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Jim Grant Asks When The World Will Realize “That Central Bankers Have Lost Their Marbles”
Jim Grant Asks When The World Will Realize “That Central Bankers Have Lost Their Marbles”
April 15 comes and goes but the federal debt stays and grows. The secrets of its life force are the topics at hand— that and some guesswork about how the upsurge in financial leverage, private and public alike, may bear on the value of the dollar and on the course of monetary affairs. Skipping down to the bottom line, we judge that the government’s money is a short sale.
Diminishing returns is the essential problem of the debt: Past a certain level of encumbrance, a marginal dollar of borrowing loses its punch. There’s a moral dimension to the problem as well. There would be less debt if people were more angelic. Non-angels, the taxpayers underpay, the bureaucrats over-remit and everyone averts his gaze from the looming titanic cost of future medical entitlements. Topping it all is 21st-century monetary policy, which fosters the credit formation that leads to the debt dead end. The debt dead end may, in fact, be upon us now. A monetary dead end could follow.
As to sin, Americans surrender, in full and on time, 83% of what they owe, according to the IRS—or they did between the years 2001 and 2006, the latest period for which America’s most popular federal agency has sifted data. In 2006, the IRS reckons, American filers, both individuals and corporations, paid $450 billion less than they owed. They underreported $376 billion, underpaid $46 billion and kept mum about (“nonfiled”) $28 billion. Recoveries, through late payments or enforcement actions, reduced that gross deficiency to a net “tax gap” of $385 billion.
This was in 2006, when federal tax receipts footed to $2.31 trillion. Ten years later, the U.S. tax take is expected to reach $3.12 trillion.Proportionally, the 2006 gross tax gap would translate to $607.7 billion, and the net tax gap to $520 billion.
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Creditors Accuse Portugal Of “Unfair, Populist Short-Cut” In €2 Billion Bank Bail-In
Creditors Accuse Portugal Of “Unfair, Populist Short-Cut” In €2 Billion Bank Bail-In
Two weeks ago, The Bank of Portugal shocked markets by bailing in senior Novo Banco bondholders.
Novo Banco was the “good” bank forged from the ashes of Banco Espirito Santo which had to be bailed out by the state in August of 2014. The idea was to sell Novo Banco to pay for the cost of the bailout, but the auction process eventually floundered amid turmoil in Chinese markets (at least two of the potential bidders were Chinese) and uncertainty about whether this “good” bank would in fact need more capital given the elevated level of NPLs already on its books.
In November, the ECB told Novo it woudl indeed need to raise some €1.4 billion in fresh capital which the bank initially said would come from asset sales. A little over a month later, Portugal’s central bank essentially just gave up. On December 29, the bank announced it was transferring €2 billion in NB senior notes back to Banco Espirito Santo which, like a ghost skyscraper in China, is set for demolition.
In other words, Novo Banco plugged the €1.4 billion hole by essentially declaring €2 billion in bonds null and void.
There were five issues affected but you can get a pretty good idea about what happened next by having a look at how the 2017s traded that morning:
The reason this had to be done quickly was because if Portugal had waited until January, uninsured depositors would have been at risk under the EU’s new bank resolution mechanism. Plus, Portugal is anxious to get the auction process started again to avoid the decidedly unappealing prospect of having to keep the cost of the bailout on Lisbon’s books in perpetuity thus inflating the fiscal deficit by an extra 3% of GDP.
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Australia’s Housing Bubble—–The Mania Down Under
Australia’s Housing Bubble—–The Mania Down Under
Australians are being “irrationally exuberant” and borrowing too much to invest in housing, exposing the economy to financial shocks, global bond fund giant PIMCO says.
In a detailed statistical study that compares Australian borrowers to those in other countries, PIMCO researchers found that Australians’ decision to borrow is driven by falling interest rates and rising house prices – not economic fundamentals that reflect the health of the economy like employment.
In the US wages and other measures of economic health drive people’s decisions to borrow.
The world’s biggest bond investor said Australians’ focus on capital gains and cheap credit “may not be sustainable or linked to the productivity of the asset.”
Australians also appear to be ‘trigger happy’ about debt – they respond far quicker than other borrowers to changes in interest rates and asset prices. They start borrowing more after only six months of increases in house prices compared with a year in the US.
“Households are exhibiting irrational exuberance because they are placing little weight on broader fundamentals like unemployment that may be more representative of future incomes or asset price returns, increasing the likelihood of asset price bubbles,” the report released by the bond fund on Wednesday said.
Australians react faster and “more vigorously to a shock in asset prices or mortgage rates” which makes the economy more vulnerable to an external shock, such as a sharp slow down in China’s economy or another financial market sell-off, the report said.
The conclusions may bolster those who believe parts of Australia’s property market are into a bubble, including Treasury secretary John Fraser, and put pressure on regulators to take action. A sharp fall in property prices could hit the big banks, which borrow billions each year from overseas investors like PIMCO.
“The key point is that the speed which Australian households reacted to changes in housing assets and mortgage rate was much faster,” the researchers said.
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