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Sunday
Dec312017

The Next Financial Crisis will be Worse than the Last

This piece first appeared in Truthdig.

We’ve made it through 2017. The first-season installment of presidential Tweetville is ending where it began, on the Palm Beach, Fla., golf course of Mar-a-Lago. Though we are no longer privy to all the footage behind the big white truck, we do know that, given the doubling of its membership fees, others on the course will have higher stakes in the 2018 influence game.

The billionaire who ran on an anti-establishment platform went on a swamp-filling, deregulatory and inequality-producing tear, in the process creating the wealthiest Cabinet in modern United States history and expanding his own empire along the way. His offspring, Russia-related investigations aside, didn’t do too shabbily either. White House policy adviser Ivanka Trump’s brand opened a splashy new store in the lobby of Trump Tower in Manhattan, just in time for Christmas.

If you look at the stock and asset markets, as Donald Trump tends to do (and as Barack Obama did, too), you’d think all is fine with the world. The Dow Jones Industrial Average rose about 24 percent this year. The Dow Jones U.S. Real Estate Index rose 6.20 percent. The price of one Bitcoin rose about 1,646 percent.

On the flip side of that euphoria however, is the fact that the median wagerose just 2.4 percent and has remained effectively stagnant relative to inflation. And although the unemployment rate fell to a 17-year low of 4.1 percent, the labor force participation rate dropped to 62.7 percent, its lowest level in nearly four decades—particularly difficult for new entrants to the workforce, such as students graduating under a $1.3 trillion pile of unrepayable or very challenging student loan debt. (Not to worry though: Goldman Sachs is on that, promoting a way to profit from this debt by stuffing it into other assets and selling those off to investors, a la shades of the subprime mortgage crisis.)

Those of us living in the actual world without billionaire family pedigrees possess a healthy dose of skepticism over the “Make America Great Again” sect that believes Trump has transformed America “hugely,” for record-setting markets don’t imply economic stability, nor do 40 percent corporate tax cuts translate into 40 percent wage growth. We can march forward into 2018 carrying that knowledge with us.

But first, a recap. For the U.S. financial system, 2017 was marked by five main themes: The GOP’s “You All Just Got a Lot Richer” Corporate Tax Reduction Plan; Big Banks Still Bad; The Fed’s Minor Policy Shift; Debt; and Deregulators Appointed to Positions of Regulatory Authority.

Banks Are Still Big and Bad

The Big Six banks have paid billions of dollars in settlements for a variety of frauds committed before and since the 2007-2008 financial crisis, but that didn’t keep them from tallying up new fines in 2017. The nation’s largest bank, JPMorgan Chase, agreed to pay $53 million in fines for scamming African-American and Latino mortgage borrowers with disproportionately higher rates than for white borrowers. The Consumer Financial Protection Bureau fined Citigroup $28.8 million for not disclosing foreclosure-avoiding actions. Bank of America got fined $45 million for its foul treatment of a California couple trying to save their home.

But the Big Six bank that received the most attention in 2017, as it did in 2016, was Wells Fargo. The number of people affected by its fake-account creation scandal grew from 2 million reported in 2016 to about 3.5 million. That increase resulted in Wells Fargo expanding its associated class-action settlement to $142 million.

Wells Fargo was mired in smaller scandals, too. For instance, it charged 800,000 customers for auto insurance they didn’t need, raised mortgage rates for certain customers without properly disclosing it was going to, and made a bunch of unauthorized adjustments to people’s mortgages.

No Glass-Steagall Reinstatement, More Deregulation

The idea of reinstating the Glass-Steagall Act of 1933 featured in both the Democratic and the Republican National Committees’ platforms during the campaign season. But Trump’s treasury secretary, Steven Mnuchin, made it clear multiple times there would be no such push from the administration, arguing against doing so before senators including Elizabeth Warren and Bernie Sanders.

To emphasize his disdain for regulation and oversight, Mnuchin also pushed the Financial Stability Oversight Council, over which he presides, to vote 6 to 3 to rescind American International Group’s designation as posing a potential threat to the U.S. financial system. Thus, AIG will no longer be paying penance for its role at the epicenter of the last financial crisis by filing regular risk reports anymore. Federal Reserve Chair Janet Yellen also supported the move.

