- The End Of IMF Credibility (Or Why Christine Lagarde Should Be Fired… But Won't Be)
Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
The IMF’s Independent Evaluation Office (IEO) issued a report a few days ago entitled ‘The IMF and the Crises in Greece, Ireland, and Portugal’. It is so damning for managing director Christine Lagarde and her closest associates, that it’s hard to see, certainly at first blush, how they could all keep their jobs. But don’t be surprised if that is exactly what will happen.
Because organizations like the IMF don’t care much, if at all, about accountability. Their leaders think they are close to untouchable, at least as long as they have the ‘blessing’ of those whose interests they serve. Which in case of the IMF means the world’s major banks and the governments of the richest nations (who also serve the same banks’ interests). And if these don’t like the course set out, a scandal with a chambermaid is easily staged.
But the IEO doesn’t answer to Lagarde, it answers to the IMF’s board of executive directors. Still, despite multiple reports over the past few years out of the ‘inner layers’ of the Fund that were critical of, and showed far more comprehension of events than, Lagarde et al, the board never criticizes the former France finance minister in public. And maybe that should change; if the IMF is to hold on to the last shreds of its credibility, that is. But that brings us back to “Organizations like the IMF don’t care much, if at all, about accountability.”
What the IEO report makes very clear is that the IMF should never have agreed, as part of the Troika, to assist the EU in forcing austerity upon Greece without insisting on significant debt relief, in the shape of a haircut, or (a) debt writedown(s). The IMF’s long established policy is that both MUST happen together. But its Troika companion, the EU, is bound by the Lisbon Treaty, which stipulates: “The Union shall not be liable for or assume the commitments of central governments”. Also, the ECB can not “finance member states”.
If Lagarde and her minions had stayed true to their own ‘principles’, they should have refused to impose austerity on Greece if and when the EU refused debt relief (note: this has been playing out since at least 2010). They did not, however.
* * *
The IMF caved in (how willingly is hard to gauge), and the entire Troika agreed to waterboard Greece. The official excuse for bending the IMF’s own rules was the risk of ‘contagion’. But in a surefire sign that Lagarde et al were not acting with, let’s say, a “clear conscience”, they hid this decision from their own executive board.
Moreover, the IEO now says it was unable to obtain key records or assess the activities of secretive “ad-hoc task forces”. “Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located; [the IEO] has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff..”
One must wonder why the IMF has an executive board at all. Is it only to provide a facade of credibility and international coherence? When it becomes so clear, and -no less- through a report issued by one of its own offices, that its ‘boots on the ground’ care neither for its established policies nor for its board, isn’t it time for the board to interfere lest the Fund loses even more credibility?
The IMF’s main problem, which many insiders may ironically see as its main asset, is the lack of transparency, combined with the overwhelming power exerted by the US and Europe. And Europe’s grip on the IMF is exactly what the report is about, in that it accuses Lagarde et al of bowing to EU pressure, to the extent that it abandons its own guiding ‘laws’. It acted like it was the European Monetary Fund, not the international one.
So there’s no transparency, no accountability, and in the end that will lead to no credibility and no relevance. Well, that’s exactly how the EU lost Britain. And that shows where accountability and credibility are important even for non-democratic supra-national institutions, something these institutions are prone to neglect.
No, there will not be a vote put to the people, no referendum on the IMF. Though that would sure be interesting. What can happen, though, is that countries, even large ones like China and Russia, threaten to leave, perhaps start their own alternative fund. These things have already been widely discussed.
What is sure is that the US/Europe-centered character of the Fund will have to change. If Washington and Brussels try to appoint another European as managing director (an unwritten law thus far) they will face a rebellion.
* * *
That next appointment may come sooner than we think. Because Christine Lagarde is in trouble. It’s even a bit strange, and that’s putting it gently, that she’s still in her job. What’s hanging over her head is a 2008 case, in which she approved a payment of €403 million to businessman Bernard Tapie, for ‘losses’ he was to have suffered in 1993 when French bank Crédit Lyonnais supposedly undervalued his stake in Adidas.
Lagarde is accused of negligence in the case, in particular because she ignored advice from her own ministry (yeah, that does smack like the IMF thing) and let the Tapie case go to a special arbitration committee instead of the courts. That Tapie was a supporter of the Sarkozy government Lagarde served as finance minister at the time makes it juicier.
So does this: In 1993 Crédit Lyonnais was a private bank. But in 2008, it had been wound up and was run by a state-operated consortium. Therefore, the €403 million ‘awarded’ to Tapie out-of-court was all taxpayers money. Even juicier: in December 2015, a French appeal court overruled the compensation and ordered Tapie to repay the money, with interest.
What’s peculiar about Lagarde staying on at the IMF is that she is not merely under investigation or even ‘only’ accused of committing a crime. Instead, she has been ordered to stand trial, something she’s spent 8 years trying to avoid. Still, apparently nobody sees any problem in her continuing to act as Managing Director of the IMF.
That is quite something. And it directly affects the Fund’s credibility. If a president or prime minister of a country, any country, had been ordered to stand trial, the likely procedure would be to temporarily stand down and let someone else take care of government business pending the trial.
As it stands, however, Lagarde is allowed to sit pretty. And then? Borrowing from the Guardian: “A charge of negligence in the use of public money carries a one-year jail sentence and a €15,000 fine. The CJR is made up of six members of the French Assemblée Nationale, six members of the upper house, the Senate and three magistrates. No date has been set for the hearing.”
Ironically, negligence turns out to be a very light charge. Someone in Lagarde’s position could have given away or squandered trillions of euros and then be fined €15,000. But then, class justice is alive and well in France. What are the odds that she will be convicted? She’d have to be found with a chambermaid in Manhattan for that to happen…
* * *
That’s perhaps what the IMF board are thinking too. Whether that’s wise remains to be seen. Hubris rules all these institutions, sheltered as they are from the real world. But the real world is changing.
