Saturday, March 23, 2019

A Modest Proposal....

TO: Don @realDonaldTrumpMike @VP, Mitch @McConnellPressKevin @GOPLeaderChuck @SenSchumerNancy @SpeakerPelosi,
Steny @LeaderHoyer,  Lindsey @LindseyGrahamSCAlexndria @AOC,
Sherrod @SenSherrodBrown , Bernie @SenSanders, Rob @senrobportman
Steve @stevenmnuchin1Jay @federalreserve 

I hope you all are well.  As you of course know, after close of business on Friday, Bob finally delivered his long awaited report to our Attorney General.  I'm sure we're all looking forward to reading Bill's abbreviated "nothing to see here" presumably partisan summary of same.  Don, I'm also grateful that you've supported the idea of making the full report public, so we can all finally move on.  America is grateful.  Whether the report indicates we need wholesale regime change/resignations/indictments or a tacit understanding that there is no "there" there, I think we can all agree that we need to make whatever decisions we need to make expeditiously so we can all get this behind us as soon as is practical.

Anyway, even though this report will probably be consuming much your time, and although, I'm sure, difficult for you, I'd like you, for the moment, to set it aside and move on to a different, dare I say, much more important topic.

We have work to do.  We have to save the Western Financial System.

As always, for those of you following my work, you'll know that the really important concepts are in RED below.  Feel free to skim past my humorous, anecdotal banter if you are pressed for time.

As you know, we Americans have been following your careers (and the careers of your predecessors) closely for quite some time now.  I think we can all agree that your collective progress, in no particular order, on Health Care, Taxation, Education, Environment, Infrastructure, 2nd Amendment issues, Drugs, Immigration, Banking/Financial/Market Reform, Trade, Monetary Policy, Consumer Protection, etc. etc. etc. has indeed been, well,  remarkable.  We appreciate your effort.

To be direct, what's also remarkable, is that in an effort to remain in office, you have all come to believe that through your collective efforts and carefully crafted public relations campaigns, you have been able to appeal to our darkest, most destructive, visceral emotions and fears, convincing roughly half of the American electorate (based on any poll of your choosing) that you and your counterparts on the other side of the aisle are all to be despised and vilified with a passion heretofore unimaginable, by roughly one half of the electorate or the other.  This is an incredible, unthinkable, yet effective achievement and quite a prolific legacy indeed.   You should all be proud.

The partisan, petty and often patently false distractions and narratives that you and your constituents have all chosen to shout from the mountaintops, bring front and center, and elevate to an unproductive, destructive public debate, is something I could not imagine seeing in my lifetime.  I may be overstepping my bounds here, but like emotionally damaged children forced to watch their dysfunctional parents scream, fight and antagonize each other, I'd suggest that most of us Americans would prefer to have the ugly, legislative sausage making done behind closed doors.  But, alas, here we are.  Through your carefully choreographed public displays of disturbing, irrelevant discourse, our reputation as a nation is quickly evolving from the "shining city on the hill" to a "how to" manual for, every third world Banana Republic on the planet.  (I'm sure I'll get hate email from "Banana Republic" supporters for that last comment.....but I digress.)

For the love of God.....Please focus....

At any other time in history, my reaction to your antics would have been, "Geezzz.....what a mess....but that's Ok.....we've got a strong democracy and another election on the way....American voters are good hearted and wise...we'll find some reasonable people to put in office and we'll get through this..."

Unfortunately, today, delay and "waiting" for the next election is no longer an option.  We are quickly running out of time.  Unless you folks are incredible poker players and you are somehow feverishly working together as a cohesive unit behind the scenes to implement workable versions of the policies I'm going to discuss below, the American dream as we've known it, is doomed to extinction.

That said, I feel compelled, as an American citizen, to speak up.  I'm trying to help you.  I'm trying to help you save Western Civilization.


The Threat to Western Civilization

If you have indeed been following my work, and I know some of you (or your staffs) have been (Google Analytics is a wonderful thing), you are at least suspicious that I might actually be on the right track.  I'll refer you to four recent posts (Below) which you might find informative, but if you already believe that the following thesis (in RED) may indeed be accurate, or at least merit further investigation, there's no need to rehash the concepts here.  I'd refer you to Jay, Steve and their teams, as they have a much greater/better resource/data-set than I have access to.

Dalio's Big Debt Crisis....the FSB Report and Financial War Games....  

Keeping is Simple....China has $50.1 Trillion of Brand New Financial Assets

Twas the Night Before Christmas....

When will Xi Click the "Sell Button"

I'll also cite two excellent and extremely wonkish BIS working papers, written, of course, using generally unintelligible economic jargon (Below) which also reference what we're discussing today.

Triffin: dilemma or myth?

FX swaps and forwards: missing global debt?

Again, no need to wade through these two working papers if you don't have time, I understand you folks are busy.  I'll try to sum both of them up in a sentence or two.  The "Triffin" paper discusses the history of monetary policy, debating the legitimacy of Bob Triffin's "Dilemma", that America at some point will be unable to supply enough "safe" dollar assets and reserve currency to satisfy the global demand for same.  Referenced and described in the "Missing Global Debt" paper, as of 2017 there are at least US$21.4 Trillion (both Balance Sheet and Off-Balance Sheet) of known, non-bank dollar debt lurking outside of the United States. (i.e. out of the FED's purview)  That amount is growing rapidly.  The looming question is whether the FED, when subjected to demands for Eurodollars (and now clandestinely, and more appropriately, "Chinadollars"....as a point of reference, I believe I'm actually coining the phrase "Chinadollars" in this post, since most economists don't believe or understand that they actually exist) could effectively backstop a dollar shortage. The thinking is that It would be much more difficult to do so now, as off-shore dollar (Eurodollar & Chinadollar) requirements are much larger than they were prior to the Great Financial Crisis.  The requirements, to support exchange rate equilibrium are also growing rapidly.  Any rescue package the FED puts together would have to be on a much larger scale today.  The conclusion of both of these, in my words rather than the respective authors, is that we are in uncharted territory.  Western Central Bankers will be putting in some overtime at some point soon.

Jay, I think you know what I'm talking about....I'm guessing this is what drove your "pivot" and keeps you up at night.  I have to say, that after your 60 Minutes interview I'm a bit concerned that you don't see this tsunami coming.  Perhaps you are just trying to calm the masses and project an air of confidence.  I certainly hope that's the case.


Unfortunately, I have this recurring nightmare that you and the other governors are in the cockpit of an out of control airliner, you've skipped a few  training classes and are frantically paging through the operators manual.  With the frightened passengers screaming in the background, your eyes widen as you discover the manual is written in Mandarin....That's when I wake up in a cold sweat.       

Jay Powell - 60 Minutes - Full Transcript & Inverveiw - All is well.....
https://www.cbsnews.com/news/jerome-powell-federal-reserve-chairman-60-minutes-interview-2019-03-10/

In normal, regular, every-day, non-economist lingo, as far as you folks are all concerned, here's where we are today:

In a nutshell, here are our two choices:

Option #1.) Disengage with the Chinese under a managed policy, temporarily disrupting both Western and Chinese economies and markets, leaving the lion's share of the inevitable global economic pain to be absorbed on mainland China. Or.... 

Option #2.) Continue on the current path, allowing the CCP to destroy the US and Western economies, filling the void with their own shell game ideology, eventually breaking the dollar as the world's preferred reserve currency.

The obvious problem with this decision tree, is that "Option 2", kicking the can forever down the road, which ends with the US ceding financial hegemony to the CCP, actually keeps all of you in office and supports the current status quo until it's too late to prevent the collapse of Western financial systems.  Ouch!  

Whereas, "Option 1", the option where we survive financially as the leaders of the free world, and our own corrective fiscal and financial policies (i.e. those designed jointly by both Republicans and Democrats) will temporarily depress asset values, destroy market cap (Apple, Walmart, Amazon, American Retail, our Large/Global Banks and any business with a Chinese supply chain significantly embedded in their business model, etc. etc.)....and cost millions of global jobs, does, unfortunately, not keep all/any of you in office...any politicians (you) who are deemed to have caused this malaise will be blamed.  The American people will revolt at the ballot box.  Of course, the CCP understands this all too well.  

