distortions.

Fannie and Freddie were on the hook for insuring Trillions of mortgage securities. These GSEs essentially had no reserves or equity in the event of a significant downturn, a fact that had no bearing whatsoever on the safe haven pricing of their perceived money-like securities. Insurers of Credit were on the hook for Trillions, with minimal reserves. So, investors held (and leveraged) Trillions of “AAA” with little concern for losses or illiquid trading. Meanwhile, there was the gargantuan derivatives marketplace thriving on the assumption of liquid and continuous markets, despite hundreds of years of market history replete with recurring bouts of illiquidity and dislocation.

There were as well myriad variations of cheap market “insurance” readily available, bolstering risk-taking with the misperception that risks (equities, Credit, interest-rates, etc.) could always be easily hedged. And so long as Credit expanded (risky loans into “money”), the economy boomed and markets inflated, the pricing for market insurance remained low (or went lower).

As Einhorn stated, “risk was transferred, but not really being transferred, and not properly valued.” It amounted to a historic market Bubble distortion. Underlying risks were being grossly distorted and mispriced in the marketplace. Distortions fostered a massive expansion of risky Credit and untenable financial intermediation – a powerful boom and bust dynamic that culminated in a crash. Amazingly, catastrophic market distortions evolved gradually enough over years so to barely garnered attention. Can’t worry about risk when there’s easy “money” to amass.

Central bankers learned the wrong lessons from that modern-day market crisis. The post-crisis focus was on traditional lending and bank capital. As the thinking goes, so long as banks avoid reckless lending and remain well-capitalized, the risk of a repeat crisis is negligible. They did come to appreciate the risk of institutional Too Big to Fail, but again the solution was additional bank capital. Market distortions behind the Bubble and crash didn’t even enter into the discussion. Indeed, the Fed moved aggressively to reflate market prices, employing various measures that specifically manipulated market perceptions, prices and dynamics. There was no recognition that this course would elevate the entire structure of global market Bubbles to Too Big to Fail.

The “Moneyness of Credit” evolved into the “Moneyness of Risk Assets.” It moved so far beyond Fannie, Freddie, and Wall Street structured finance distorting perceptions of risk in mortgage securities. The Federal Reserve and global central bankers turned to brazenly distorting risk perceptions throughout equities, corporate Credit, sovereign debt, EM and the rest. Slash rates and force savers into the risk asset marketplace. Inject new “money” into the securities markets and guarantee liquid, continuous and levitated markets. Who wouldn’t write flood insurance during a predetermined drought? And then, why not reach for risk, speculate and leverage with prices rising and market insurance remaining so cheap? History’s Greatest Market Distortions.

The VIX ended Friday’s session at 11.43, only somewhat above recent historic lows. The Fed is only a few weeks from what will likely be its fifth “tightening” move of this cycle. And with rather conspicuous market excesses facing a tightening cycle, why does market insurance remain so cheap? For one, markets assume that central bankers will not actually impose a tightening of market or financial conditions. Second, the greater risk asset Bubbles inflate the more confident the markets become that central bankers have no alternative than to backstop market liquidity and prices.

“The West will never allow a Russian collapse.” Then, after the LTCM bailout and the “committee to save the world,” the powers that be would surely not allow a crisis in 1999. Then it was “Washington will never allow a housing bust.” Later it was 2008 as the “100-year flood.” Global central bankers will simply not tolerate another crisis. And it is always these types of pervasive market misperceptions that ensure far-reaching distortions – risk-taking, lending, speculating, leveraging, investing, etc. – that inevitably ensure problematic market “adjustments.”

One of the Capitalism’s great virtues is the capacity for a well-functioning pricing mechanism to promote self-adjustment and self-correction. And I would argue that the pricing of finance is absolutely critical to system adjustment and sustainability. Increasing demands for finance should induce higher borrowing costs that work to temper demand. But the proliferation of non-traditional non-bank and market-based finance essentially generated unlimited supply. It may have been subtle, though consequences were earth-shattering.

With Wall Street intermediation leading the charge, the mortgage finance Bubble period experienced a huge surge in demand for Credit accommodated at declining borrowing costs. 
This was transformative particularly for home and securities price inflation dynamics, where rising asset prices generally tend to incite heightened speculative demand. The critical pricing mechanisms that promote self-adjustment and correction became inoperable.