Ironically, many people think these changes will reinforce the IMF. Since the Fund can issue a sort of ‘super money’ in the shape/guise of Special Drawing Rights (SDRs), and especially China would seem to like SDRs becoming the world’s reserve currency instead of the US dollar, the IMF in some people’s eyes holds a trump card.
There may well be an effort to hide private and public debt throughout the planet even more than it is hidden now, through SDRs. We’ll likely see governments and perhaps large corporations issue bonds denominated in SDRs. China seems to think that this could potentially halt much of its capital flight.
My trouble with this is that it’s either too unclear or too clear who would profit most from such schemes. Even if the next managing director of the IMF is not European, but Asian or African, the puppet masters of the Fund will still be the same western financial ‘cabal’. And I don’t see China or Russia signing up to that kind of control, and willingly expand it by making SDRs far more important.
Then again, there’s a sh*tload of debt that needs to be hidden, and the whole world is running out of carpet to sweep it under. Then again, Russia is not that indebted. It’ll be hard to get a consensus.
* * *
But all that won’t help Greece. Let’s get back to that. We left off where Lagarde conspired with the EU, under the guise of preventing contagion, to abandon the IMF’s own rules in order to waterboard the country. Of course, we know, though nobody writing on the IEO report mentions it, that the contagion they were trying to prevent was not so much between nations but between banks.
The bailout-related policies and actions that Lagarde hid from her own board (!) were designed to make French and German banks ‘whole’ at the cost of the Greek people. It became austerity, so severe as to make no sense whatsoever -certainly inside an alleged ‘Union’-, even if the IMF -not the world most charitable institution- has always banned this without being accompanied by strong debt relief.
Schäuble and Dijsselbloem saved Germany and Holland at the expense of Greece. This will end up being the undoing of the EU, even if nobody’s willing to acknowledge it despite the glaring evidence of the Brexit.
It will probably be the undoing of the IMF as well. And there I get back to what I’ve said 1000 times: centralization can only work in times of growth. There is no conceivable reason, other than dictatorship, why people would want to be part of a centralizing movement unless they get richer from it.
In today’s shrinking global economy, we have passed a point of no return in this regard. Everyone will want out of these institutions, and get back to making their own decisions about their own lives, instead of having these decisions being taken by some far away board with no accountability.
Let’s end with a few quotes about the IEO report. Ambrose Evans-Pritchard was in fine form:
IMF Admits Disastrous Love Affair With The Euro and Apologises For The Immolation Of Greece
The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.
[..] In Greece, the IMF violated its own cardinal rule by signing off on a bailout in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery, and many suspected from the start that it was doomed. The organisation got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion. “The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package, but by then it was a fait accompli.
[..] The injustice is that the cost of the bailouts was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union. Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognised in the report. “If preventing international contagion was an essential concern, the cost of its prevention should have been borne – at least in part – by the international community as the prime beneficiary,” it said.
* * *
That would seem to leave the IMF just one option: to apologize profoundly to Greece, to demand from the EU that all unjust measures be reversed and annulled, and to set up a very large fund (how about €1 trillion) specifically to support the Greek people, including retribution of lost funds, repair of the health care system, reinstatement of a pension system that can actually keep people alive and so on and so forth.
And to top it off of course: debt writedowns as far as the eye can see. You f**k up, you pay the price. This makes me think of a remark by Angela Merkel a few weeks ago, she said ‘we have found the right mix when it comes to Greece’. Well, Angela, that is so completely bonkers it’s insulting, and the IMF’s own evaluation office says so.
I like this one from Bill Black as well:
It was only after forcing the Greek people into a pointless purgatory of a decade of disaster that the troika would consider providing debt relief…The only ‘debt relief’ they offer to discuss is a ‘long rescheduling of debt payments at low interest rates.’ This, under their own dogmas, will lock Greece into a long-term debt trap that will materially lower Greece’s growth rate for decades and leave it constantly vulnerable to recurrent financial crises. That is a recipe for disaster for Greece, Italy, and Spain (collectively, 100 million citizens) and for the EU. It is financial madness – and that ignores the political instability it will cause to force an EU member nation to twist slowly in the wind for 50 years.”
Got that one off of Yanis Varoufakis’ site, and he must be feeling very vindicated, even if not nearly enough people express it, by the IMF report. Because he’s said all along what they themselves are now admitting. But it ain’t much good if nothing changes, is it? Or, as Varoufakis put it:
[..] to complete this week’s drubbing of the troika, the report by the IMF’s Independent Evaluation Office (IEO) saw the light of day. It is a brutal assessment, leaving no room for doubt about the vulgar economics and the gunboat diplomacy employed by the troika. It puts the IMF, the ECB and the Commission in a tight spot: Either restore a modicum of legitimacy by owning up and firing the officials most responsible or do nothing, thus turbocharging the discontent that European citizens feel toward the EU, accelerating the EU’s deconstruction.
[..] The question now is: What next? What good is it to receive a mea culpa if the policies imposed on the Greek government are the same ones that the mea culpa was issued for? What good is it to have a mea culpa if those officials who imposed such disastrous, inhuman policies remain on board and are, in fact, promoted for their gross incompetence?
In sum, an urgent apology is due to the Greek people, not just by the IMF but also by the ECB and the Commission whose officials were egging the IMF on with the fiscal waterboarding of Greece. But an apology and a collective mea culpa from the troika is woefully inadequate. It needs to be followed up by the immediate dismissal of at least three functionaries.
First on the list is Mr Poul Thomsen – the original IMF Greek Mission Chief whose great failure (according to the IMF’s own reports never before had a mission chief presided over a greater macroeconomic disaster) led to his promotion to the IMF’s European Chief status. A close second spot in this list is Mr Thomas Wieser, the chair of the EuroWorkingGroup who has been part of every policy and every coup that resulted in Greece’s immolation and Europe’s ignominy, hopefully to be joined into retirement by Mr Declan Costello, whose fingerprints are all over the instruments of fiscal waterboarding. And, lastly, a gentleman that my Irish friends know only too well, Mr Klaus Masuch of the ECB.