If you do indeed opt for and succeed in implementing "Option #1"  you'll have to come up with yet another "it's not our fault" wag-the-dog blame scenario.  I'll leave that public relations battle/framing up to you.  


GIVEN:  

1.)The RMB exchange rate has been manipulated through currency controls.  The exchange rate should be 20+:1 rather than 7:1 based on relative money supply growth.  This imbalance has been accomplished through these currency controls, making the RMB virtually unusable outside of the Chinese mainland. 
2.) The Chinese Communist Party (CCP) currently controls at least US$25 Trillion of Western Financial Assets through anonymous Off-Shore Tax Haven entities.  
3.) These assets were purchased at significant discounts through their pegged/overvalued currency.  (i.e. using the aforementioned CCP Currency Controls and money supply expansion.)

THESIS:  

The CCP intends to weaponize these financial assets, selling them off in a coordinated "Pump & Dump", disrupting/destroying Western Financial Markets, forcing Western Central banks to "print money" like never before.  The end game being the US Dollar will no longer be the world's reserve currency and the RMB will finally be "marked to market" along with the newly weakened dollar.  The CCP will have effectively exported their self inflicted debt problem to the rest of the world.      

In order to save Western Civilization we'll need to refer to our wonderful, brilliant compadre', Dr. Richard Thaler's work and look to some basic principals of Behavioral Economics.  I'd suggest you bring him on this.  He's really a bright guy.  I'm sure he'd free some time to help us save Western Civilization. 

Following Rich's lead, we'll need to incentivize, or nudge "good" financial behavior and penalize "bad" financial behavior.

Because the USD/RMB exchange rate is currently so flawed, we'll also need to do everything we can to shore up liquidity in Western Financial Systems prior to the dam bursting. (You'll notice that Jay and Mario are beginning to take steps already) We further need to distinguish between "real" Western Money/Financial Assets and "fake" Chinese/CCP owned Money/Financial Assets.

My premise is that when the CCP financial asset "dump" begins, we must be prepared to do everything possible to prevent the inevitable capital flight which would destroy the Western Banking/Financial systems.  Extraordinary times require extraordinary measures.

Again, I'll emphasize, the hundreds of thousands of Chinese Accounts, Shell Companies, and investments sitting off shore (and on-shore) poised to "send money home" are not "free market" independently owned finances of Chinese entrepreneurs and investors who will make independent (rational or not) decisions on what to do with "their" money.  In the eyes of the CCP, the money doesn't belong to these Chinese citizens and entities.  It's not "their" money.  It's CCP money.  These entrepreneurs and investors will do exactly what they are told to do, and exactly when to do it, by the CCP.  They will move these "printed from thin air" Financial Assets in a carefully choreographed, weaponized yard sale designed and implemented to collapse the Western Financial System.  When Xi clicks the sell button....."Everything must go."   

The "Financial War Games" tools I describe below are general/strategic in nature, but must be developed and ready to launch as soon as is practical.  I don't have the resources or data to come up with the nitty-gritty particulars and probable "what-if" implications behind each of these tools (you folks do....or at least you should), but I believe each of my recommendations below are important and directionally correct. It's also important to note that, throughout history, each of these recommendations has been implemented with varying levels of success (or not) depending on their relationship to a holistic policy framework.  In any case, if/when the circumstances warrant, these (or directionally similar) recommendations must be implemented in their entirety.  Putting a couple of band-aids in place won't accomplish what we'll need to get done.

I'm hopeful that you will have carefully crafted, well thought out versions of the below recommendations ready to deploy by executive order at the drop of a hat, well in advance of when we actually need them....and we needed them yesterday.  When the clock strikes midnight, we can't endure months of Congressional debate.  We won't have that kind of time.  We have to think these "what-ifs" through now.  If we do indeed dawdle, muddle and stumble, pausing to figure these things out, under extreme stress, in a vacuum of politically motivated misinformation, as we did with the last financial crisis, it will all be over before we know it.

As always, I welcome your input.

The Goal

The obvious concern (as described in my Dalio's Big Debt Crisis....the FSB Report and Financial War Games....  post) is that once the CCP begins the "Dump" and Western Central Banks move to support markets and liquidity, we'll need to make sure that Western Currency doesn't leave (or become idled within) the respective Western financial systems under dubious circumstances.  i.e.) Dollars sitting in offshore Forex accounts will be of no use to the US Banking system.  Central banks will have to "print it again" to replace it.  (I'll refer to US/Canadian/Aussie Dollars, Yen & Euros as Western Currency for the purpose of this discussion....the world's currencies, many pegged to the dollar, of course will all be caught up in this spectacle, but that analysis is well beyond the scope of this post)  In short, we'll need to curtail the flow of Western money off-shore, while simultaneously providing a significant advantage to Domestic Investors to keep money on-shore (and usable) which does not currently exist today.  To steal a phrase, we'll need to "Build a Wall"......but this one will actually be necessary, and will actually have to work.


The Manafort Indictment - An Illustration of the Problem

The Manafort Indictment is instructional on a number of fronts.  First, it's really a poster child for the ease in which someone, with a little bit of access and a criminal mindset can hide and launder significant amounts of money, avoid paying taxes on foreign income, theoretically forever, if he/she were operating with less hubris.  Second, it illustrates the level of resources, and dogged relentlessness, required to adequately investigate and prosecute these relatively complex cases.  Finally, we can presume from the infrastructure that exists to facilitate these schemes, and the rapidity in which financial assets have ballooned offshore, that there are tens of thousands of "Manaforts" out there.  If you have a chance to read through the relatively short (34 page) indictment I'd encourage you to do so, as it's quite entertaining.

For the purpose of this analysis, I'm going to ignore the FARA (Foreign Agent Registration Act) violations contained within the Indictment as they are not relevant to this discussion.  When we review the Indictment, we see that Manafort accomplished the following, all fully described in the indictment:

1.) Manafort/Gates ran approximately US$75 Million through accounts owned and controlled by twenty three (23) domestic entities and fourteen (14) foreign entities under his direction and control.  The foreign entities were domiciled in Cypress, St. Vincent, the Grenadines and the UK.  Manafort also failed to complete and file the FBAR (Foreign Bank Account Reports) as required by the US Bank Secrecy Act.

2.) Through these entities he laundered approximately US$18 million in funds used to purchase US Real Estate, property, goods and services, concealing these transactions form the Treasury, Department of Justice and US Banking Authorities.  Manafort directed these hundreds of wire transfers for his personal benefit, failing to report and pay income taxes on the funds.

3.) During the time period between 2008 and 2014 Manafort made hundreds of wire transfer transactions (documented in the indictment) to roughly two dozen "vendors" who accepted payment from foreign entities under his control.  The indictment was silent as to whether the vendors broke any US laws.

4.) Once the money was effectively laundered, Manafort used the funds to acquire Real Estate in New York and Virginia, using the properties as collateral for additional bank loans, thereby committing mortgage fraud, misrepresenting both his financial relationships and the occupancy of the properties purchased.

5.) According to the recent USA Today chart below, the cost of the investigation is now roughly $25.5 Million with the expected recovery being approximately US$28.6 Million.  The investigation, by virtue of seizures and asset forfeitures, at least to date, looks like it has actually "made money".



















































































https://www.usatoday.com/story/news/politics/2019/02/12/mueller-russia-investigation-costs/2736507002/

When we further examine the extent of this network, we can also appreciate the level of difficulty and amount of forensic accounting work necessary to put a case like this together.  It's currently impossible to locate and bring all of the "Manaforts" out there to justice in anything approaching an efficient manner, without the expeditious and immediate cooperation of off-shore financial institutions.  For emphasis, there are currently no systems in place to match (currently nonexistent) third party, Off-Shore Foreign Bank data/reports with the FBAR documents and Tax Returns.  Today, it's simply too easy to "get away with it" and the Manafort wannabe's out there know it.