Consumer Financial Protection Bureau Bashing

In a major blow to citizen security, Richard Cordray, the Obama-appointed regulator, resigned as director of the Consumer Financial Protection Bureau in November.

During his six years at the helm of the CFPB, which the Dodd-Frank Act formed in 2011, the 1,600-person regulatory entity accomplished a lot. It has provided $11.9 billion in relief to consumers for enforcement actions affecting more than 29.1 million people, handled 1.2 million consumer complaints and garnered timely responses on concerns for 97 percent of consumers.

Still, Trump appointed White House budget director Mick Mulvaney to the post that Cordray vacated. Remember: Mulvaney as a congressman wasn’t a fan of protecting consumers. “I don’t like the fact that [the] CFPB exists,” he said. “I will be perfectly honest with you.”

Over at the Office of the Comptroller of the Currency (OCC), Joseph Otting, Mnuchin’s former partner in the takeover of IndyMac and subsequent flurry of foreclosures, was confirmed to the top position. In that spot, Otting will be able to help the Trump administration dial back more post-crisis bank regulations.

The Fed and Debt Bubbles

The Federal Reserve raised rates three times this year. With trepidation that more or larger hikes would cause a market meltdown (because cheap money has lifted banks and markets over the past decade), each time the Fed acted, it did so by the smallest sliver it could—25 basis points. All told, this brings the total rate hikes of 2017 to 75 basis points. The short-term interest rate now sits in a 1.25 percent to 1.5 percent range.

As part of its rate-hike-into-strength message, the Fed forecast that the job market and economy will further improve in 2018. Trump’s appointed Fed leader, Janet Yellen’s No. 2 man, Jerome Powell, will take stewardship of the Fed in February 2018. Policywise, he will do exactly what Yellen and Ben Bernanke did before him, given that’s how all his votes went—albeit while advocating less oversight of the big banks. That’s because cheap money turbo-boosts the stock market, and quick rate hikes can harm the bond markets.

The reality is that the Fed and the administration are scared that selling too many bonds back into the capital markets will result in broader sell-offs, which could lead to another credit squeeze and possible recession, not to mention losses for the big banks exposed to those corporations.

Zombie Companies

Fueled by cheap Fed money and low rates, the amount of outstanding corporate debt has nearly doubled from pre-crisis levels of $3.4 trillion to record levels of $6.4 trillion.

By Oct. 1, U.S. investment-grade corporate debt issuance had already surpassed $1 trillion—beating 2016’s pace by three weeks. The amount of speculative-grade (or junkier) corporate debt issued during the first three quarters of 2017 was 17 percent higher than over the same period in 2016. Altogether, that means that U.S. corporate issuance is set for another record year, as well as the sixth consecutive year of increased corporate debt issuance.

As history has shown us, all bubbles pop. Until then, certain companies are the equivalent of the living dead. The Bank of International Settlements (BIS), or central bank of global central banks, defines zombie firms as “firms that could not survive without a flow of cheap financing.” The latest BIS Quarterly Report labeled one of every 10 corporations in emerging (EME) and advanced countries as a “zombie.”

Corporate debt of nonfinancial U.S. companies as a percentage of GDP has surged before each of the last three recessions. This year, it reached 2007 pre-crisis levels. That didn’t end well last time. Plus, now, that debt has been powered by central banks the world over.

And whereas, in the past, companies used some of their debt to invest in real growth, this time corporate investment has remained relatively low. Instead, companies have been on a spree of buying their own stock, establishing a return to 2007-level stock buybacks.

Corporations and Taxes

Companies have taken advantage of cheap money to increase their debt and buy their own stock, even though Trump and the GOP peddled the notion that decreasing their tax rate by a whopping 40 percent would move them toward diverting their money from the stock and bond markets into jobs and wages.

The GOP tax bill cuts the corporate tax rate from 35 percent to 21 percent. Collectively, large U.S. companies only pay an average effective tax rate of 18 percent anyway. They only contribute 9 percent to the overall tax receiptsthe U.S. government receives each year.