You probably guessed by now that I would certainly and urgently add Christine Lagarde to that list of people to be fired. And not appoint another French citizen as managing director. Too risky. They do crazy things. The IMF must be reorganized, and thoroughly, or it no longer has a ‘raison d’être’.
I see no reason to doubt that those who call the shots are too blinded by hubris to execute such measures, so I’ll list these things one more time: transparency, accountability, credibility and if you don’t have those you will lose your relevance.
But it’s probably a bad idea to begin with to let an economy, if not a world, in decline, be governed by the same people who owe their positions to its rise. It would seem to take another kind of mindframe.
- Why Did Khizr Khan Delete His Law Firm's Website?
Khizr Khan, the Muslim Gold Star father of Captain Humayun Khan, set off a media firestorm at the DNC last week when he criticized Trump for his "unconstitutional" policies aimed at banning Muslim immigration to the United States. A question posed by Breitbart is whether Khizr Khan's law firm, KM Khan Law Office, actually derives profit directly from Muslim immigration to the United States making him more than just an innocent conscientiousness objector to Trump's policy?
Breitbart suggests that Khan did, in fact, stand to profit from his viewpoints shared at the DNC and point to his website bio which lists "EB-5 Investments & Related Immigration Services" as a specific area of practice. Oddly enough, since these reports have surfaced the website of Mr. Khan's law office has been taken down. Luckily, prior versions of the website are available on the wayback machine which can be seen here:
Why would Khan remove his website over such a discovery? Perhaps it's related to the fact that the EB-5 program has come under intense scrutiny from certain members of Congress, the SEC, Homeland Security and the NSA. Senator Chuck Grassley recently described the program as "riddled with flaws and corruption." Below are some relevant excerpts from Senator Grassley's prepared remarks at the Judiciary Committee Hearing on February 2, 2016 regarding EB-5:
It is widely acknowledged that the EB-5 program is riddled with flaws and corruption. Maybe it is only here on Capitol Hill—on this island surrounded by reality—that we can choose to plug our ears and refuse to listen to commonly accepted facts. The Government Accountability Office, the media, industry experts, members of congress, and federal agency officials, have concurred that the program is a serious problem with serious vulnerabilities.
There are also classified reports that detail the national security, fraud and abuse. Our committee has received numerous briefings and classified documents to show this side of the story.
The enforcement arm of the Department of Homeland Security wrote an internal memo that raises significant concerns about the program. One section of the memo outlines concerns that it could be used by Iranian operatives to infiltrate the United States. The memo identifies seven main areas of program vulnerability, including the export of sensitive technology, economic espionage, use by foreign government agents and terrorists, investment fraud, illicit finance and money laundering.
An interagency working group was organized by the National Security Staff because of the serious concerns. This group’s draft memo said, “The capital raising activities inherent in the regional center model raise concerns about investor fraud and other conduct that may violate US securities laws.”
More information about the EB-5 Immigrant Investor Program can be found on the Department of Homeland Security website.
While it's unclear how this saga will play out, one thing we're pretty sure of is that we'll see a couple more days of related headlines before we finally get to put this to bed.
Senator Grassley's full comments can be viewed below:
- Peter Schiff: Time Is Running Out, "Crisis Worse Than 2008 Coming"
Submitted by Mac Slavo via SHTFPlan.com,
We are headed for disaster, and the only question is how long the economy can dodge a bullet.
The illusory bubble on Wall Street claims to be at record highs, but the reality, the underbelly, is dark indeed.
Economic expert Peter Schiff speaks on not only the safe haven of gold, and what is at stake in the election, but just how dire the financial consequences will be when the great storm hits and batters everyone.
As Before Its News reports:
The endgame for the U.S. economy is oblivion. 2008 was a minor correction compared to the eventual collapse of the U.S. Dollar.
WHY: After the dot.com bubble burst in 2000, Fed chairman Alan Greenspan-led the Federal Reserve through a series of interest cuts that brought down the Federal Funds rate to 1% by 2004. The bubble created by those years of cheap Fed money at 1% resulted in U.S. households losing a total wealth of almost $14 TRILLION in the 2008 crisis. Stock markets fell by almost half for losing $7.9 trillion, and the housing market lost $6 trillion.
FAST FORWARD TO TODAY: We’ve had 7 years of interest rates at 0%. As a result, there is more than just a housing bubble this time. There’s a stock bubble, a housing bubble, a bond bubble, a student loan bubble, and I could go on. As Peter explains, the Fed only has ONE option at this point: Continue to fake it for as long as possible by printing more money (otherwise known as “quantitative easing”), or let the whole system come crashing down.
HERE IS THE REALITY: The world has caught on, and the gig is up. Under Obama’s stewardship, the U.S. national debt has gone from $10 Trillion, to what will be $20 Trillion by the time he leaves office, with nothing more than 100 MILLION Americans out of work, and 50 MILLION in poverty and on food stamps. That’s what cheap money bought for us. It was all “borrowed” cheap money too, making it infinitely worse, and the world is tired of lending.
In no uncertain terms, Schiff warns that the next crisis will be far, far worse than the 2008 collapse, and the “recovery” that has since rotted away at the house:
- 65 Million Americans Would Like To Work But Can't Risk Losing Their Entitlements
At the DNC last week, Anastasia Somoza, who has cerebral palsy and spastic quadriplegia, took to the stage to deliver an emotionally-stirring speech advocating for the rights of disabled people across the country. She also took the opportunity to brand Trump as a candidate that "feeds off of fear and division" and "shouts, bullies and profits off of the vulnerable Americans" while describing Hillary as someone who "sees her." Unsurprisingly, this is a narrative which has reverberated with America's media outlets as they couldn't help but assist the Democrats in their effort to exploithelp Anastasia in her quest to elect Hillary.
