Staying afloat in an economy running aground

Amid all the shouting and tumult of the current protests and riots around the country, it's easy to lose sight of the sobering economic reality all around us.  That's dangerous.  Our economy is in a very poor state indeed, and it's getting worse, not better.  We need to be alert to what's happening, and take what steps we can to protect ourselves.

The first point to remember is that financial authorities around the world are basically losing control.  They're guilty of what Einstein defined as insanity:  doing the same thing over and over again, expecting different results.  We aren't yet seeing all the effects of that in our day-to-day buying and selling and earning:  but it's rapidly getting to the point that we will.  What goes on beneath the surface affects everything happening on top, as we're about to find out.

In the USA, the Fed is pumping trillions of dollars into the bond and securities market, but it's doing no more than barely keeping the ship afloat.  It's pumping out just enough water to balance that flooding in through the leaks - but the leaks are getting larger and larger.  As David Stockman points out:

Here’s an eye-opener to put this madness in perspective. Annual federal outlays posted at $3.896 trillion in 2014 and were the product of 225 years of relentless expansion by the Leviathan on the Potomac.

But it now appears quite certain that the annual deficit in FY 2020 will actually be larger than the total spending level that took more than two centuries to achieve.

That’s right. Owing to the mushrooming coast-to-coast soup lines hastily erected by Washington in response to the collapse of jobs, incomes and business cash flows brought on by Lockdown Nation and the evaporation of tax revenues, Uncle Sam will borrow more this year than the total spending just six years ago.

Stated differently, back in the day, we struggled to keep total federal spending during 1981 under $700 billion. By contrast, the Donald has borrowed nearly 4X that in the last 90 days!

So, yes, perhaps Trump’s one truthful boast is that he is indeed the king of debt.

Needless to say, there is nothing remotely rational, plausible or sustainable about an FY 2020 budget that’s going to end up with revenue south of $3 trillion and spending north of $7 trillion.

That’s not even banana republic league profligacy; it’s just sheer stupidity and madness, bespeaking a bipartisan duopoly in Washington that has had its collective brains turned into sawdust by the relentless, egregious money pumping of the central banks.

For want of doubt, just consider what has happened since March 11 on the eve of the Lockdown Nation’s commencement.

The public float of federal debt has soared from $17.85 trillion to $20.24 trillion, gaining $2.39 trillion;

The Fed’s balance sheet has exploded from $4.31 trillion to $7.17 trillion, gaining $2.86 trillion.

The Fed has, therefore, effectively monetized 119% of the gain in the publicly traded Treasury debt.

There's more at the link.

President Trump is not the sole arbiter of such nonsensical spending, of course.  He's being guided by the "experts" at the Federal Reserve and other financial institutions, who are doing all they can to protect themselves and the nation's banks.  Often they're acting independently in doing so, without asking the President's permission at all.  They aren't interested in what might happen to the rest of us in the process.  They did the same to President Obama, and President Bush before him.

There are two nations on earth whose Gross Domestic Product exceeds $2.86 trillion dollars, namely the USA and China:  yet the Federal Reserve has increased its balance sheet (and the debt owed by the US taxpayer) by that amount in less than four months.  That's beyond insane.  It's so catastrophically horrible that I don't have words to describe it.  We're all on the hook for that expenditure, in the name of the "full faith and credit of the United States" - yet it's been manufactured out of nowhere, digital binary ones and zeros in a computer somewhere.  There's no economic output to generate it, no business and commerce to justify it.  It's just numbers - but those numbers are burying us, because we'll have to repay them sooner or later, and we can't.  They're so large it's not humanly possible to do so.

What's more, if the dollar should lose its status as an international reserve currency because of this debt overhang, what will replace it?  Gold?  The Chinese renmimbi?  Neither looks very sound in the light of yesterday's news.

... one market which seemed stubbornly immune to any counterfeiting was that of physical gold in China, which was odd considering that over the past decade China had emerged as the world's biggest counterfeiter of various, mostly industrial metals used to secure bank loans, better known as "ghost collateral", and which adding insult to injury, would frequently  be rehypothecated meaning often several banks would have claims to the same (fake) asset.

All that is about to change with the discovery of what may be one of the biggest gold counterfeiting scandals in recent history.

. . .

... more than a dozen Chinese financial institutions, mainly trust companies (i.e., shadow banks) loaned 20 billion yuan ($2.8 billion) over the past five years to Wuhan Kingold Jewelry with pure gold as collateral and insurance policies to cover any losses. There was just one problem ... at least some of 83 tons of gold bars used as loan collateral turned out to be nothing but gilded copper. That has left lenders holding the bag for the remaining 16 billion yuan of loans outstanding against the bogus bars. And as Caixin adds, the loans were covered by 30 billion yuan of property insurance policies issued by state insurer PICC Property and Casualty and various other smaller insurers.

. . .

The 83 tons of purportedly pure gold stored in creditors’ coffers by Kingold as of June, backing the 16 billion yuan of loans, would be equivalent to 22% of China’s annual gold production and 4.2% of the state gold reserve as of 2019.