There is a special place in market hell for long-term price distortions. Given sufficient time, an enterprising Wall Street will ensure a proliferation of new products and strategies meant to profit from upward price trends and ingrained market perceptions. As central banks punished savers and “helped” the markets with low rates, QE and liquidity assurances, The Street ensured an onslaught of enticing new investment vehicles and approaches. Why not just buy a corporate Credit ETF instead of holding zero-rate deposits or T-bills? Of course it’s perfectly rational to own equities index ETFs, especially with central bankers ensuring underperformance by active managers conscious of risk. And after a number of years, with markets booming and economies humming along, don’t fundamentals beckon for participating in the junk bond ETF bonanza?

From my perspective, there are two key areas where central banker-induced market distortions have been precariously exacerbated by (fed and fed by) structural developments. First, the perception of “moneyness” has spurred Trillions of flows into the ETF complex. Indeed, the perception of safety and liquidity has created a structural vulnerability to a destabilizing reversal of flows. Everyone perceives they can easily – and almost instantaneously - get out of the market with a couple mouse clicks. And in a rehash of Wall Street Alchemy, hundreds of billions (Trillions?) of illiquid securities have been intermediated through the ETF complex - transformed into perceived liquid ETF shares. This has been a particularly momentous development for corporate Credit and critical as well for mid- and small cap equities.

A second perilous structural development has been within the Wild West of Derivatives. The perception that there are no limits to what central bankers will do to bolster the markets has fostered an explosion of derivative strategies - variations of writing market protection or “selling flood insurance during a drought”. The availability of cheap risk protection became fundamental to financial excess on a systemic basis.

I would add, as well, that over the years a powerful interplay has evolved between the ETF complex and derivatives markets. The perception of highly liquid ETF shares – especially in corporate Credit and liquidity-challenged equities – has been integral to “dynamic” derivative hedging strategies. Why not leverage in corporate Credit and outperforming small cap stocks when cheap derivative protection is so readily available? Better yet, why not leverage a “diversified” portfolio of multiple asset classes (i.e. “risk parity”)? And, likewise, why not garner easy returns from selling such insurance on the low-probability of a market decline? After all, liquid markets in ETF shares are available for shorting in the unlikely event the seller of market protection decides to hedge risk.

November 17 – CNBC (Jeff Cox): “Though stock market prices have held up in November, investors generally are running from risk at a near-record pace. Judging from the flow of money out of high-yield bonds, investors are getting increasingly leery of a market that continues to hover around record levels, despite a handful of rough trading sessions in November and a rocky start Friday. Funds that track junk bonds saw $6.8 billion of outflows over the past week through Wednesday, according to Bank of America Merrill Lynch. That's the third-highest on record.”

Just a very interesting week in the markets. There was a Risk Off feel to junk bond flows. Risk aversion also appeared to be gaining some momentum early in the week. The S&P500 traded to a two-week low in early-Wednesday trading, confirmed by a safe haven bid to Treasuries. 
Equities then rallied sharply Thursday, in what appeared a habitual final jam prior to option expiration (conveniently crushing the value of puts). For the week, the safe haven yen gained 1.1%, while the euro increased 1.1% and the Swiss franc rose 0.7%. Gold gained 1.5%. The Treasury yield curve flattened notably, with two-year yields up seven bps and ten-year yields down five bps (62 bps spread a 10-year low).

There were other dynamics not necessarily inconsistent with incipient Risk Off. The small caps rallied 1.2% this week. There also appeared a squeeze in some of the popularly shorted stocks and sectors. The Retail Sector ETF (XRT) surged 3.9%. Footlocker jumped 34.5% and Abercrombie & Fitch rose 23.8%. And speaking of popular shorts, Mattel jumped 27.8% and Buffalo Wild Wings gained 16.3%.

It would not be extraordinary for a market to succumb to Risk Off at the conclusion of a short squeeze. In the initial phase of Risk Off, the leveraged speculating community pares back both longs and shorts. The upward bias on popular short positions fuels disappointing performance generally on the short side, spurring short covering, frustration and position adjustments. The market had that kind of feel this week. Definitely some instability beneath the markets’ surface, while complacency generally held sway.

Next-Generation Crazy: The Fed Plans For The Coming Recession

Insanity, like criminality, usually starts small and expands with time. In the Fed’s case, the process began in the 1990s with a series of (in retrospect) relatively minor problems running from Mexico’s currency crisis thorough Russia’s bond default, the Asian Contagion financial crisis, the Long Term Capital Management collapse and finally the Y2K computer bug.