Just today, Bloomberg published an article entitled "These Government Rules Trap Millions of Americans in Poverty" that details the personal stories of various folks with disabilities who are willing and able to work but don't out of fear of oppressive rules which could result in the loss of their government benefits. Take the case of Susanne Brasset, who says she only keeps $5 in her bank account because she's "scared to save more" due to the risk that she might lose her social security "medicaid and other crucial benefits". Brasset goes on to confirm that:
"There’s more money I could be making, but I’m discouraged by all the rules I need to adhere to.”
How rude! We're truly disgusted that our government would seek to oppress the country's benefit recipients with outlandish rules aimed at determining a person's financial wherewithal prior to doling out billions of taxpayer dollars. This country claims it wants to protect its citizens but blatant taxpayer protections like this only serve to permanently impoverish marginalized segments of our electorate. Bloomberg describes these taxpayer protections as rules that are:
"intended to bar freeloaders [but] end up keeping disabled people in a permanent state of poverty, unable to put money away for emergencies, retirement, and other life goals."
How could anyone argue with that? But don't worry, as Bloomberg points out, there is a "loophole" that allows benefit recipients to save up to $100,000 without risking their taxpayer-funded benefits. Introducing ABLE:
ABLE is a savings account, created by Congress in 2014, that can be opened by or for people with a disability that began before they turned 26. Like a 529 college savings plan, ABLE accounts are run by states, which need to pass legislation of their own to create them. Just as investment gains in a 529 plan aren’t taxed if the money is used for higher education, the funds in an ABLE account are tax-free if they go toward disability-related expenses, a broad category that includes housing, education, health care, and basic needs.
ABLE goes only so far in fixing a confusing and frustrating system, but it does create a much-needed loophole. For some, the account offers a way to prepare for emergencies. For others, like 35-year-old filmmaker and activist Dominick Evans, it could let them save money that doesn't count toward the asset cap so they can work without losing benefits.
Strings are attached. Total contributions, whether by an account holder, friends, or family, are capped at $14,000 a year. If an account exceeds $100,000, the holder can lose eligibility for cash benefits from Social Security's Supplemental Security Income program until the overage has been spent. When a Medicaid recipient dies, the health insurance program for the poor can take the contents of an ABLE account as compensation for the care that was provided.
News of this option brought a huge sigh of relief from Susanne, who said that ABLE:
“…gives me peace of mind. Saving money should be a right to each and every American.”
We're a little fuzzy on our founding documents but admit that we missed the constitutionally protected right of all Americans to redistributed wealth.
- Boomers Again? What Another “Scorched Earth Generation” President Means For Gold
Submitted by Pater Diekmeyer via SprottMoney.com,
Donald Trump and Hillary Clinton’s acceptance as Republican and Democratic parties’ nominees for President sets the stage for the contest to begin in earnest.
Both Trump, who is 70, and Clinton, who is 68, were born in the post-war Baby Boom era. So were their vice-presidential back-ups, Mike Pence and Tim Kaine, as well as all U.S. presidents since Bill Clinton.
Gold investors thus need to consider the implications of a member of one of the most delusional, spendthrift, and amoral generations in history, occupying the White House for another four years.
After “the greatest generation” … “the scorched earth generation”
In his best-selling book “The Greatest Generation,” Tom Brokaw profiled Baby Boomers’ parents’ generation, which he described as “American citizen heroes, who came of age during The Great Depression and World War Two … united by common values – duty, honor, economy, courage, service, love of family and country.”
In their youth, Boomers, who were born between the mid-1940s and the early 1960s, stated loudly that they wanted to be nothing like their parents before them.
They succeeded.
Andrea Yalnizyan, of the Canadian Centre for Policy Alternatives, has described this privileged group, which replaced religion with consumption, as “the scorched earth generation.”
Not surprisingly, the records of U.S. leaders from the Boom generation have been disastrous.
Starting with Bill Clinton, through George Bush the Younger (who though born in 1943 was a child of a returning WW II veteran) and Barack Obama, Boomer presidencies have been characterized by increased government spending, borrowing, and money printing. More recently, they have introduced a new innovation: perpetual war.
Trump and Clinton’s pronouncements suggest if either were to take office, they would follow the paths of previous Boomer presidents. Their administrations would thus almost certainly be characterized by:
Delusional politics
Boomer Presidents have presided over what Chris Hedges characterizes of an “Empire of Illusion,” where image and spectacle trump (forgive the pun) reality. That includes governments that:
- Produce phony numbers (unfunded liabilities, off-balance sheet debts, massaged government statistics). Trump’s personal financial statements, which suggest that his personal brand name alone (excluding real assets) is worth more than $3 billion, provide a taste for what is in store.
- Extend and pretend, refusing to deal with current problems, ranging from insolvent financial regimes, bankrupt pensions and healthcare systems to climate change, but instead passing on the growing problems to their successors.
- Support captured regulatory bodies and oversight authorities (these include debt rating agencies and auditors who rubber stamp the most egregious misrepresentations, if their checks are big enough)
Bigger government
Baby Boomer presidents have all acted on the belief that there is no problem that cannot be solved by more government. The Clinton Administration was one of the first to use off-balance sheets liabilities in a material way, to disguise the unsustainable costs. George Bush the Younger nearly doubled the national debt and Barack Obama did so again.
Both Trump and Clinton look set to instigate continued government spending increases when they take office, this time financed with an innovation suggested by another Baby Boomer Ben Bernanke: helicopter money.
More wars from the Chicken Hawks
Millions of Boomers served the United States nobly in wars of questionable value, such as Vietnam. However, prominent Boomer leaders almost all ducked active military service. Calvin Trillin, of The Nation magazine, describes such folk, many of whom were active in promoting wars that others would fight, as “Chicken Hawks.”
These include George W. Bush (who avoided Vietnam by using family connections to get assigned to a National Guard unit, where he could get pilot lessons for free). Bill Clinton ducked military service by studying in England. Hillary Clinton was able avoid active duty because she was a woman. Donald Trump ducked out by getting a medical deferment.