If this case wasn't such a high profile crime spree, perpetrated by a national political figure, promulgating a raid on Mr. Manafort's home, we might never have known the extent of this fraud.  Some believe, and I'm one of them, we probably still don't, and perhaps never will, have the full grasp of what happened.  Dozens of investigators, attorneys and professionals were assigned to this case.  Under the current construct, enormous resources are required to investigate, prosecute and conclude these cases.   The Manafort case is, unfortunately, the exception, rather than the rule.  Most tax cheat cases don't "make money"....the money is long gone.

Moreover, to my knowledge, none of the bankers involved have been charged with violations of US Anti-Money-Laundering (AML) "know your customer" laws, which US Financial Professionals are, of course, required to follow.   After a multi year investigation, costing $25.5 million and counting, we caught one high profile tax cheat.....probably 10,000 or so cheaters to go.  So it goes.


The Incentive for "Good Behavior" (the Carrot)

Long Term Capital Gains Tax Reduction Before the Republicans (copied herein) erupt with glee and you Democrats (also copied herein) deride me as yet another "rich bastard" (Misplaced though it is, I don't take offense....I'm comfortable and happy to have benefited by our current system...but it's nevertheless a harsh moniker that comes with harsh times) who wants to give yet another tax break to the other "rich bastards" (no offense intended to present company copied herein as well).....please hear me out.  The Tax Code's dirty little secret is that the "Capital Gains Tax" along with the "Death Tax" are the two gigantic, fake taxes that publicly strike fear in the hearts of America's wealthy/elite, yet, privately, behind closed doors, nobody (at least anybody who knows what they are doing or is properly advised) ever actually has to pay.  For example, taxes like "earned/wage" income taxes, property taxes, sales taxes, excise taxes or generally anything that inures to the responsibility of the "little people" are paid by (taken from) us/them before we ever see it.   Conversely, as "rich bastards" we have been given the privilege to "choose" to pay taxes on Capital Appreciation whenever we feel like it (triggering event), let it grow in tax deferred accounts, hedge it to prevent the triggering event, or for some modest fees, choose to avoid these taxes all together off-shore.  (Consult your tax advisers for a long list of legitimate devices/tools you can use to avoid paying these taxes.....the list is significant.) 

I could argue, quite successfully, that the US Capital Gains Tax Structure today, when combined with both offshore and "tax-purpose" entities/devices is the most regressive tax structure in history.

Currently, the amount of Capital gains taxes paid in relation to both Financial Asset appreciation and GDP are indeed insignificant. 



The figures in the chart to the left are taken from the latest (2017) IRS Data Book.  You'll note that in 2017 the IRS Collected roughly $3.4 Trillion of total taxes, broken out, in big round numbers (my long time readers know how much I enjoy "big round numbers") as $1.9 Trillion for Individual Income Taxes, $1 Trillion for "Payroll Taxes" (half individual & half business), about $400 Billion for Business Income Taxes, with Excise Taxes and "Death Taxes" bringing up the rear as insignificant in the grand scheme of things.

So what's missing you might ask?  That's right, where are the Capital Gains Taxes?  Well, unfortunately, in the IRS Data Book Capital Gains Taxes Paid/Collected are not broken out anywhere.  In the entire 86 page report, Capital Gains Taxes are not mentioned once.  That's weird.... Huh?  You might guess that the only reason that the Long Term Capital Gain Tax collected isn't in the report is that these taxes are buried in both of the "big" individual and business taxes or they are irrelevant in the grand scheme of things.....and you'd be right on both counts! 

The best source (and only public source that I'm aware of) of data describing historical Capital  Gains Taxes Collected, comes from a report issued by the US Treasury in 2016, although the data is no longer published, presumably because of its insignificance, we can calculate that since the Financial Crisis, net Long Term Capital Gain Taxes paid, despite the incredible increase in Financial Assets (aka wealth) have averaged roughly US$69 Billion per year.  Please read that figure again and let it sink in:

US Capital Gains Taxes Collected Since 2008 have averaged US$69 Billion Per Year.

If we assume the "average" continued on in 2015-2017 (Note in 2019 with the new income indexing, exempting lower income taxpayers....the ones who actually pay the tax....we can expect Capital Gains Tax collections to decrease even further) we conclude the following:



Here's the Treasury Data:
https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Taxes-Paid-on-Long-Term-Capital-Gains.pdf







































1.) Capital Gain Taxes Collected are 14.4% of "Total Net Gains", yet, they are only 2.47% of all Taxes Collected during the period (2008-2017) ($27.8T),

2.) Capital Gain Taxes collected were 2.37% of the Increase in Value of all US Financial Assets during the period (2008-2017 = $28.9T) Note: if we include the portion for US owned Financial Assets residing in Tax Haven accounts for "tax purposes" the % is much lower.  Total Off-Shore Tax Haven Assets are US$58.7 Trillion as of 2017, of which US Investors own a significant percentage, but these figures are, of course unavailable.

3.) When we further compare the Capital Gains Taxes Paid during the period (2008-2017) to current US Wealth (i.e. Total US Financial Assets of  $96.8T as of 2017), the ratio becomes 0.71%.  Again, if we make the same adjustment for Off-Shore Tax Haven Assets, the percentage would be significantly reduced.

4.) Finally, when we compare the Capital Gains Taxes Paid in relation to US GDP over the same period (2008-2017 = $165.1T) the ratio approached zero....at 0.42%.  (Note:  All Federal Tax Collections for the same period amounted to 16.8% of GDP)

Further note that since the financial crisis, total tax collections have increased by roughly a $1 Trillion since 2009.  The increase is comprised almost exclusively of Individual Income Taxes and Payroll Taxes.  In America, we no longer tax capital appreciation, and under the current tax structure, it appears we never will.






It appears that America is well on the way to following the French capital flight model, where French capital abandoned the country to Luxembourg, the Netherlands, Ireland and Switzerland....searching for a better return.  A tax exemption and a few basis points compounded over time makes quite a difference in a portfolio.


...or Great Britain, which doesn't necessarily want to leave the EU but refuses to shoulder the financial burden of the French, the Italians, the Greeks, the Spaniards, etc...etc....with no way to pay for it.



Bear in mind that un-taxed financial assets in Luxembourg/Netherlands/Ireland/Switzerland Tax Havens, since the financial crisis, have increased by at least US$12 Trillion, as taxed financial assets in the UK/France/Germany have decreased by roughly the same amount.  Yet another remarkable coincidence.



Once the leadership of a nation refuses, or is unable to finance its society......anarchy will eagerly step in to replace it...

When I look at the numbers above, I find it hard to understand from a tax/incentive perspective, why anyone would actually "work for a living" anymore.  I'm surprised that the American workforce just doesn't go out, get 0% interest rate loans, set up LLC's in the Caymans and trade Treasuries and FOREX futures from their couch all day....Oh....that's right.....it's Ray Dalio's "60% of American's can't scrape $400 dollars together because they can't afford an education, can't find a decent job and consequently their credit is really shitty dilemma".....quite a dilemma indeed.

The more worrisome and frightening aspect of this is that in America, unlike France and Great Britain, the potential "Yellow-Vest" recruits are heavily armed.

I'm also sure there's a very good reason why every Cabinet member and most members of Congress have offshore accounts.  They (you) fully understand how this mechanism works, after all, they (you) along with help from lobbyists and influencers created it.  After all, it's important to have a safe place to keep your unaccounted-for PAC money.

@AOC, I love your enthusiasm, but you are probably too new to the game to truly understand this. You seem to be preoccupied with "saving the environment", irritating billionaires and promulgating a 70% personal tax rate (which nobody who understands tax structured entities today would pay).  These endeavors, though entertaining, are simply not a productive use of your time, but, I'm sure, if you ask a few lobbyists, they will get you in touch with capable advisory help and put you on the right track.  You owe it to your constituents.

Based on the above, along with a few more modifications, though counter-intuitive, we must LOWER the Capital Gains Tax Rate to collect more taxes.  I'll suggest a preliminary 5% rate implemented along with the recommendations below.  The rate must be low enough, compared to alternatives, that investors will choose to pay it.  To paraphrase Don's words, although relating to a different topic... "You've got nothing now....what the hell do you have to lose?"