Companies like General Electric haven’t paid any taxes in a decade. But more to the point, that tax cut is another form of cheap money giveaway. Even Jamie Dimon, chairman and CEO of JPMorgan Chase, concurred. He called the tax cut a “QE4” (another round of quantitative easing, added to the three rounds the Fed executed over the past decade to reach $4.41 trillion in credit).

Looking Ahead to 2018

As we enter the new year, consider this: All the Fed talk about “tapering” or reducing the size of its book, and even the 75 basis points of rate hikes, are a setup for the next act of the same play.

Since the Fed’s announcement that it was going to stop reinvesting the interest payments on the bonds it’s holding, the size of its book has been about the same. There’s always a mismatch between what the Fed says and what it does.

So despite its tapering talk, the Fed’s balance sheet is down a mere $10 billion (an equivalent of a rounding error) this year. Its book of assets remains at $4.41 trillion, a figure equivalent to 23 percent of U.S. GDP. Incoming Fed Chair Powell is more likely to keep supplying cheap money than withdrawing it from the markets in the instance of any wobbles.

What does that mean? Financially speaking, 2018 will be a precarious year of more bubbles inflated by cheap money, followed by a leakage that will begin with the bond or debt markets. The GOP tax cuts won’t technically kick in monetarily for corporations until after the year is over in 2019, but the anticipation of extra funds will fuel more buybacks. This will help to provide cover for any rate hikes the Fed implements, because it provides corporations the ability to boost their own share prices further.

Meanwhile, the Treasury Department, Federal Reserve and other smaller regulatory authorities in Washington will push for greater deregulation of the financial systems and banking industry on any level possible. If there is another financial crisis in 2018 or later, it will be worse than the last one because the system remains fundamentally unreformed, banks remain too big to fail and the Fed and other central banks continue to control the flow of funds to these banks (and through to the markets) by maintaining a cheap cost of funds.

Politically, no one in any position of the most power will do anything to fix any of this. It's up to us to push it.

Tuesday
Aug292017

A decade of G7 central bank collusion - and counting...

Since late 2007, the Federal Reserve has embarked on grand-scale collusion with other G-7 central banks to manufacture a massive amount of money. The scope and degree of this collusion are historically unprecedented and by admission of the perpetrators, unconventional in approach, and - depending on the speech - ineffective.

Central bank efforts to provide liquidity to the private banking system have been delivered amidst a plethora of grandiose phrases like “unlimited” and “by all means necessary.” Central bankers have played a game with no defined goalposts, no clock rundown, no max scores, and no true end in sight.

At the Fed’s instigation, central bankers built policy on the fly. Their science experiment morphed into something even Dr. Frankenstein couldn’t have imagined. Confidence in the Fed and the U.S. dollar (as well as in other major central banks globally) has dropped considerably, even as this exercise remains in motion, and even though central bankers have tactiltly admitted that their money creation scheme was largely a bust, though not in any one official statement.

Cracks in the Facade

On July 31, 2017, Stanley Fischer, vice chairman of the Fed, delivered a speech in Rio de Janeiro, Brazil. There, he addressed the phenomenon of low interest rates worldwide.

Fischer admitted that “the effects of quantitative easing in the United States and abroad” are suppressing rates. He also said there was “a heightened demand for safe assets affecting yields on advanced-economy government securities.” (Actually, there's been heighted demand for junky assets, as well, which has manifested in a bi-polarity of saver vs. speculator preference.) What Fischer meant was that investors are realizing that low rates since 2008 haven’t fueled real growth, just asset bubbles.

Remember, Fischer is the Fed’s No. 2 man. He was also a professor to former Fed Chair Ben Bernanke and current European Central Bank President Mario Draghi. Both have considered him to be a major influence in their economic outlook.

The “Big Three” central banks — the Fed, the European Central Bank and the Bank of Japan — have collectively held rates at a zero percent on average since the global financial crisis began. For nearly a decade, central banks have been batting about tens of trillions of dollars to do so.

They have fueled bubbles. They have amassed assets on their books worth nearly $14 trillion. That’s money not serving any productive, real-economy purpose – because it happens to be in lock-down.