In office, both Trump’s and Clinton’s avoidance of military service will put enormous pressure on them to “look tough.” Both will almost certainly buckle to such pressure. Clinton, for example, who in her early days on the scene was regarded as a dove, has been forced by political pressure to actively support almost every military action that the U.S. has ever undertaken.
The first generation to leave behind less than what they inherited
Both Trump and Clinton presidencies thus look set to continue favor the “Empire of Illusion” policies described by Hedges.
Under either’s stewardship, unless things change, Boomers will cap a dubious performance: they will be the first generation in U.S. history to leave behind a weaker country than the one they inherited.
In that climate, investors’ priorities need to be to minimize the damage to their portfolios. Return of investment, rather than return on investment, needs to be the main focus.
A sound investment strategy, in such an environment, would almost certainly be overweight in hard assets, which are grounded in the reality-based community.
- White House Caught Secretly Airlifting $1.7 Billion US Taxpayer Cash To Tehran To Ensure Iran Nuclear Accord Success
What Donald Trump has proclaimed the worst deal ever made, may just have become worst-er. The shocking truth behind the US-Iran nuclear deal, as WSJ reports, is that John Kerry and the Obama Administration airlifted $1.7bn of cash in 'compromise' payments (read – bribe) to Tehran to ensure the release of 4 captured sailors coincidentally the same weekend as the signing of the nuclear deal.
With all the chatter of helicopter money as solution to the western world's economic ills,The Wall Street Journal's Jay Solomon and Carol Lee expose, it appears The Obama Administration is already busily dropping cash where ever it needs things done in a hurry…
Wooden pallets stacked with euros, Swiss francs and other currencies were flown into Iran on an unmarked cargo plane, according to these officials. The U.S. procured the money from the central banks of the Netherlands and Switzerland, they said.
The money represented the first installment of a $1.7 billion settlement the Obama administration reached with Iran to resolve a decades-old dispute over a failed arms deal signed just before the 1979 fall of Iran’s last monarch, Shah Mohammad Reza Pahlavi.
The settlement, which resolved claims before an international tribunal in The Hague, also coincided with the formal implementation that same weekend of the landmark nuclear agreement reached between Tehran, the U.S. and other global powers the summer before.
“With the nuclear deal done, prisoners released, the time was right to resolve this dispute as well,” President Barack Obama said at the White House on Jan. 17—without disclosing the $400 million cash payment.
Of course, senior U.S. officials denied any link between the payment and the prisoner exchange. They say the way the various strands came together simultaneously was coincidental, not the result of any quid pro quo.
But U.S. officials also acknowledge that Iranian negotiators on the prisoner exchange said they wanted the cash to show they had gained something tangible.
Sen. Tom Cotton, a Republican from Arkansas and a fierce foe of the Iran nuclear deal, accused President Barack Obama of paying “a $1.7 billion ransom to the ayatollahs for U.S. hostages.”
“This break with longstanding U.S. policy [not to] put a price on the head of Americans, and has led Iran to continue its illegal seizures” of Americans, he said.
Since the cash shipment, the intelligence arm of the Revolutionary Guard has arrested two more Iranian-Americans. Tehran has also detained dual-nationals from France, Canada and the U.K. in recent months.
Perhaps most ironically, the Iranians did not want US Dollars…
Iranian press reports have quoted senior Iranian defense officials describing the cash as a ransom payment. The Iranian foreign ministry didn’t respond to a request for comment.
The $400 million was paid in foreign currency because any transaction with Iran in U.S. dollars is illegal under U.S. law. Sanctions also complicate Tehran’s access to global banks
The Obama administration has refused to disclose how it paid any of the $1.7 billion, despite congressional queries, outside of saying that it wasn’t paid in dollars. Lawmakers have expressed concern that the cash would be used by Iran to fund regional allies, including the Assad regime in Syria and the Lebanese militia Hezbollah, which the U.S. designates as a terrorist organization.
…
Mr. Kerry and the State and Treasury departments sought the cooperation of the Swiss and Dutch governments. Ultimately, the Obama administration transferred the equivalent of $400 million to their central banks. It was then converted into other currencies, stacked onto the wooden pallets and sent to Iran on board a cargo plane.
On the morning of Jan. 17, Iran released the four Americans: Three of them boarded a Swiss Air Force jet and flew off to Geneva, with the fourth returning to the U.S. on his own. In return, the U.S. freed seven Iranian citizens and dropped extradition requests for 14 others.
We leave it to Sen. James Lankford (R., Okla.) to conclude:
“President Obama’s…payment to Iran in January, which we now know will fund Iran’s military expansion, is an appalling example of executive branch governance,… Subsidizing Iran’s military is perhaps the worst use of taxpayer dollars ever by an American president.”
And now comes the big test of the mainstream media in America – can they stop discussing Trump and Khizr Kahn for long enough to question the deliberate obfuscation of facts in yet another foreign policy snafu by the administration?
- D-Day For Australia's Real Estate Bubble?
Submitted by Pater Tenebrarum via Acting-Man.com,
Unknowable Degrees of Bubble Insanity
Back in February, we brought you an update on the truly insane real estate bubble in Australia (see: “Australia’s Housing Bubble – In the Grip of Insanity” for details) in the wake of Jonathan Tepper of Variant Perception reporting on an eye-opening fact-finding tour in Sydney.
This rotting shack in Sydney and its tiny plot of land sold for nearly $1 million in May of 2014 – more than two years ago. Since then, house prices in Australia have increased even further. Yes, it is an insane bubble, no doubt about it.
As every seasoned market observer knows though, the fact that a bubble has obviously attained crazy proportions does not mean it cannot become even crazier. We only need to think back to the Nikkei index in the late 1980s, the Nasdaq in the late 1990s, or the grand-daddy of modern-day bubble insanity, the Souk Al-Manakh bubble in Kuwait in the early 1980s.