With the exception of Y2K – which turned out to be a total non-event – these mini-crises were threats primarily to the big banks that had unwisely lent money to entities that then flushed it away. But instead of recognizing that this kind of non-fatal failure is crucial to the proper functioning of a market economy, providing as it does a set of object lessons for everyone else on what not to do, the Fed chose to protect the big banks from the consequences of their mistakes. It cut interest rates dramatically and/or acquiesced in federal bailouts that converted well-deserved big-bank losses into major profits.

The banks concluded from this that any level of risk is okay because they’ll keep the proceeds without having to worry about the associated risks.

At this point – let’s say late 1999 — the Fed is corrupt rather than crazy. But the world created by its corruption was about to push it into full-on delusion.

The amount of credit flowing into the system in the late 1990s converted the tech stock bull market of 1996 into the dot-com bubble of 1999, which burst spectacularly in 2000, causing a deep, chaotic recession.

Instead of letting this (also well-deserved) crisis run its course, the Fed again protected Wall Street by cutting interest rates to unprecedentedly-low levels, something that rational observers warned would cause another bubble of some kind. Sure enough, the resulting housing bubble expanded to epic proportions before popping in 2007, with results that most readers remember clearly.

The Fed then completely lost it, setting short-term interest rates at literally zero and buying trillions of dollars of bonds to push long-term rates down to record low levels. This lit a rocket under asset prices, enriching the banks and their wealthy clients while saddling the rest of society with debilitating student loan, car, house and credit card debt. Again – to observers outside the Keynesian bubble delusion – this was not sane behavior. But in the context of an overriding compulsion to save Wall Street at any cost, it was sold – and bought – as somehow heroic rather than pathological.

Which brings us to today, 9 years into the latest bubble-driven recovery with debts everywhere at record levels, stocks and bonds priced for perfection, and interest rates still at historically low levels.

Now the Fed is making plans for the next, inevitable recession. And not surprisingly, given the past three decades’ trajectory, those plans are even crazier than their predecessors:

Fed’s Williams calls for global rethink of monetary policy 
(Reuters) – Global central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy, San Francisco Fed President John Williams said Thursday, warning that to fight the next recession, as with the last, they would need to do more than just cut interest rates.
Other Fed officials, including Chicago Fed Bank President Charles Evans, have in recent days urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious. 
With many major economies facing slower growth and thus lower interest rates even when unemployment is low, central banks will need to find ways to stimulate their economies that work even when many other countries are also trying to boost their growth. 
“We will all be better able to contain the next economic recession if we develop approaches that succeed even when many countries are simultaneously constrained by the lower bound,” Williams said at the opening of a two-day conference on Asian economic policies at the San Francisco Fed. “And that means taking into account the nature of monetary policy spillovers.” 
Strategies that central banks should consider including not only the bond-buying and forward guidance used widely in the last recession, but also negative interest rates that was used in some non-U.S. countries, as well as untried tools including so-called price-level targeting or nominal-income targeting. Central banks may also want to consider setting a higher inflation target, he said.


(MarketWatch) – Inflation has been too low for too long and the U.S. central bank has to alter its communications with the markets to convince investors the central bank is willing to let it run hotter than the 2% target, said Charles Evans, the president of the Chicago Fed, on Wednesday. In a speech in London, Evans said the Fed must alter its statement to make clear that its inflation target of 2% is not a ceiling. “Our communications should be much clearer about our willingness to deliver on a symmetric inflation outcome, acknowledging a greater chance of inflation at 2.5% in the future than what has been communicated in the past,” Evans said. Many economists and Fed officials think the low inflation seen this year is due to transitory factors. But Evans said “it gets harder and harder for me to feel comfortable” with the transitory explanation “with each low monthly reading.”

Some thoughts

 Think of the Fed – and the other major central banks – as a person who does a stupid but not necessarily criminal or pathological thing, and then starts committing ever-more serious crimes to cover up the original act. Each new atrocity is justifiable in the moment, since it keeps the perpetrator out of jail, but the later stages of the process seem criminally-insane to rational bystanders. Here’s some of what the Fed is planning and why it’s bad:

  • Negative interest rates are a distortion of markets that imply a fundamental misunderstanding of the purpose of markets, which is to efficiently allocate capital. When savings generates a negative return, as they do when bonds and bank accounts charge rather than pay interest, capital shrinks rather than grows. There is no possibility of “efficient allocation” when returns are negative.