The Enforcement Tools for "Bad Behavior"...(the Sticks)

Generally, in order to understand economic activity and thus, make correct monetary policy decisions, Jay and company must get a handle on the "usable" liquidity within the the US Financial System and by definition, the amount of "unusable" US dollar liquidity outside of the system.  i.e.) Doubling M1 doesn't help Main street America if it immediately jumps into Caymans accounts owned by the CCP.  Once we've rewarded "good behavior" with low domestic Long Term Capital Gains Rates, we must raise the cost of offshore "legal" avoidance, and of course, bring the hammer down on "illegal" tax evasion, bringing the money supply "home".  (As you can see, I've become really fond of using "quotes" to emphasize these terms.)

Don't get me wrong, there are lots of good reasons for US Taxpayers and Foreign Investors to have overseas financial relationships.  There are also lots of "not so good" reasons.  We simply need to separate the two and apply the proper cost/tax structure to each of them.

Increased Tax Return Reporting Requirements on US Entities with Foreign Relationships - Today, we have a wonderful system of tax filing and reporting where you simply check some boxes on your 1040/1120/1065/5472/851/etc. etc. forms describing your relationship with a foreign entity.  If you have an interest in, or signing authority on a foreign bank account you are also required to file a Foreign Bank Account Report (FBAR).  Since there really isn't much detail required (links to the forms below) I can imagine that if it just slips your mind to mention any of these relationships to your tax preparer that these boxes might easily just go unchecked.  The IRS also has all sorts of brochures and training materials for tax preparers as to what to look for and "red flags" but again, if these relationships aren't disclosed, I doubt that the IRS would be able to pick up on it without an onerous, cumbersome and costly level of investigation.  I also imagine that, since relatively few tax returns have these "foreign" boxes checked, if you do indeed check these boxes there would be an increased level of IRS scrutiny....at least there should be.  This presumed, insufficient level of "unchecked box" oversight might further incentivize a tax payer's accidental memory failure when it comes to "box checking".  Of course, this lack of oversight probably didn't happen by accident.  There was most likely, significant resource, forethought and lobbying effort by wealthy investors and industry groups, emphasizing the importance of the free flow of capital which stymied of any sort of enforcement funding directed at lackadaisical "box checking".  As we all know, the free, anonymous, unrestricted flow of capital and firearms is absolutely necessary to make America great again. 

That said, from a national security perspective, I'd also think, and recommend, that if a US taxpayer is indeed entering into significant overseas transactions and/or maintains ownership of foreign bank accounts, that transaction amounts and the details of the particular accounts involved should also be disclosed and easily verifiable/cross checked by the Treasury.   (This disclosure was absent in the Paul Manafort "Poster Child" Indictment above)

To that end, I would add one question block to the form 5472 (and/or any other applicable forms), the purpose of which would be to identify whether the the Taxpayer has any off shore bank accounts.  The bank name and routing number would be required to be disclosed along with the total debits/credits and ending balance for the tax year, to be retained by the IRS in easily accessible/searchable electronic form. I'd contract the folks at Google and have them get to work on it....if Google can figure out how to archive every aspect of our lives and chronicle our every movement, matching up some bank account information should be a piece of cake.

Off-Shore Tax Haven Accounts - Ownership and Balance Reporting - Develop acceptable framework/treaties to work with Tax Haven jurisdictions (Caymans/Luxembourg/Netherlands/Hong Kong/Singapore/Switzerland/Ireland/Cypress, etc.) to develop Anti Money Laundering (AML) disclosures and electronically share "true" ownership and signing authority of accounts/records.  Require Foreign Banks doing business with US Banks to gather Tax ID numbers and electronically transmit monthly balances, total debits and credits by routing number for same.  The foreign banks should be required, like US Employers are required for 1099's and W2's, and US Banks/Brokerages are required with 1099-INT/DIV's, to electronically file these notices with the IRS and copy the taxpayer on what was filed....just to jog his/her memory.  The Treasury should set reasonable compliance deadlines and revoke access to the US Banking System/SWIFT should foreign financial institutions fail to comply.

For example, when we look at the eight page official "Statement of Cooperation" issued by the Cayman Islands Monetary Authority (CIMA) intended to state its commitment to the FED, FDIC, et al, with regard to "information sharing", we see that the statement is filled with "will endeavor to", "under certain circumstances", "upon request" and "where warranted" fake-helpful-ish language, indicating that the CIMA currently has no intention of assisting the US Treasury in getting to the bottom of tax fraud cases.  The statement is so vague and non-committal that it's actually pretty comical.  This is type of "cooperation" is not acceptable.

Off-Shore Balance Excise Tax - Simply put, there should be a cost to US Investors for keeping funds off shore.  A small percentage of say 3%/yr. (Feel free to run the numbers and come up with your own reasonable percentage) on the offshore financial assets/balances required to be reported by US Taxpayers/Entities should be sufficient.  These taxes would be collected along with annual tax return filings and reported on the modified 1040/1120/1065/etc. forms described above.

Excise Tax on Wire Transfers "Money Out" - There should also be a cost to moving money off shore.  I'd recommend a 1% excise tax on on overseas wire transfers.  (Again, feel free to do some research and come up with a better number).  This excise tax would be applied similarly to gasoline taxes, collected by banks and remitted to the Treasury "at the pump" so to speak, as off shore wire transfers are completed.  There would, of course, be no tax on money coming in, the excise tax would be a "one way" tax on money leaving.

Increased Civil and Criminal Penalties - As a "real" national emergency and a matter of national security, we must enhance the penalties for improper or misleading statements on US Tax returns regarding foreign funds.  After all, we're not talking about meaningless documents like those silly SF-86 White House Security Background Check forms, where it's easy to forget about hundreds of contacts with unregistered foreign agents.  I mean really, we all  know how easy it is for these secret  "agents of a foreign government" meetings to slip one's mind.  Luckily, with those forms, once an error is pointed out by investigators, the subject is simply allowed to amend the form as often as is necessary, until he/she get's it right.

US Tax returns, are arguably the most important, sacrosanct, intimate document an American citizen produces on a periodic basis.  For those of us who are blessed to have worked hard and received the bounty of this country, we owe it to the American public to make sure that these documents are carefully and accurately prepared by professionals.  They should be error free.  They should be perfect.  Consequently, there should be significant, per incident, civil, monetary penalties for each "error" on these tax forms including and up to forfeiture of any property involved in the non-disclosure, per existing 18 US Code 981 & 982 and 18 US Code 2461 requirements/guidelines.

Properly Fund IRS Enforcement - We must properly develop an electronic matching system which compares Foreign Bank reported data to US Tax Returns and Identify discrepancies or reporting failure.  We must implement a system to identify discrepancies between foreign bank reports and US Tax Returns.  There should be significant administrative, "by the book" penalties for non compliance.  i.e.) if you didn't check a box, or your figures are wrong, without any determination as to whether there is a tax liability involved, there's a significant "failure to disclose" fine.  I might even suggest a reasonable "amnesty window" allowing a penalty free, but NOT tax free, window for compliance.  Non-compliant taxpayers would be allowed one chance to get the data right and amend prior tax returns with no criminal penalties.  Like those SF-86's.....Everyone deserves a limited number of second chances.   

The IRS would be tasked with hiring a small army of analysts, programmers, investigators and prosecutors to gather and compare the newly acquired third party foreign bank account data to taxpayer reported data.  Currently, as I'll discuss below in the Manafort analysis, it's not yet practical or cost effective for the IRS to investigate and hunt down tax cheats until the third party bank data is fully accessible and automated.

Of course, it will be important to fully publicize the favorable compliance window as well as the thunderous level of enforcement resources under development, which will soon be crashing down on tax cheats in the near future.  It should also be clear to taxpayers that the newly funded, increased enforcement action on offshore accounts will be treated as a profit center for the IRS. Now, there's a new MAGA jobs program that might prove to be worthwhile, hiring 50,000 new IRS examiners, agents and IT professionals....that might help make America great again....don't you think?