The latter example is generally less well known than the others, but it is unsurpassed in terms of sheer mass dementia. What made this bubble so special – at its peak Kuwait’s stock market had a total capitalization of more than $100 billion, which made it the third-largest equity market in the world behind the US and Japan at the time, a fact that should have told market participants they were skating on very thin ice – was the use of post-dated checks to pay for stock purchases.
The bubble needed a trigger to pop, and that trigger was delivered when one day, a single one of these post-dated checks actually bounced. One of the biggest market crashes in history ensued – a truly dramatic wipe-out, that in the end destroyed the country’s entire OTC stock market.
As we have pointed out previously, while residential real estate is actually a consumer good, analytically it should be treated as akin to a capital good maintained over several consecutive stages of production, as it renders its services over a very long period of time (the same principle holds for other durable goods – see J.H. de Soto, Money, Bank Credit and Economic Cycles).
One implication of this is that interest rates are very important to the valuation of real estate. At present, the administered central bank interest rate in Australia is at a new low, and since it remains actually high compared to similar rates in other developed countries, it may well decline even further.
Australia’s administered central bank interest rate – click to enlarge.
Gross market rates all over the world have so far continued to follow the downtrend in central bank rates, so the market has yet to reassert itself (we plan to post an in-depth discussion of the current trend in gross market rates soon). As long as rates remain low, real estate bubbles tend to remain well supported.
Let us not forget, the bursting of a number of housing bubbles in 2006-2009 (in the US, Spain and several other countries) was preceded by a slow but steady increase in interest rates and a sharp slowdown in money supply growth in the major currency areas. Neither one nor the other are in evidence in Australia at present – at least not yet.
Australia’s narrow money supply M1 has grown sharply in recent years (the pace of the advance is comparable to the pre-2008 era) – click to enlarge.
An Important New Development
One of the reasons why interest rates are so important in keeping residential real estate bubbles from imploding is that they make otherwise unaffordable properties seemingly affordable.
Most home buyers use mortgages to finance house purchases, and the size of the monthly payment is therefore a main criterion in terms of affordability. Given that these are usually very long term loans with terms ranging from 15 to 30 years, the level of interest rates makes an enormous difference.
Below is a slightly dated chart via Variant Perception (ending in Q2 2015) that compares Australian home prices, household incomes, rents and construction costs. It should be obvious how irrational house prices have become in light of the huge gap that has opened up between these time series.
The chart also demonstrates that low interest rates are indeed of overwhelming importance in sustaining these sky-high prices. There is certainly little else that will.
Australia: house prices vs. household income, rents and construction costs.
Keep in mind though what we have mentioned in the annotation to the chart of Australia’s money supply above. The credit expansion that has been the driving force of the bubble has largely been the work of commercial banks. While the central bank has enabled them to offer loans at lower and lower rates, it is their willingness to actually do so that is decisive.
Another chart illustrating the importance of interest rates to Australia’s housing bubble: the share of “interest only” mortgage loans, the principal of which is settled with a balloon payment at the end of their term. The influence of rates on the size of the monthly payment is even greater in these cases.
One of our readers has recently made us aware of a recent development that may well throw a major spanner into the works. Similar to what has happened in other desirable destinations, Chinese buyers have played an increasingly important role in Australia’s property market. They have been especially active in the market for condominiums, which has experienced an extremely pronounced boom as a result.
What we were hitherto not aware of was the extent to which these buyers have actually obtained financing from Australian banks. This source of funding is now threatening to dry up. The banks are pulling back after learning that many of the loan applications seem to be fraudulent.
This happens to coincide with a noticeable surge in supply in the market – many developments that have been started in order to cash in on the huge gap between prices and construction costs are now finished or about to be finished (we can picture a great many “ghost apartment blocs” in Australia’s future).
As the Financial Review reports:
“Off-the-plan buyers of Australian apartments are in crisis as tough new borrowing rules mean thousands of investors who have paid a deposit are struggling to complete their purchases, according to local and overseas mortgage brokers and financiers.
Shanghai-based financiers claim their Chinese clients’ funding from Australian banks has been frozen and they face foreclosure – or usurious interest rates – from private financiers. Australian financiers claim their local clients, many of them Asian, have had their settlements deferred by three months to find alternative funding.
“All the deals have been frozen,” said Mark Yin, an agent with Shanghai-based Home Tree Group, about his Shanghai clients’ funding with Australian banks. “We are now looking for finance all over the world.”
Mr Yin said this represented nearly 100 per cent of his clients who were waiting for properties to be completed in Australia and that most of the apartments were in the Melbourne CBD.
Melbourne-based Marshall Condon, chief executive of mortgage broker Neue Black and who also has off-shore and local Asian investors, added: “In the next three to 12 months, many investors will be applying for funding to complete their deals, however, they will be become increasingly concerned as they discover funding is limited.”
Billions of dollars has been invested in tens-of-thousands of high-rise apartments that are reshaping the skylines of the nation’s major capitals, particularly Melbourne, Sydney and Brisbane. Most have been sold off-the-plan, which means purchasers buy off the blueprint with a deposit and complete when it is built, which requires a second valuation and financing commitment by the lender. But a huge increase in supply has slowed demand, particularly around Melbourne’s CBD, pushing down prices.
Lenders, which initially fell over themselves to finance overseas’ buyers, slammed on the breaks when spot checks on the loan applications detected widespread fraud. The main problem is mainland Chinese buyers, which account for about half of the deals. That means many local lenders that agreed to provide funding when buyers made deposits, will not recommit upon completion.
Nervous local lenders fear that a sharp downturn, or change of sentiment, could result in foreclosures with overseas borrowers they have little chance of locating. Mortgage brokers, who receive their commissions upon final completion, are nervous they will not be paid for negotiating deals and financing.
Developers, some of whom have already canceled projects, are concerned about financing existing and future projects. It also has potentially big economic impact for local consumer sentiment, building services and government revenues.