  • “Evans said the Fed must alter its statement to make clear that its inflation target of 2% is not a ceiling.” One of the hallmarks of obsession is a fixation on one thing to the exclusion of everything else. The Fed official quoted here is living in a world where real estate, bond and stock prices are at record levels, and consumer, corporate and government debt is soaring. And where a painting, wristwatch, and piece of paper with a single line of text recently sold, respectively, for $450 million, $17 million, and $1.8 million. And he sees unacceptably-low inflation.

  • “Strategies that central banks should consider including not only the bond-buying and forward guidance used widely in the last recession, but also negative interest rates that was used in some non-U.S. countries, as well as untried tools including so-called price-level targeting or nominal-income targeting, he said.” Price-level targeting, since it focuses on the wrong prices, will simply blow up even bigger asset bubbles (thus illustrating another definition of insanity: repeating the same activity while expecting a different outcome).

    And nominal-income targeting? Here again, it’s easy to raise the average income by enriching the 1%, but using negative interest rates (which lower the incomes of small savers) and asset purchases (which bypass small savers who lack big stock and bond portfolios) to help society as a whole is worse than pointless. Which is another sign that the Fed literally doesn’t see the biggest part of the economy — financial asset prices — because those prices aren’t accounted for in its “aggregate demand” economic models.

Anyhow, the list of delusions and other pathologies could go on for a while. Suffice it to say that when the next recession hits – which, based on the action in junk bonds, subprime mortgages and the yield curve, may be fairly soon – some truly crazy ideas will be dumped on a still (amazingly) unsuspecting public.

A Republican tax plan that will help the rich and harm growth

Are shareholders really the most worthy recipients of a windfall?

by Lawrence Summers

US House Speaker Paul Ryan, a Republican from Wisconsin, speaks during a news conference on tax reform © Bloomberg

With the release late last week of the Republican tax proposal, the most important debate on tax in the US in a generation is now in full swing.

Most reasonable experts will agree that tax reform has the potential to spur investment and raise wages, while at the same time simplifying the system and increasing its fairness and legitimacy. The right issue for debate is not the desirability of tax reform or even of business tax reform directed at spurring investment. It is instead the likely economic effect of particular proposals.

Unfortunately, the proposal from Republicans in the House of Representatives on offer now may well retard growth, reward the wealthy, add complexity to the tax code and cheat the future even as it raises burdens on the middle class and poor. There are three aspects of the proposal that I find almost inexplicable, except with reference to the power of entrenched interests.

First, what is the rationale for tax cuts which increase the deficit by $1.5tn in this decade and potentially more in the future, rather than revenue neutral reform such as that adopted in 1986? There is no present need for fiscal stimulus. The national debt is already on an explosive path, even before taking account of large new spending needs that are almost certain to arise in areas ranging from national security to infrastructure to addressing those left behind by globalisation and technology.

Borrowing to pay for tax cuts is a way of deferring, not avoiding, pain. Ultimately the power of compound interest makes even larger tax increases or spending cuts necessary. But in the meantime debt-financed tax cuts raise the trade deficit, and reduce investment thereby cheating the future.

Second, what is the compelling case for cutting the corporate rate to 20 per cent? Under the proposed plan, for at least five years businesses will be able to write off investments in new equipment entirely in the year they are made. So the government is sharing to an equal extent in the costs of and the returns from investment, eliminating any tax induced disincentive to invest. The effective tax rate on new investment is reduced to zero or less, before even considering the corporate rate reduction.

Corporate rate reduction serves only to reward monopoly profits, other rents or past investments.

After the trends of the past few years, are shareholders really the most worthy recipients of a windfall?

Proponents of the House approach defend it by pointing to international considerations. Unfortunately the “territorial” approach pushed by the House could, by renouncing the objective of taxing the global income of US companies, actually work to encourage offshore production. Wouldn’t it be much better for the US to lead an initiative to prevent a race to the bottom in global corporate taxation than to try to win a race to the bottom?

Third, why include new complexities that help the richest taxpayers while taking steps that hurt middle income families? Why should passive owners of businesses that are already avoiding corporate tax get a big rate reduction to 25 per cent, when those who actually operate and work in such businesses pay at a higher rate? What is the rationale for eliminating the estate tax when it is paid by only 0.2 per cent of households?

At a bare minimum, if such provisions are to be adopted one would assume that they would be paid for to the maximum extent possible through steps like eliminating the carried interest loophole, or loopholes that enable real estate tax shelters. Not so. The proposal instead goes after measures like the adoption tax credit, deductions for major medical expenses and the deductibility of student loan interest. These seem like far better benefits to preserve than carried interest.