I think American voters would absolutely be willing to jettison the MAGA slogan and get behind a MATCH program "Make America Tax Cheat Hell!"  I can visualize it on red baseball hats all over the heartland!

Again, all of the above are important, necessary steps to separate and identify legitimate offshore money from illegitimate offshore money.

Acts of Financial War - (Even Bigger Sticks)

The following mechanisms will have to be available once we've separated and identified legitimate offshore funds from CCP and/or illegal/criminally controlled funds.  The CCP will likely consider these actions an escalation of "financial war" and respond in a predictable, retaliatory manner. 

Currency Controls - When this mess goes south, we'll need to protect the dollar.  Which means that we won't be honoring what were previously considered free market commitments to those who would have improperly obtained US/Western Assets through nefarious, questionable means or with illegitimate funds of unknown origin.  We need to develop a system where we can vet or pre-approve larger transactions in advance.  Based on the incredible increase in offshore Tax Haven Assets (roughly US$58 Trillion as of 2017 with an estimate of roughly US$65 Trillion currently) we'll need to take a page out of China's play book (SAFE) and develop a framework to prevent deposits of questionable origin from leaving Western Financial Systems.  As a point of reference, today, if you are a Chinese Citizen and you attempt to take more than $50,000/yr. of your currency off shore without specific CCP permission, you'll get a stern talking to as well as some "reeducation".  Your family might wonder where you've been for the last few weeks/months, but it's all part of the CCP modus operandi.  We need to replicate a version of these currency controls in America and have them ready to go should the need arise.

My concern of course is that once the CCP begins the "Dump" the owners of the US$25+ Trillion of Western Currency (the CCP controlled portion of the US$65 Trillion) will attempt to get it out of usable circulation, transferring it to Chinese banks to bolster foreign currency reserves.  Since this has become a matter of national security, US Bankers must have the authority or discretion to delay or stop larger transfers of questionable origin to non-US Banks until they can determine whether the transfers are legitimate and/or might cause systemic liquidity risk to their institutions.  The framework must be coordinated with other Western Central Banks and financial systems.

As a point of reference, the CCP is already doing this with US Investor funds on the mainland today. US Investors are having trouble getting their money off the mainland.  This isn't publicized as the investors are trying to work out the issues through back channels at mainland banks, rather than have their funds seized outright. 

In other words, we'll need to provide institutions and bankers the latitude to stop the illegitimate, foreign drivers of the "run".

Chinese Branch Banks - Develop a framework to immediately shut down and suspend operations (unplug) the CCP Branch banks operating in US Markets on US soil.  (ICBC, Bank of China, China Merchants Bank, CITC and the Agricultural Bank of China).  We should encourage other Western Nations to do the same.  I don't care if we have to cut power to their buildings, large amounts of Western Currency must not be allowed to improperly leave the US banking system through these CCP conduits.

Western Banks Operating in China - By my count, the US currently has nine (9) banks operating in China.  There are at least forty-five (45) additional foreign banks with branches on the Chinese mainland.  (Hong Kong (5), UK/EU/Swiss (17), Japan/Singapore/South Korea (10), Other (13)) There should be an executive order "shelf-plan" ready to go, if necessary, to immediately close US Branches on the Chinese Mainland, and suspend, pending further review, transfers to banks actively involved in transferring/exchanging Western Currency to the mainland (CCP controlled accounts).  Most likely, these operations will be considered casualties of financial war.  Let's just do our best to negotiate, evacuate and get our bankers home.




What We Hope To Accomplish

So let's sum it up.  Here's what we need to accomplish before the US$25+ Trillion tsunami of sell orders on Chinese owned, dollar/euro denominated Financial Assets washes away our Western financial system:

1.) Stabilize the Western money supply.
2.) Understand the flow of "real" money/assets vs. "fake" CCP money/assets. 
3.) Provide the FED with On-Shore/Off-Shore "usable" Money flow/domicile data.
4.) Provide "Onshore Stimulus" via significant Capital Gains Tax Cuts, incentivizing money to "come home".  Reduce the Long Term Capital Gain tax rate to 5% (keeping the 0% rate for lower income taxpayers)
5.) Increase Revenue and deincentivize Off-Shore Tax Havens by increasing the tax cost. (Excise Taxes on Off-Shore balances and transfers "out".)
6.) Increase Revenue through Tax Collections/Enforcement on illegal funds.
7.) Streamline/automate the tax collection matching process on offshore tax schemes and intentional failure to report (FBAR Violations) through international bank cooperation agreements.   
8.) Develop an efficient criminal enforcement mechanism for "aiding and abetting" the "Manaforts" of the world. 
9.) Rebalance the tax base by collecting an appropriate tax on Off-Shore capital appreciation.
10.) Provide meaningful, usable data to the FED, Treasury and Banking System allowing them to stop and/or review illegitimate Off-Shore transfers prior to completion.  
11.) Fully understand and be ready to respond with targeted liquidity when Xi does indeed "press the sell button".

Again, I can't emphasize enough how difficult this will be for all of us.  The sacrifice that will  be required to get the country and the world through this will be enormous.  Kicking the can down the road is no longer an option.

Finally, you all have it within your combined power, here and now, to change history.  We can continue on the same path, put out fires and scratch our heads, wondering why the economy isn't reacting to all of this stimulus.  (I know, I know....some of you think that everything is great...that's part of the problem)  We can continue to keep our heads in the sand and believe that the CCP is simply a second tier, bumbling competitor not-ready for prime time on the global stage, letting our arrogance and self importance blind us to what's actually happening to our great country.  We can continue to dream that someday, the Chinese Communist Party will somehow see the light and march with us, hand in hand to a Kumbaya Utopian world order, where every voice is heard and the entire planet, not just America, becomes the land of the free and the home of the brave.  Yes....we can continue to take that unlikely, improbable path.....because it's easy.

Today, at least for a short time, the choice is ours.  The sooner we act, the better off America will be.  We can all, as a united coalition, galvanize our resolve for the good of the American people.  We can choose to engage with each other and disengage with the CCP.   We can chose to acknowledge our problems, together, and fix them.  We can either do something together, soon, as American leadership, or continue our "all is well" Rip Van Winkle sleep walk into the forfeiture of Western hegemony's whirring-buzz-saw.

I, for one, am getting way to old to start over without putting up a fight..... breaking up is indeed, really hard to do.....



Finally, if we fail, and we're required to begin teaching our children how to say "at your service exalted one" .....在你的服务高举一个 .....in simplified Chinese, I want you to visualize that, fifty years from now, when some little boy/girl in Iowa does a "Who caused the demise of Western Civilization?" subliminal, state-monitored Wang-ipedia search through the (stolen IP) Huawei chip surgically implanted in his/her cute little head at birth, your names, faces and biographies will all come up.....

I hope you'll think long and hard about that.


Additional Reading/Viewing

Mueller Investigation Costs
https://www.usatoday.com/story/news/politics/2019/02/12/mueller-russia-investigation-costs/2736507002/

Yi Gang - pledges "No Intervention"....well....he doesn't need to intervene....he has enough off-shore monetary firepower already.
https://www.bloomberg.com/news/articles/2019-03-10/pboc-s-yi-says-prudent-monetary-policy-is-also-counter-cyclical

SAFE Controls - $50,000/yr.
https://www.ft.com/content/b69166fa-ee01-11e7-b220-857e26d1aca4

Caymans Cooperation Agreement
https://www.cima.ky/upimages/commonfiles/1499794669STATEMENTOFCOOPERATION.pdf
Offshore Money transaction Tax

1120
https://www.irs.gov/pub/irs-pdf/f1120.pdf

5472
https://www.irs.gov/pub/irs-pdf/f5472.pdf

851
https://www.irs.gov/pub/irs-pdf/f851.pdf

Manafort indictment
https://www.politico.com/f/?id=0000015f-6d73-d751-af7f-7f735cc70000







Jay Powell - 60 Minutes - Full Transcript & Inverveiw - All is well.....
https://www.cbsnews.com/news/jerome-powell-federal-reserve-chairman-60-minutes-interview-2019-03-10/