In his speech, Fischer channeled Bernanke, Yellen and other major central bank leaders who, having been so enthusiastic about the possibilities, later intimated that low rates and massive asset buying and/or holding programs alone aren’t enough to stimulate economic growth. Which begs the question, why they've continued for so long.

As this policy was propagated by the Fed, Fischer essentially admitted that the Fed caused low interest rates globally while failing to achieve the growth it promised.

With a decade of failed policy experiments behind us, why should we have faith that the Fed — or any other central bank — has any clue about what to do next? The answer is simple. We shouldn’t.

As Fischer went on to tell the Financial Times on August 15, 2017:

“It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude. And now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really, extremely dangerous and extremely shortsighted. One can understand the political dynamics of this but one cannot understand why grown, intelligent people reach the conclusion that [you should] get rid of all the things you have put in place in the last 10 years.”

In other words, why should we hope that a 10-year global “solution” to instill long-term financial stability and economic growth, even as it’s been repeatedly touted as such, should do what central bankers said it will? The answer again is, we shouldn't.

The Winners and Losers

Since the global financial crisis, the biggest G7 winners have been the Big Six US banks that profited from access to cheap money. They benefitted from central bank purchases of their securities that exaggerated the value of the remaining securities on their books. They used “printed” or electronically crafted money to stockpile cash and fund buybacks of their own shares and pay themselves dividends on those shares. By producing and distributing artificial money, central bankers distorted reality in global markets. Multi-national banks were co-conspirators in that maneuver.

After the Big Six banks passed their latest round of stress tests, they began buying even more of their own shares back. The move elevated their stock prices further. The largest U.S. bank, JP Morgan Chase, announced its most ambitious program to buy back its own shares since the 2008 crisis, $19.4 billion worth. Citigroup followed suit with a $15.6 billion buy-bank plan.

The Fed’s all-clear was just another version of quantitative easing (QE) for banks. Instead of buying bonds via QE programs, the Fed greenlighted banks to further speculate in their own stocks, creating more artificiality in the level of the stock market. In all, US banks have disclosed plans to buy back $92.8 billion of their own stock to say thank you to the Fed for the “A.” That was piling on to their existing trend; according to S&P Dow Jones Indices, “Stock repurchases by financial companies in the S&P 500 rose 10.2% in the first quarter [of 2017] and accounted for 22.2% of all buybacks.”

More ominous than that was another clear sign that a decade of money-conjuring collusion helped the same banks that caused the last crisis. Proof came in the form of a letter to the U.S. Senate banking committee from Thomas Hoenig, the vice-chairman of the U.S. Federal Deposit Insurance Corp. (FDIC), the government agency in charge of guaranteeing people’s deposits. He wrote that in 2017, U.S. banks used 99% of their net earnings toward purchases of their own stock and paying dividends to shareholders (including themselves).

They thus legally manipulated markets in plain sight by pushing their own share prices up with cheap money availed to them by the central bank that is supposed to regulate them.

As of this year, global debt levels stood at 325% GDP, or about $217 trillion. The $14 trillion of assets the G-3 central banks held on their books is equivalent to a staggering 17% of all global GDP. The European Central Bank (ECB), Bank of Japan (BOJ) and Bank of England are still buying collectively $200 billion worth of assets per month.

In the wake of that buying, noncash instruments — crypto currencies and hard assets like gold, unrelated to the main G-7 monetary system — have become increasingly attractive on the fear that in another major downturn or crisis, central banks and private banks will retract cash and liquidity from their customers.

In that likely event, banks will protect themselves and turn to governments and central banks again. In the absence of some sort of outside central bank benchmark, like a modern gold standard or use of currency basket benchmarks like the IMF’s Special Drawing Rights (SDR), currency wars will continue to be fought.

With rates hovering between zero and negative in some countries, there would be little to no room to maneuver in the face of another crisis. Thus — another thing has become increasingly clear: Central bankers have demonstrated gross negligence regarding the consequences of their monetarily omnipotent actions.

If rates were to rise higher in the US (and I don't think we're in for more than another 25 basis points, this year which is under last year's Fed forecast) so would the cost of servicing that debt. That would hurt companies domestically and abroad, iinduce more defaults and a rush by the banks involved in derivatives associated with that debt to concoct more toxic assets. The vicious cycle of central bank bailouts would reverberate again. 