In short, more than 4% of China's official gold reserves may be fake. And this assume that no other Chinese gold producers and jewelry makers are engaging in similar fraud (spoiler alert: they are.)

Again, more at the link.

That's just one company out of thousands - perhaps tens of thousands - of investment companies, private banks, and other corporations that fund the day-to-day operations of China's economy.  If you think it's the only one to engage in such massive fraud, you haven't been reading Chinese economic news over the past few years.  There have been scores, perhaps hundreds of them.  Follow these links for just a few examples:

• This Banking Fraud Shows How Shady China’s Economy Remains
• Booming Fraud in China:  Decoding Chinese Fraud Environment
• Chinese province admits falsifying economic data for years

China's "economic miracle" may be resting on very shaky foundations indeed - and whether we like it or not, China has become the main manufacturing engine of the world's trade.  If it falters, everyone suffers.

That danger is confirmed by a good hard look at Chinese economic figures.  They show, not just private, but official fraud and economic obfuscation.

World trade ... had already taken a hit starting in late 2018, as tariffs, counter-tariffs, and threats of tariffs jiggled supply chains around. By December 2018, the index was down 1.2% from a year earlier. Year-over-year declines became a regular feature starting in June 2019. Then in March, the index dropped 5.4% year-over-year, and in April 16.2% year-over-year. This brought the index down 18% from the peak in October 2018, and back to where it first had been in January 2008.

. . .

The CPB obtains the data for the World Trade Monitor and for the individual countries from the official statistical data releases by each country. The exports of all major regions and countries plunged in March and April. There is one exception: China. In China, based on the official data released by the Chinese government and used by the CPB, neither imports nor exports ever really got hit this year at all.

This contradicts absolutely everything else we know about trade with China, including what major container carriers have said, and how they have slashed capacity to and from China as trade between China and the rest of the world spiraled down. But miraculously, it doesn’t show up in China’s official data.

China’s data has always been whatever the government wants the world to think it is. But the pandemic elevated China’s data to new and unprecedented levels of deep-fake status all around.

With imports and exports, however, cheating invariably comes to light: China’s exports show up as imports by other countries, and China’s imports are other countries’ exports. When global trade goes to heck in a straight line ... but only China’s imports and exports pretend nothing has happened, then we have to wonder: Who exactly was China trading with? The Martians?

And this puts forward a second thought: Given that China’s import and export data were fake during the pandemic, and should have been a lot lower, the overall World Trade Monitor, which includes China’s fake data – and with China being a massive factor in global trade – should have been a lot lower in reality as well.

More at the link.

All the reports I've cited above are looking at economic conditions below the surface of normal business and commerce.  They're the underlying reality on which our everyday economic activity is based.  If that underlying reality is a lie;  if it's based on fiscal jiggery-pokery, and falsified gold and monetary reserves, and inaccurate and unreliable economic data, then we have no sound foundation at all on which to base our decisions.  We're forced to operate "by guess and by God" - and anybody's guess is as good as anyone else's.  Unpredictability becomes the order of the day.  How can any business know what's "safe" to make, or sell, or buy, if none of them know what tomorrow may bring?  How can any consumer plan their budget if they don't know whether the job(s) on which they rely to bring in their income will be there next week, let alone next month?

That being the case, it behooves all of us to prepare for the struggle ahead.

• Get out of short-term debt as far as possible, and minimize long-term debt repayments to the lowest possible level (if necessary by refinancing debt).
• Build up a reserve fund of cash on hand, not in the bank, but stashed somewhere safe.  If banks shut down, you need to be able to access your money.  I strongly suggest saving up to three months' expenses;  six months is better;  a year provides very useful peace of mind.  Most of us can't afford anything like that, but we can at least build up a few weeks' reserve.  That's better than nothing.
• Build up reserves of essential foodstuffs and domestic supplies, so that if cash becomes tight, you can live off your reserves for at least a period.  I think a minimum of 30 days' reserves is essential;  three months is better;  and you should extend that as far out as is practicable, depending on your storage space and your budget.  I don't think a year is excessive, although it may be unaffordable for many of us.
• Build a network of friends and acquaintances who can help each other through the hard times.  If one is good at plumbing, he can do that for the others in exchange for help with maintaining his vehicle.  Another can offer electrical repairs in exchange for work in his garden.  A third might clean out gutters in return for a meal for himself and his family.  Barter goods and services with each other, and also consider working together to secure your homes and neighborhoods.  In tough economic times, the riots we're already experiencing will turn into "feral youth shopping expeditions".  Be prepared to deal with them.
• Stand ready to support each other financially, if necessary.  If a breadwinner loses his or her job, that family may find itself in really difficult circumstances.  Be willing to help them out, in the knowledge that when your turn comes (as it probably will), the same help will be available to you.  "Do unto others as you would have them do unto you."  It works.
• By all means, take advantage of any and every government program to help in economic hard times.  You'd be a fool not to do so.  We can see what's coming, so let's grasp every lifeline available, and make the best use of it.  However, in doing so, never let the government seize control of your future.  Keep it at arm's length.  Remember President Ford's warning:  "A government big enough to give you everything you want is a government big enough to take from you everything you have."

Keep your powder dry, friends - economically and in every other way.

Peter