Kyle Bass - Thoughts on "not wasting" the trade talks.  So much to do....so little time....
https://www.bloomberg.com/opinion/articles/2019-02-11/trump-can-t-waste-china-trade-talks

Trade Balance for China - OED - $20T Western Currency from Trade Alone
https://atlas.media.mit.edu/en/visualize/line/hs92/show/chn/all/all/1995.2017/



























EXPORTS $29,869,203,365,116
IMPORTS $18,277,591,290,356
BALANCE  $11,591,612,074,761 
BAL Invested at 6% - $20,005,189,141,954


World Currency Transaction Breakdown























US $2 Trillion of illegal money flow from China to the West
http://www.antimoneylaunderinglaw.com/2017/01/qa-on-the-2-trillion-in-proceeds-of-corruption-removed-from-china-and-taken-to-us-australia-canada-and-netherlands.html


IRS - Gross Collections
https://www.irs.gov/pub/irs-soi/17databk.pdf

Capital Gains Taxes Paid thru 2014
https://www.taxpolicycenter.org/statistics/historical-capital-gains-and-taxeshttps://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Taxes-Paid-on-Long-Term-Capital-Gains.pdf

BIS Working Paper - Missing Global Debt?
https://www.bis.org/publ/qtrpdf/r_qt1709e.pdf

BIS Working Paper - Triffin Dilemma? of Myth?

FATCA/IGA Compliance
https://www.reuters.com/article/us-usa-tax-fatca/cayman-islands-u-s-reach-pact-to-fight-tax-evasion-idUSBRE97D17U20130814


TAX Issues
https://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-offshore-corporate-tax-loopholes/

IRS-Abusive Off-Shore Tax Schemes
https://www.irs.gov/businesses/small-businesses-self-employed/abusive-offshore-tax-avoidance-schemes

Citi - The RMB as  Global Currency...."Not so much"
https://www.citivelocity.com/citigps/waiting-waiting-global-renminbi/

Thursday, February 21, 2019

Dalio's "The Big Debt Crisis"....the FSB Report & Financial War Games

While I was on vacation, doing some fishing and sailing, (Our good friends have a boat in the Bahamas and they invite us to join them on occasion....it's good to have friends with boats in the Bahamas...) reading Ray's wonderful, new(er) book "The Big Debt Crisis", it just so happened that the Financial Stability Board (FSB) published their frightening, yet riveting, can't put it down, Global Monitoring Report on Non-Bank Financial Intermediationwhich, as you also know, I've been following for years.  

So, in order to kill three canaries with one coal mine, I thought I'd combine my take on the two tomes, 1.) Ray's "how we got here" historical perspective on the next "Big Debt Crisis", combined with and followed by 2.) A more current update vis-a-vi the FSB's data/findings in anticipation of the next "Big Debt Crisis" and finally, 3.) A "What the heck is going to happen next in the virtually guaranteed, next, upcoming "Big Debt Crisis?" and exactly how it's going to go down.   (Spoiler Alert: the Chinese Communist Party might be referred to as "Individual #1" in the scenario.)   Of course I'll try to fold-in some fun pop-culture and awesome financial gallows humor when I can.  Remember, the stated goal of my work and tag line is, and has always been:

Let's Make Global Financial Armageddon Fun Again!

 ....did I mention that today we're going to talk about the next "Big Debt Crisis"? 

As always, I've read these hundreds of pages and distilled them for you in a few bullet points... so that you don't have to.....that's the value I try to bring to the table.  Further, as in past posts, if you are a dry, lifeless, economist and/or financier who doesn't have the time, or feel like trudging through my colloquial, comedic quips, clips, wit and wisdom, feel free to just check out the charts & graphs and skip through to the TEXT IN RED....that's where I'll highlight the really important conclusions, financial metrics and analysis of same.     

But first, to set the cheery, optimistic mood, I've included a few vacation pictures below....some of the advertising and public relations people I know have mentioned that I should make an effort to identify with the masses (you, my dear readers) and show them (you) I am actually a loving, caring "human being" rather than a cold, heartless, game-theory-automaton economist.  Moreover, some of my readers have mentioned that my take(s) on the upcoming, apocryphal, global financial Armageddon can be a bit of a downer.....so here you go..... 



Ok....Got it?  Pretty isn't it?  Heaven on Earth....Feel better?  Now back to work.  Strap yourselves in.....this is going to be a doozy...

Ray Dalio's "Big Debt Crisis"

One of the best, most instructive, valuable books I've ever read....period....exclamation point!  Of course I have to acknowledge that everyone's taste and interest in fine financial/economic literature is personal and unique, but this bad boy really was a page turner.  The searchable pdf version is a bit long at 471 pages (with citations and references that might actually consume a lifetime of financial research should you choose to explore them), but it's so entertaining I had finished it before I knew it....Like any great author, Ray left me wanting more.  I'm looking forward to the sequel.  I bought the hard copy as well....I figured Ray could use another $50.00. 

What Ray's Book Is:

The book is a three volume set describing/analyzing Monetary Policy throughout history and the correct, efficient, adequate, (or abysmal) use of same.  The first volume is actually the "summary" of the "Archetypal Debt Crisis", indicating that throughout history these F%#&ing things actually happen quite often.  Everyone with any interest in economics and finance should, at a minimum, read this first volume.  It summarizes the findings and similarities of the last 48 "big" debt crises as described in Volume 2 & 3.  Ray chose to deploy his sizable Bridgewater resources, some of the brightest economic and financial minds on the planet and had them research debt crises throughout history in search of common ground/data.  His stated goal, is to provide a framework for policy makers and investors to properly understand and deal with the next, inevitable, debt crisis.

Volume I

Perhaps Jay Powell read the book, saw something (we'll get to that later when we talk about the FSB Report) and pulled the "pivot"?....here's the text from his recent statement....

"industrial production and factory employment remain at all-time highs through April, measures of construction had rebounded sharply after falling in the first quarter".

Geezz.....I'm sorry, I've gotta get my notes in order....the above was actually from the Federal Reserve Bulletin issued in June of 1929.  Where was I, Oh yeah.....here's the text of Jay's interview on MSNBC, at least as best as I can remember.....it went something like....

"Hey guys ...the economy is fine....everything is rosy....nothing to see here...we're going to continue our mechanical, predictable, rock-solid march toward interest rate and balance sheet normalization......(pause....leafing through pages of the Financial Stability Board (FSB) Report...shuffle ....shuffle).....OH CRAP!......never mind what I just said.....but we're going to stop raising rates and are actually considering cutting them now..... and that balance sheet normalization thing ain't happenin' anytime soon... thanks for having me on today.....Sorry for the pump fake.....really, everything is just fine and dandy......Oh man look at the time....gotta go.....oh....and I like beer...."

Of course the FED Analysts/Pundits cleaned up the language a bit for the news clips....


Anyway, back to work.....in the first volume, here's what Ray says:

"From my examination of these cases, the biggest risks are not from the debts themselves but from a) the failure of policy makers to do the right things, due to a lack of knowledge and/or lack of authority, and b) the political consequences of making adjustments that hurt some people in the process of helping others. It is from a desire to help reduce these risks that I have written this study."

The Next significant point(s) Ray makes are (My emphasis added):

1) When debts are denominated in foreign currencies (USA) rather than one’s own currency (China), it is much harder for a country’s policy makers to do the sorts of things that spread out the debt problems, and 2) the fact that debt crises can be well-managed does not mean that they are not extremely costly to some people. (Lost Jobs, Bankruptcies, Jumping out Windows, Alcoholism, Drug addiction, Homelessness, etc. things you and I, the "little people" have to work through.)

He also describes how there are two types of "Depressions":

Deflationary Depressions -  Debt restructuring and austerity dominate, without being balanced by adequate stimulation (especially money printing and currency depreciation).  Deflationary depressions typically occur in countries where most of the unsustainable debt was financed domestically in local currency, so that the eventual debt bust produces forced selling and defaults, but not a currency or a balance of payments problem. (i.e. The "Great Depression" 1929 and China 2019 - ?)