Savers and pensioners are getting close to no interest on their nest eggs. Depositors are paying banks to house their money through fees that offset negligible interest. Small businesses have to jump through hoops to get loans for expansion purposes. Wages are stagnant. Ultimately, big banks had played the system — and us — again, this time with central banks helping to fund them. The threat of an even larger collapse looms as stock markets and global debt have been propelled higher.

As we approach the ninth anniversary of the collapse of one of my former employers, Lehman Brothers, and the 10th anniversary of the beginning of central bank collusion into the financial crisis, there has been – no change – in global G7 central bank monetary policy.

Jackson Hole offered a different spin on the same old verbiage, indicating that a bit of nipping here, means a lot of tucking somewhere else. Janet Yellen took what could be her last hoorah to craft her legacy as potential Fed Chair nominee and current Trump National Economic Council Director, Gary Cohn, awaits his possible turn. And if it’s not him, it’ll remain her, or someone else that will perpetuate more of the same policies.

While speaking to the monetary policy glitterati at central bank base-camp, Yellen declared any dialing back of regulatory reform measures for banks should be “modest.” She said, “The evidence shows that reforms since the crisis have made the financial system substantially safer.” There was no mention of the unprecedented decade of easy money bolstering the financial system - that makes it appear - solvent.

For all the cheap cash offered up, much at the expense of taxpayers who will bear the burden of the associated debt this enabled, and the bank fraud it plastered over, it will be ordinary citizens who will pay the price – yet again.  In the era of money fabrication and monetary policy collusion, a decade of ongoing “emergency” procedure spells an eventual recipe for disaster.

Big US banks are bigger than before the crisis. They float atop a life-raft, among other things, of $4.5 trillion Fed asset book, as part of a total $14 trillion G7 central bank asset book. Yellen’s speech was code for preserving the status quo and central bank elasticity high. As for Cohn’s sentiment on the matter? Well, he feels the same. So does Trump. So did Obama.

Take the composite of all that and what are you left with? Ongoing G7 central bank monetary policy collusion, zero percent interest rates globally, unlimited QE potential, and major asset bubbles.

 

Tuesday
Aug152017

Transcript of my Speech in Tokyo on global monetary policy, big banks & geo-politics in the Trump era

The following is the transcript from my speech: Shifting US-Japan Geo-Politics, Banking Landscape and Financial Regulations in the Trump Era. It was given on July 11, 2017 at the Canon Institute for Global Studies in Tokyo, Japan:

 

President Trump has talked a lot about America First. Over the last 6 months, we have seen that America First means that the United States could also be excluded from the rest of the world’s trade policy. For instance, Japan and the European Commission (EC) have recently agreed to an economic partnership agreement (EPA), which could be the largest trade agreement ever. This is an example of the United States being excluded from trade alliances. The new climate in the United States has created opportunities for other countries like Japan.

The shift toward America First and isolationism is not wholly because of President Trump. It is the result of a trend that started approximately 10 years ago. It has much to do with the lack of regulation in the US banking system.

Prior to 1999, the United States regulated banks under the Glass-Steagall Act. This Act required that banks separate their commercial banking operations from their trading, speculation, and securities businesses. That act was repealed in 1999, and the repeal has had a number of consequences.

For one thing, the repeal led to a series of corporate scandals in the United States just a few years later. It also led to the creation of the “Too Big to Fail” concept. It allowed Citigroup, JPMorgan Chase, and Bank of America to become conglomerate banks. It led each bank to increase the risks they hold, and it increased the interdependency of banks throughout the world.

That increased risk and interdependency eventually resulted in the global financial crisis. And yet banks still hold many of the same risky investments they had prior to the crisis, and are still interdependent.

Many in the United States have been talking about reintroducing the Glass-Steagall Act in order to mitigate that risk and interdependency. When President Trump ran for office, he discussed this. It was in the Republican platform as well. 