Instead of pursuing the current plan, Congress should return to the 1986 approach of revenue neutral tax reform, with an effort made not to adversely affect the progressivity of the tax system. This would enable what is most important now — strengthening incentives for investment in the US relative to other countries, while at the same time raising the legitimacy of the tax code.

It is possible, though I doubt it, that the questions I have raised here have good answers. And there may be reasons why 1986 is an inapplicable model for today. What is certain, though, is that a once-in-a-generation debate is under way. Even those who disagree on policy should be able to agree on the importance of not taking decisions until all relevant analysis can be completed.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

A Risky Corner of the Market With Room to Run

Money has flooded of late into so-called leveraged loans, which are arranged by banks often to help private-equity firms leverage up companies they buy

By Paul J. Davies

A bubble occurs and ultimately pops when fundamental demand is misjudged and too many assets of ever poorer quality are mistakenly—or cynically—supplied to the market. Photo: MARY ALTAFFER/Associated Press 

The market for packaging risky loans is running hot-as-hell. It may not be a bubble yet, but troubling characteristics make it an area to watch.

Money has flooded of late into so-called leveraged loans, which have the credit quality of junk bonds and are arranged by banks often to help private-equity firms leverage up companies they buy. The banks then sell the loans on to investors.

U.S. retail investors in particular have piled into loan-focused mutual funds and ETFs. There have been outflows in recent weeks, but these funds still hold $97 billion of investors’ money compared with less than $18 billion a decade ago, according to Lipper.

Weekly flows into and out of U.S mutual and exchange-traded funds investing in loans

Insurers and pension funds have also invested heavily, both with specialist managers and through buying structured funds known as collateralized loan obligations. U.S. and European CLO volumes could hit totals in 2017 that rank as their second or third biggest year ever.

Issuance of special investment funds known as collateralized loan obligations (CLO)

With such huge demand, yields on such loans have been crushed: in Europe they are at record lows and still falling, according to S&P Global LCD, in the U.S. they are just very low. Demand from investors has outstripped supply as private-equity firms have found it hard to close really big buyouts. And this is the source of worrying signs.

Yields on U.S. and European loans sold in capital markets

Funds struggling to put investors’ money to work have been accepting cheaper and looser terms. Borrowers now have the whip hand. This has allowed them to slash interest rates on their debt by refinancing quickly. They have also managed to kill the traditional covenants, which protect lenders from businesses developing problems in repaying their debt.

Fewer covenants mean fewer defaults as borrowers have no conditions to breach. But this could also mean that when defaults do come, borrowers will be in a much worse state and lenders get less back.

These loans and the CLOs that invest in them are typically less easily tradable than securities such as corporate bonds. It is this illiquidity that gives them the extra sliver of yield that investors desire. As such, loans and CLOs fit into the broader pattern of investors’ drift into illiquid and private assets in the hunt for better returns.

If this sounds worrying, there could be a leg up to keep the loan market going. Supply has been held back partly because U.S. regulators have restricted how much debt can be used in buyout deals. The White House is pushing to change this, which could give the entire market another boost, improving supply, but also make loans riskier.

A bubble occurs and ultimately pops when fundamental demand is misjudged and too many assets of ever poorer quality are mistakenly—or cynically—supplied to the market. The loan market is fertile ground for such conditions to take root, but there may be a way to go before things get really dangerous.

The Triumph of Collectivism

by Jeff Thomas

The French Revolution began in 1789. Maximilien Robespierre was one of its most eager proponents.

An extreme left-winger, he sought a totalitarian rule that claimed to be “for the people” (echoing the recently successful American Revolution), but in reality was “for the rulers.” He in turn inspired Karl Marx, author of The Communist Manifesto.

Both Robespierre and Marx had been well-born and well-educated but rather spoiled and, as young adults, found that they had no particular talent or inclination to pay their own way in life through gainful employment. Consequently, they shared a hatred for those who succeeded economically through their own efforts and sought a governmental system that would drain such people of their achievements, to be shared amongst those who had achieved less.

Interestingly, neither one saw himself as a mere equal to the proletariat that they championed.

Each saw himself in the role of the one who was to cut up the spoils and make the decisions for the rest of society.

It’s worthy of note that collectivist leaders never see themselves as becoming the humble and patient recipients of whatever bones the government chooses to throw them. They always see themselves in the role of rulers.