Inflationary Depressions -  Classically occur in countries that are reliant on foreign capital flows and so have built up a significant amount of debt denominated in foreign currency that can’t be monetized (i.e., bought by money printed by the central bank). When those foreign capital flows slow, credit creation turns into credit contraction. In an inflationary deleveraging, capital withdrawal dries up lending and liquidity at the same time that currency declines produce inflation. Inflationary depressions in which a lot of debt is denominated in foreign currency are especially difficult to manage because policy makers’ abilities to spread out the pain are more limited. (i.e. the Weimar Republic 1920-1924 and the USA 2019 - ?

 Ray further points out that Debt Cycles are historically broken down into six "parts".

1.) Early Part
2.) Bubble
3.) Top
4.) Depression
5.) Beautiful (or "not so Beautiful" depending on policy) Deleveraging
6.) Normalization (or...Pushing on a string)

He goes on to describe and chart how, in aggregate, various indicators/indexes (Equity Prices, Yield Curves, Interest Rates, Money Supply, Capital Flows, Inflation, etc.) have moved and reacted throughout the cycle(s) as well as what the cycle duration(s) might reasonably be expected to be.    

Here's an example of the format:
We note that these cycles last roughly 11 years (give or take...60 months to the "top" and another 84 months to a loosely defined normalization...i.e.) Minimal "window jumping".)
Ray further describes the tools available to policy makers (pg 36) ranked by effectiveness.  These are obvious, but there's some heft behind these if you choose to refer to the book. For the sake of this discussion I'll be brief.

Monetary Policy #1 - Cut Interest rates.  Most effective, but unavailable and obviously less effective as rates approach 0%.

Monetary Policy #2 - Central Bank Buying Assets - Effective, but QE primarily benefits investors/savers (i.e., those who own financial assets) much more than people who don’t, thus widening the wealth gap.  The impact to economic activity/growth is limited.  The money isn't "spent". 

Monetary Policy #3 - Print Money putting more directly into the hands of spenders instead of investors/savers and incentivize them to spend it.  This is (all sorts of variations of) "Helicopter Money"....some of these include: Debt-financed fiscal spending, Public Works Projects, Debt Write-downs/offs, "Cash for Clunkers", Home Buyer Credits, etc. Universal Basic Income (UBI) or anything to get people spending money, creating jobs and get the economy moving again.
   
Continuing in Volume I, there are a number of important observations/guidelines directed primarily toward policy makers generally presented in a subtle format similar to "if this happens, consider this....not that" that differentiate whether a de-leveraging is "well managed" or "poorly managed".

 
From what I could tell, and I was looking for it when I read the book, Ray never actually comes out and explicitly says we're currently at the "top" of a debt cycle.....but based on the character of the current data and the timeline, I think I'd find it hard to argue that we've not topped out.  Even if we're not yet at the top, again based on the data, it can't be far off.

Volume II

I found Volume II to be the "meat" of the book.  I really enjoyed the layout.  The section is a wonderful study of policy issues and challenges of the three greatest Debt Cycle Bubbles in history.  The discussion of the German Debt Crisis and Hyperinflation (1918-1924) was followed by that of the US Debt Crisis and Adjustment (1928-1937) and finally an analysis of the US Debt Crisis (2007-2011).  I particularly enjoyed the way the narrative, stats, commentary and policy explanations flowed through the "center" of the pages with newspaper headlines, quotes from politicians and relevant citations in the margins of the pages.  I'm not going to recap the details here because Ray does such a great job, I couldn't do it comparative justice.  If you are a serious student of finance, economics and/or political history, you'll thoroughly enjoy this section.  I'm hopeful you'll read it with the enthusiasm and vigor I did.. 

Since Ray didn't include many photos, even though I've always images tell a story tell the story pretty well, I've attached a few of my favorite images that might have been included in the section below, just to compliment his work...

Volume III

Volume III is a compendium of the data derived from the Forty Eight (48) Debt Crises studied.  This section provides the core (summary) data which was used to develop the "archetypal template" discussed in section one.  To be frank, and to confess my ignorance, being a Midwestern American, generally isolated from global mishaps, I had not even known about most of these "crises" since they didn't seem to effect me, nor was I familiar with the hardship and sadness that must have been endured by the folks around the globe as they made their way through all of them.  As a prototypical American, I was, of course, naively brought up to believe that it's always been "all about us".  My memory could be foggy, but I don't believe I'd even heard the term "monetary policy" until I'd been enrolled in the University Wisconsin Business School for a few years.  On the other hand, I was taught to "hide under my desk" to protect myself from a nuclear blast in second grade.  Apparently, according to the school system, rural Wisconsin was a strategic ICBM target at the time.  As an eight year old sitting under my desk, after Mrs. Mc Neil passed around ominous, frightening pictures of mushroom clouds and their destructive aftermath, I remember thinking "sitting under my desk isn't going to help....this is really stupid".  I guess misguided educational/curriculum bias has been around for a while and continues today.  Anyway, these debt "cycles" are apparently a very regular, predictable thing....someone's always "in one", sitting under their desk, somewhere ....who knew?

As I was reading through the few pages dedicated to each of these crises, I quickly found myself analyzing them and contemplating them in the context of Ray's archetypal template, as described in Volume I.  I was often thinking "Hey, this one is a lot like the Wiemar Republic, just not as bad, with a communist twist" or "Oh man...this one was just like the US Great Depression....why are they tightening??!!"

Anyway, there's far too much here and much of it is beyond the scope of this post, but I'd encourage you to read/scan through Volume III if you have the time, at least just to get the idea.  It's a brilliant, worthwhile read.  Here's the Table of Contents for review, and perhaps to pique your curiosity.




What Ray's Book Isn't:

Finally, one of the most interesting things about the book is that throughout its 471 pages Ray references the word "China" a grand total of twenty eight (28) times.  Twenty seven (27) of these occurred within a brief discussion of the Chinese role and their 2008/2009 participation/funding of the American "Great Recession" which I'll also refer to later on in this post, with a discussion of Hank Paulson's frequent trips to Beijing aptly described in the prologue of Richard McGregor's wonderful work "The Party"....but I digress.  The other lone reference to "China" benignly pertained to the 2015 Chinese Stock Market crash, when comparing indicators present in past bubbles as a validation of the data.  Again, Ray does not take even one page to discuss the decade long, greatest money printing, debt build up in history, currently happening on mainland China.  I find that remarkable.

As many of you know, my background is in the insurance business.  I own a wonderful insurance agency where I spend my day advising people on insurance coverage for their homes, cars, small businesses and the "stuff" that most of us would hate to be without if something horrible happened.  Occasionally, because we put insurance policies in place to protect these folks, a few times a year, because of a house fire, a horrific traffic accident, a tornado, lawsuit, etc. I find myself trying to help someone through what just might be the 2nd worst day of their life. (By definition, I'd guess, the last day of your life is probably the worst one.)

Anyway, the "Big Debt Crisis" is strictly an economic and policy analysis of the statistics that comprise what are probably some of the "worst days" of many peoples' lives.  Ray, as you'd expect, is relatively clinical in his discussion of how Monetary Policy and debt cycles impact people in terrible, often irreparable ways.  Here's an example of a quote from page 61 in a discussion of "War Economies":

"....the debts and the outcome of the war (whether it is won or lost) will be enormous. The worst thing a country, hence a country’s leader, could ever do is get into a lot of debt and lose a war because there is nothing more devastating. ABOVE ALL ELSE, DON’T DO THAT"

Again, Ray is focusing on the economics of these cycles, policies and their financial impact.  Even though, in World War II for example, roughly 80 million people were killed, an untold number were injured and traumatized, families destroyed, their homes, towns and entire cities were obliterated, and tens of millions became refugees, the Big Debt Crisis refrains from any detailed discussion of the human suffering associated with these "policy" decisions.  I'd humbly suggest that a failure to win the war and properly finance it, running up big debts in the process, might be far from "the worst thing" (I'm thinking, the Holocaust, or "lobbing nukes at each other" for example) a leader could do.