However, since the election, two interesting things have happened. President Trump gave an interview in which he said he still needed to think about Glass-Steagall. Since then, he has not talked much about it. Meanwhile, Secretary of the Treasury Steven Mnuchin has said that President Trump does not intend to bring back the old Glass-Steagall Act, but is rather considering a “21st century Glass-Steagall” that would merely require banks to set aside money for emergencies related to risky investments rather than actually restructure. 

I would like to talk more in detail about some of the risks that banks now face in order to highlight why the discussion about regulations like Glass-Steagall is so important.

One emerging risk today is corporate defaults. Thanks to quantitative easing, there is a lot of cheap money available in the market right now. According to S&P Global Ratings, as a result of all the cheap money, corporate debt is expected to climb from $51 trillion today to $75 trillion by 2020. At the same time, the global speculative-grade default rate is now 4.2 percent. This is the highest level since 2009, which was the worst year of the financial crisis. A total of 162 companies defaulted in 2016. This is the second time we have seen annual defaults above 100 since 2009. This has a large impact. When companies default, jobs suffer, research and development suffers, and the market suffers. It reduces confidence, which can catalyze a crisis.

Even with the level of risk we are seeing around corporate defaults today, central banks continue to buy assets, to the tune of $200 billion per month. Will this pace slow in the future? Many are now talking about whether the central banks will change their policies on quantitative easing. The Federal Reserve has been slowly raising interest rates. On the other hand, the Bank of Japan has announced that it will begin an ‘unlimited’ Japanese Government bond buying program.  

One issue surrounding quantitative easing is that it is honestly very difficult to tell what the true effect of this policy is. There is no guarantee that when a central bank purchases bonds that it will result in more long-term hires or higher wages, for example. We cannot look at inflation or deflation to see how quantitative easing has impacted the market, because the money from quantitative easing doesn’t go to consumers. It goes to banks and financial speculators. We cannot be certain that any of the money has gone toward jobs or infrastructure. No regulatory requirement even attempted to guarantee that. 

That said, there are some who feel that quantitative easing has been successful in revitalizing our economies. In June, Fed Chair Janet Yellen said in a speech, “Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we are much safer, and I hope that it will not be in our lifetimes and I don’t believe it will be.”

This remark echoes a similar comment made by former Fed Chair Ben Bernanke in 2007 just before the financial crisis. Partly because of that, it is really difficult to accept what she is saying. For instance, the Federal Reserve subjected a number of banks to stress tests this year, and 34 banks passed. However, those tests don’t look at massive corporate defaults. They don’t look at interdependency. There are risks they don’t consider.

The risks faced by banks in the United States today are greater than even before the financial crisis. The amount of assets that the big six banks hold is about 70% to 80% larger than it was prior to 2008. The amount of deposits they hold is about 40% higher. For these reasons, I think we need to be really careful about the rate at which defaults are increasing, how stocks are supported by share buybacks, and other risks fed by artificial, or conjured money.

Central banks around the world are now pursuing a coordinated zero percent money policy and increasing their assets. The big three central banks in the United States, Europe and Japan now hold assets equivalent to about 17% of global GDP. If this money was liquidated into the real economy instead, it would have a huge positive impact. 

In recent years, central banks have used quantitative easing to inject more liquidity ostensibly into the economy. However, as I mentioned, that liquidity hasn’t necessarily reached the real economy. Quantitative easing has failed to produce real sustainable growth. There have been very low increases in wages throughout the world. For many people, even though their country’s economy may be considered stable by generic measures mostly touted by central banks and governments, their personal economies are instable.

One outcome of that is that people are starting to question the ability of their governments to understand the economy. When that happens, people tend to vote out whoever is in power. This is one of the things that I think contributed to Trump’s victory in the United States. In turn, the economic situation globally has affected political decisions domestically, and those decisions are affecting our international alliances.

The shift in our policies toward international alliances might again have an impact on the global economy. It’s a circle. President Trump seems to be shying away from multilateral agreements and toward more isolationist ideas. The last time the United States did that was in the 1920s. In fact, isolationist policies were one of the reasons there was such a speculative mood in the United States in the 1920s, and that speculation led to the financial crash of 1929.