Collectivism has remained unchanged in its essence to the present day. It attracts those who would take the productivity of others, enrich themselves, and dole out the remainder to the masses. Seen in this light, collectivism would seem abhorrent. Who in his right mind would wish to lose his freedom, to end up as a member of the lumpenproletariat?

But collectivism has thrived, based on one human emotion—jealousy. Collectivist leaders have learned to sell the people on the enslavement of collectivism by convincing them that those they envy will be brought down—to have their gains taken from them and distributed by the state to those who are less able or less inspired.

Let’s have a look at a few quotes from some of the most noted collectivists and see how their ideas are holding up in today’s world…

“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” – Vladimir Lenin

“The best way to destroy the capitalist system is to debauch the currency.” – Vladimir Lenin

Both of these principles are moving rapidly ahead in the EU, US, and other “advanced” countries.

Taxation in both jurisdictions is already high and leaders plan increases. Inflation is claimed to be necessary, although they claim the present level to be lower than it really is. In fact, it’s unnecessary.

It was only a century ago that income tax became institutionalised, robbing people steadily of their wealth without them realizing it, through inflation.

The euro, which gobbled up dozens of independent currencies, is in trouble, and the dollar is nearing the end of its ability to function. They will both soon be destroyed, very much as Comrade Lenin would have wished.

Another primary objective is to dictate what constitutes truth.

“Make the lie big, make it simple, keep saying it and eventually, they will believe it.” – Joseph Goebbels

“A lie told often enough becomes the truth.” – Vladimir Lenin

“Print is the sharpest and the strongest weapon of our party.” – Joseph Stalin

Governments have always been known for lying to their constituents, but today, it’s become a fine art. Today, through television, governments are capable of spoon-feeding simplistic dogma and repeating it over and over again, in a way that the three leaders above could never have imagined (but George Orwell most certainly did).

“Give us a child for eight years and it will be a Bolshevik forever.” – Vladimir Lenin

“The secret of freedom lies in educating people, whereas the secret in tyranny is in keeping them ignorant.” – Maximilien Robespierre

All collectivist leaders figure out early on that, whilst education can make a country grow and prosper, it also inspires people to think for themselves, and this must not be allowed to proliferate. Hence the conscious effort to dumb down the proletariat.

In the US in particular, scholastic accomplishment has been steadily and purposely declining since 1965. Although many current US history books no longer teach students about the American founding fathers, they do teach about gender bias, the need for enforced equalization between citizens, and even the significance of Oprah Winfrey. They are no longer history books; they are now books on contemporary culture.

But dumbing down is insufficient. The use of force is often necessary, and that means disarming the populace.

“The only real power comes out of a long rifle.” – Joseph Stalin

“The most foolish mistake we could possibly make would be to allow the subjugated races to possess arms.” – Adolf Hitler

“We don’t let them have ideas. Why would we let them have guns?” – Joseph Stalin

The first quote is from 1924, but an avowed fan of Stalin, Mao Tse-Tung, echoed this principle, saying, “Political power grows out of the barrel of a gun,” in his Problems of War and Strategy in 1938. The quote from Adolf Hitler is from 1942.

Certainly, the EU and the US in particular have been dramatically ramping up their authorities in the weapons department, indicating that they believe doing so will more greatly ensure their power. By going further to disarm their people, as they are also pursuing, they will further ensure that the state becomes all-powerful.

Here are a few miscellaneous quotes to ponder:

“When there is state, there can be no freedom, but when there is freedom there will be no state.” – Vladimir Lenin

“It is enough that the people know there was an election. The people who cast the votes decide nothing. The people who count the votes decide everything.” – Joseph Stalin

“Demoralise the enemy from within by surprise, terror, sabotage, assassination. This is the war of the future.” – Adolf Hitler

The first quote reminds us that, in the eyes of collectivist leaders, freedom and the state are opposites, regardless of what their rhetoric might say. The second quote reminds us that the belief that democracy exists because voting is allowed is a false hope. The third quote warns that the terror in our midst is no accident. Nor is it necessarily due to outside forces. If need be, terrorism can always be created through false-flag events to justify the removal of the rights of the populace.

Political leaders in the former “free” world regularly state that the removal of inalienable rights, the ever-increasing taxation, and the now-perpetual warfare are “making the world safe for democracy.” However, when the democracy is destroyed by these very acts, they are in fact making the world safe for collectivism. As they themselves state:

“The bureaucrat has the world as a mere object of his action.” – Karl Marx