Overseas financiers, typically based in Singapore and Malaysia, are working on rescue packages for borrowers by creating private bail-out funds, or buying apartments off stressed purchases, which means they lose their deposit. They include rolling five-year terms, starting at 7.5 per cent, or one-year emergency loans at 12 per cent, according to financiers.
Other packages are stepped-loans where the different amounts of the loan have different rates, invariably several times higher than Australian lenders’ standard variable or fixed rate loans. For example, Australian banks and other local lenders are offering three-year fixed rates at below 4 per cent. Home Tree Group’s Mr Yin said so far he was unable to secure funding for his clients and doubted they would be able to settle.
“I have now stopped dealing in Australian property,” he said. Another agent in Shanghai, the chief executives of Iron Fish China Lanny Xu, said while most of his clients were not affected by the change, around 20 per cent were trying to on-sell apartments as they were unable to complete settlement.
He said of some were looking to banks in Singapore for financing, as they were still happy to extend loans over Australian property. “The cost of funding in Singapore is higher than in Australia,” he said.
Mr Xu said another option was to seek finance from newly established mortgage funds, which were looking to fill the gap left by the withdrawal of Australian banks from the market. He said such funds were charging interest rates of between 8 per cent and 12 per cent.
Scott Kirchner, the manager of Bella Resident in China, said the inability of offshore buyers to access finance was “really starting to bite”. “We are reluctant to take on new clients unless they have 100 per cent of the cash for a property,” he said. “But then there’s the issue of how do they get the money out of China.”
(emphasis added)
In other words, a number of buyers are now faced with a sudden increase in interest rates from 4% to between 8% to 12% – regardless of the administered interest rate of the RBA. It is of course possible that the effect will once again stay local (i.e., confined to Melbourne and condominiums), similar to what happened when commodity prices collapsed.
The downturn in commodities led to sharp declines in property prices in regions and towns close to mining activities. However, house prices in the big cities continued to soar – not least because the RBA cut rates in order to offset the impact of the commodities bust.
It is definitely possible though that this latest development is actually the pin that finally pricks the bubble. As noted above, in Kuwait a single bounced check reportedly triggered an avalanche. The Souk Al-Manakh bubble is certainly not directly comparable to Australia’s housing market, but when a bubble is already very stretched, something will eventually trigger its demise – at times it can even be a seemingly small event.
Condominium high-rises in Melbourne – to date the consensus was that the market “might” be oversupplied by 2018 – it appears as though this juncture has been brought forward.
Conclusion
It is a very good bet that many of the condominium high-rises built in anticipation of ever-growing demand and an unimpeded expansion of bank credit will turn out to have been unwise investments. As Ludwig von Mises reminds us in Human Action, these malinvestments become visible once the banks are getting cold feet and are beginning to pull back – which is precisely what seems to be happening in this case.
However conditions may be, it is certain that no manipulations of the banks can provide the economic system with capital goods. What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The boom is built on the sands of banknotes and deposits. It must collapse.
The breakdown appears as soon as the banks become frightened by the accelerated pace of the boom and begin to abstain from further expansion of credit. The boom could continue only as long as the banks were ready to grant freely all those credits which business needed for the execution of its excessive projects, utterly disagreeing with the red state of the supply of factors of production and the valuations of the consumers. These illusory plans, suggested by the falsification of business calculation as brought about by the cheap money policy, can be pushed forward only if new credits can be obtained at gross market rates which are artificially lowered below the height they would reach at an unhampered loan market. It is this margin that gives them the deceptive appearance of profitability. The change in the banks’ conduct does not create the crisis. It merely makes visible the havoc spread by the faults which business has committed in the boom period.
– L.v. Mises, Human Action p. 559
(emphasis added)
It is probably still fair to say though that an outbreak of caution on the part of lenders is a trigger for the bust, in the sense that the illusory accounting profits generated during the boom period will suddenly disappear.
Of course it remains to be seen if this recent development will have wider implications for Australia’s real estate bubble or if the central bank’s loose monetary policy will continue to trump such disturbances in the farce. This is one development though which the RBA cannot really influence – it is essentially a major rate hike affecting an important group of buyers, and it seems as though a lot of hitherto anticipated demand simply won’t be there.
Bonus picture: the back of the $1 million shack. Just in case you thought it might look better from a different perspective…
- Welfare Is The New Work
Authored by Stephen Moore, published Op-Ed at The Washington Tmes,
The welfare state of mind has spiraled out of control in America…
Two recent news stories highlight how pernicious the welfare state has become in America today.
The first was an announcement by the feds that food stamps can be used to have groceries delivered right to a recipient’s door. Service with a smile. The Obama administration says it is too much of a hardship for those on welfare to actually travel to the grocery store. What’s next? Cooking the meal for them? If only the DMV would do home deliveries for drivers licenses.
The second story was about the hullabaloo over a proposal by Maine governor Paul LePage to prohibit food stamp recipients from using their food aid to purchase junk foods like sugary soft drinks and candy bars. He says that the state has an obesity problem and he will “implement reform unilaterally or cease Maine’s administration of the food stamp program altogether.” The Obama administration rejected his request and the left activists act as if the idea that a welfare recipient can’t buy a pint of Ben and Jerry’s ice cream at taxpayer expense is a violation of civil liberties.
The welfare/entitlement state of mind has spiraled out of control in America. No one is lifting a finger of opposition. The cost of welfare is now well over $1 trillion a year. Food stamps are so ubiquitous that they have replaced dollars as the new standard currency in many inner cities in America. Even in affluent areas with upscale grocery stores, food stamp recipients fill their carts with everything from cakes to lobster.
Liberals love welfare. It was only a few years ago that Democratic House leader Nancy Pelosi opined that putting more people on food stamps and unemployment insurance is one of the “best ways to stimulate the economy.” Which is more astonishing? That she believes this lunacy or that she would be dumb enough to say it out loud.