It looks like, for the time being, the United States will continue to act in a more isolationist manner. That is good and bad. It is bad from the standpoint of general global connectedness. It is good for other countries, including Japan. It gives other countries the opportunity to take on a stronger role in the international community. Japan is already moving to do that, as we can see with the Japan-EU EPA.

Ever since President Trump came into office, alliances excluding the United States have been completed much more rapidly. These alliances were already being planned and executed before he came into office, mostly since the financial crisis to be sure and apprehension about the current dollar-based monetary system, but he seems to have accelerated them. This is happening all over the world. China is getting involved in more alliances. Japan is as well.

I was in Mexico a couple of weeks ago and I spoke with people there about the North American Free Trade Agreement (NAFTA) and trade alliances. Since President Trump has come into power, he has been talking about how to get Mexico to pay for the wall he wants to build between the United States and Mexico. He has also made a number of negative comments about Mexico and about NAFTA. Furthermore, President Trump has also pulled out of the Trans-Pacific Partnership (TPP). Prime Minister Abe seems to be trying to save the TPP. He will not be able to move forward with the United States, but with all that has happened, we now have countries like Mexico that are looking at the situation with the United States and actively wanting the TPP to continue without the United States. Japan could thus, take a larger leadership role regarding the TPP.. 

With President Trump continuing to push his wall idea, US-Mexico relations are deteriorating. This presents a very good opportunity for China to develop its alliance with Mexico. When I spoke in Mexico, a trade delegation from China was there at the same time. These sorts of things are already happening more frequently. There has been movement on the part of other countries to create alliances outside of the partnerships with the United States ever since the financial crisis. With the election of President Trump, these movements are only accelerating. 

The Japan-EU EPA is a major agreement that has impacted that movement. Japan is a part of the shift that we are seeing as power in the international community moves slightly away from the United States. To a large extent, Japan can greatly influence how this shift plays out. Japan is already also involved in a number of other large trade deals, such as the TPP or the Regional Comprehensive Economic Partnership (RCEP). These deals could create a large amount of trade, and Japan is playing a leadership role in their negotiations. These deals are being worked out in opposition to US policies. Unless US policies change soon, they will move forward.

And as the rest of the world moves forward with its own deals, the situation in the United States today is one in which the financial crisis and the concept of “Too Big to Fail” has led many to question whether we don’t need more regulation in the banking sector to avoid another crisis.  However, many of the senior people in the Trump administration seem to be not very interested in bringing back something like the Glass-Steagall Act, so not enough is happening. There is action taking place around military spending. Although the new budget hasn’t passed yet, the draft does include a large boost for the military. We have a lot of people now working in Congress to figure out how the new budget will work, whether they can cut corporate taxes, or cut social spending, and so on.

The latest draft budget will increase defense spending by approximately $53 billion. It earmarks an extra $2.8 billion for spending on homeland security. To make that budget balanced, President Trump is cutting from social insurance programs and institutions related to international alliances. President Trump’s isolationist tendencies are not supported just by the things he says; if the budget is passed, that isolationism will be carried out through budget cuts.   

Meanwhile, he is doing no meaningful work on his campaign promise to bring back the Glass-Steagall Act. In fact, there is movement in his ranks toward further deregulation. A recent bill passed in the House of Representatives, dubbed “The Financial Choice Act”  called for the loosening of banking regulations. If this new legislation is passed, it will likely just require that banks hold onto more money for emergencies, in reserves, rather than actually separate deposits and lending activities from speculative ones. 

I think the lesson here is that there is a lot of inconsistency in what President Trump has said and what his administration is doing, and I think that people around the world understand this and that it is catalyzing the shifts in power and new economic alliances that we are seeing globally. The Trump presidency is accelerating the movement of world currencies away from the United States dollar.

Alongside all of that is the problem of whether or not the markets are sustainable at their current levels. They are not. There is a lot of risk in markets and in the economy right now. There exists a large disconnect between how the financial sector feels about the economy and how normal people outside of the financial sector feel about it. There remains a disconnect between how politicians view the economy and markets and the banking and monetary system and how it's viewed by populations on the ground. This dichotomy fueled by ongoing money conjuring policies can't end well, it can only result in another crisis. The question isn't if, but when. 

 

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