We are in the seventh year of a so-called recovery, yet 45 million Americans depend on taxpayers to put food on their table. This is roughly 5 million more than when President Obama took office. Medicaid rolls have exploded by more than 10 million, too, and Mr. Obama openly boasts about how many people he’s moved into the program. Unemployment insurance beneficiaries have fallen, thankfully, but the number of Americans collecting disability has continued to climb. Wow this is some recovery.
By the way, disability rolls are growing even as worker safety has hit an all-time high. Shouldn’t safety and automation mean fewer disabled workers? The reality, as everyone in the welfare industry knows, is that food stamps and disability are the new welfare. Neither one of them requires work in exchange for benefits.
No one wants to admit that the ease of entry into the welfare state and the generosity of the benefits is one big reason why labor force participation has collapsed. Why work?
Welfare expert Peter Ferrara notes that a big instigator for the welfare state expansion has been the decimation of welfare reform laws passed in 1996. “It’s infuriating that a law that worked incredibly well in lowering costs and getting the unemployed into the workforce, has been largely gutted,” he concludes.
As a result, the Census Bureau tells us that most families that are in poverty have no one working. Poverty is still widespread in America not because wages are too low, but that fewer poor people have a job. If there are no wages earned at all, it is impossible to get out of the poverty trap.
Welfare incentivizes non-work in many other ways. Former George W. Bush economist Larry Lindsey reports that welfare recipients generally lose at least 50 cents of every dollar benefit they gain in wage and salary from working. Sometimes the benefits fall by 70 cents per dollar earned. So a $12 an hour job returns as little as $4 an hour of extra income. Why work?
Democrats in Congress have vociferously opposed putting even baby teeth back into work for welfare requirements. Even modest workfare requirements are denounced as anti-poor. So even a proposed federal law mandating work for food stamp recipients who are non-disabled adults without kids got shot down.
We know that changing welfare laws can have a very positive impact on getting recipients back into the workforce and off welfare. In North Carolina when unemployment benefits were reduced and the number of weeks of benefits were limited, entry into the workforce shot up. Entry into the workforce grew by more than nearly any other state in the country. Go figure.
In Maine, we saw a similarly remarkable result from work requirements. According to a Heritage Foundation report: “SNAP recipients in Maine totaled 201,151 in April of 2015 — a decline of more than 28,000 in just one year. The number of ABAWDs — Able-Bodied Adults Without Dependents — in Maine declined about 80 percent” to 2,530 in 2015 from 12,000 prior to the work requirement.
This result was in line with the federal work for welfare requirements enacted in 1996. Caseloads fell by more than half and costs of aid tumbled. So why aren’t Republicans pushing workfare for all federal welfare recipients? Some are afraid that they will be viewed as hard-hearted or even cruel. But getting people off of welfare into a productive job is not just a way to reduce costs, it’s a proven way to rebuild broken lives and move people into the mainstream. There is dignity in work. There is despair in welfare. After three generations of the failed entitlement state, hasn’t welfare done enough harm to the very people it was supposed to help.
- July U.S. Auto Sales – The Good, The Bad, & The Downright Ugly
Ford (-3.0% vs. -0.5 est), GM (-1.9% vs. -1.0 est) and Fiat Chrysler (+0.3% vs. 1.9% est) all posted headline misses on July auto sales with a modest “beat” from Toyota (-1.4% vs -1.9% est) even though its sales were still down YoY. Looking past the headlines, however, the data is even worse. Ford sales to retail customers (i.e. stripping out fleet sales where they make no money) were down 6% while Fiat Chrysler was down 2%. GM managed to grow retail sales 5% YoY but only after increasing incentive spending 29% over the competition to 14.2% of total retail value….WINNING! Ford and GM stocks were punished on the misses.
According to headline data, truck sales took a big leap higher in July…but the devil is in the details. Most of the truck gains for Ford came from cargo vans which were up 35% YoY while its F-Series pickup truck was down 1% and SUVs were down 5.3%. GM posted higher unit sales of trucks, albeit on higher incentive spending, but mix shifted from the higher MSRP Silverado (units down 4% YoY) to the lower priced Colorado and Canyon models which were up 27.5% and 33.1%, respectively. Chrysler reported a 2% YoY increase in Dodge Ram sales.
Overall, July sales were slightly positive YoY but stripping out fleet sales would paint a very different picture.
Inventory-to-sales remained near all-time highs excluding the 08/09 recession.
Investors punished Ford and GM stocks for their efforts.
Please see below for additional thoughts on company-specific performance:
Ford – Ford posted a big miss at -3.0% YoY vs. consensus of -0.5%. Retail sales showed a terrible decline of 6% YoY which were offset by 6% growth in less profitable sales to rental companies and government agencies. Overall Ford sales were certainly boosted by GM’s 42% decline in fleet sales. The key money makers for the OEM were down across the board YoY with SUV sales off 5.6% (Explorer down 22%; Escape down 10%; Edge up 5%) and F-Series sales off 1%. Ford said average pricing per vehicle grew $1,600 YoY primarily on mix shift.
GM – GM also posted a big miss at -1.9% YoY vs. consensus of -1.0%. GM estimates their market share grew 1% in July to 17.9%. GM retail sales came in at +5% YoY and
fleet sales down a massive -42%, which they described as “plan”. Retail sales growth came at a substantial cost to the OEM with incentive spending for July way up to 14.2% vs. an average of 11.0% for the industry overall as GM sought to clear out old inventory. Days of inventory on dealer lots declined MoM to 66 days from 72 days.Fiat Chrysler – Fiat Chrysler posted a miss at +0.3% YoY vs. consensus of +1.9%. That said, the headline number was driven by fleet sales with retail sales down -2% YoY and lower-margin fleet sales up +22%. Popular Jeep lines struggled with Wrangler down -5% and Cherokee down -12% while Ram trucks increased +2% YoY.
Toyota – “Beat” with sales of -1.4% YoY vs. consensus of -2.9%.
Honda – Beat with sales of +4.4% YoY vs. consensus of -0.4%.
Nissan – Missed sales of +1.2% YoY vs. consensus of +3.0%.
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