Another quote relating to war economies, which is absolutely accurate from a decision tree perspective, but again, in my mind, falls a bit short on the "appreciation of human suffering" scale, again on page 61 is:

History has shown that through time, there are two broad types of relationships, and that what occurs depends on which type of relationship exists. The two types of relationships are: 

a) Cooperative-competitive relationships in which the parties take into consideration what’s really important to the other and try to give it to them in exchange for what they most want. In this type of win-win relationship, there are often tough negotiations that are done with respect and consideration, like two friendly merchants in a bazaar or two friendly teams on the field. 

b) Mutually threatening relationships in which the parties think about how they can harm the other and exchange painful acts in the hope of forcing the other into a position of fear so that they will give in. In this type of lose-lose relationship, they interact through “war” rather than through “negotiation.” 

Either side can force the second path (threatening war, lose-lose) onto the other side, but it takes both sides to go down the cooperative, win-win path. Both sides will inevitably follow the same approach.  

In the back of the minds of all parties, regardless of which path they choose, should be their relative powers. In the first case, each party should realize what the other could force on them and appreciate the quality of the exchange without getting too pushy, while in the second case, the parties should realize that power will be defined by the relative abilities of the parties to endure pain as much as their relative abilities to inflict it. 

When it isn’t clear exactly how much power either side has to reward and punish the other side because there are many untested ways, the first path is the safer way. On the other hand, the second way will certainly make clear—through the hell of war—which party is dominant and which one will have to be submissive. That is why, after wars, there are typically extended periods of peace with the dominant country setting the rules and other countries following them for the time it takes for the cycle to happen all over again.  

Ray's clinical analysis, of this complex, point of no return, "go to war or not" decision tree, with so many unknown variables, where US Citizens "vote" (are less willing to endure pain) and Chinese citizens are "arrested" (all too familiar with having pain imposed upon them) caused me to recollect this relatively recent presidential quote as reported by the Washington Post.....

He said in a series of interviews that he does not need to read extensively because he reaches the right decisions “with very little knowledge other than the knowledge I [already] had, plus the words ‘common sense,’ because I have a lot of common sense and I have a lot of business ability.”

.....my immediate thought was......"Uh-oh"....

Ray also refers to the 2008/2009 US Financial Crisis as an example of a "Beautiful" deleveraging, where the FED and Central Bankers (generally) made the best policy decisions they could have possibly made, at least under the circumstances.  He refers to the policy responses at that time as a template for what should be done in the event something like this (God help us) ever happens again.  As I recall, during the Financial Crisis, roughly 10 million Americans lost their jobs, 8 million people lost their homes and 2.5 million businesses closed.  Many folks lost their life savings and their financial future and prospects changed dramatically for the worse.  The life and future they thought they had was gone in the blink of an eye.  What I'm saying is that I guess the term "Beautiful" is relative.....beautiful compared to World War II or a nuclear winter perhaps, but far from "beautiful" for those who were irreparably harmed by the (latest) financial crisis.

Finally, as I mentioned, the book makes no "going forward" mention of the current global Financial Asset and debt build up and what might or should be done from a policy standpoint, to mitigate the impact of what appears to be the next "inevitable" debt cycle/crisis.  I found that omission to be remarkable as well.

I think American policy makers could use, and might appreciate a little help and guidance here. I eagerly await Ray's sequel.


The Financial Stability Board Report

As I've mentioned above, I've been following the Financial Stability Board's work for years.  It's outstanding and desperately needed in the globalized financial world we live in today.

Here' the link to the pdf.
http://www.fsb.org/wp-content/uploads/P040219.pdf

Like Ray's book, there's a lot of great, interesting information that jumped off the page at me.  I'd invite you to read it if you can spare the time.  For the purpose of this post I'll just just focus on a couple of, what I consider, really important things.

Non-Bank Financial Assets

Pg 5 -  The narrow measure of NBFI grew by 8.5%, to $51.6 trillion in 2017.....Since 2011, the Cayman Islands, China, Ireland and Luxembourg have together accounted for over two-thirds of the narrow measure’s dollar value increase.  

Assets held by "Non-Bank Financial Institutions" (NBFIs) are now 14% of all Global Financial Assets.  NBFI Assets are, by definition, assets held by entities that are not Banks (no government protections or direct access to central bank liquidity) and subject to "runs".   NBFIs are businesses like Broker Dealers, Investment Funds, Hedge Funds, Insurance Companies and Private Investment vehicles that typically maintain relationships with banks. Also by definition, individually, these US$51.6 Trillion NBFI assets are (generally) not systemically important and could be "allowed to fail".

When we look at the data we also see that Tax Haven money has been expanding at an extraordinary pace.  The graphic below (page 14) of the Report illustrates the tremendous concentration of Tax Haven Money (in relation to GDP).  When we examine the left hand graphic on Exhibit 2-3 we see that the concentration in (KY) The Caymans, (LU) Luxembourg, (IE) Ireland, (HK) Hong Kong, (CH) Switzerland and (SG) Singapore is primarily comprised of "Other Financial Intermediaries" is many multiples of the respective domicile GDP.  For Example, the roughly US$8 Trillion of Caymans Financial Assets represents 186,128 x GDP.   i.e.) These Tax Haven jurisdictions hold significant levels of Financial Assets that are subject to "runs" and have little/no relationship to their domiciles' domestic GDP.  The first "Real" economy that shows up on the list is the Great Britain (UK) debuting at #6 with financial assets hovering at 1,200% of GDP.  Japan (JP) comes in at #9,  at about 700% of GDP.  As you would suspect, and I've said often, these Tax Haven jurisdictions are increasingly important as anonymous, liquid, global hiding spots for "someone else's money".         



Now let's take a look at an updated version of the graphic I had originally produced for a post I had done a couple of months ago, Twas the Night Before Christmas.... updated using the 2017 data-set in the newly issued FSB report.  The graphic below is intended to illustrate the incredible expansion of Chinese, Tax Haven and "Other" money around the world since the Financial Crisis.  Simply put, we see that the lion's share of the incredible US$123 Trillion monetary expansion that took place since 2008 took place almost entirely in what I refer to as "Fake Money" jurisdictions, i.e.) China, Tax Havens and "Other" (Primarily Emerging or "Troubled" Markets).  "Old Money" domiciled (US, Germany, France, Great Britain and Japan) Financial Assets have grown at a much slower pace, with German/French/British Assets actually declining, despite a decade of ECB ZIRP.  I could also argue that a significant portion of the growth (US$28.9 Trillion) and appreciation in US Domiciled Financial Assets is also attributable a significant infusion of Chinese/Global Capital, investing in the "safest/smallest mine in the field" (i.e. should I invest in US Treasuries's or Kazakhstan Crypto today?) but we'll get to that later in the post.    






































Of course, when we're analyzing Chinese Financial data we have to be skeptical, primarily because it's usually badly translated and very complex by design, but secondly, because it's almost always total, unadulterated bullshit. When I do my analysis I like to revert to a little game my kids taught me when they were growing up.  They called it "one of these things is not like the other".



Oddly enough, the data for the FSB report and China's Financial Stability Report (FSR) are both provided by the PBOC, yet the FSB reports 2017 Chinese Financial Assets at US$56.7 Trillion and the PBOC Financial Stability Report (page 62) Reports total Financial Assets at us $85.3 Trillion (Adding Bank and "Shadow Bank" Assets together at the then current Exchange Rate).  Financial Assets are a "good thing" right?  China is HUGE!!....correct?  This must be some kind of weird US$30 Trillion rounding error?   

Here's a link to my analysis and the PBOC FSR.
https://deep-throat-ipo.blogspot.com/2019/01/keeping-it-simple-short-and-to-pointand.html

2018 Financial Stability Report (page 62)

Taking it a step further, here's what the breakdown looks like if we plug the PBOC Financial Asset figures into the previous chart.  







































We find, from the above, that:
  1. Chinese, Tax Haven and "Other" (Primarily Emerging Market or "Troubled Economy" Assets) now comprise more than half of all global assets. (US$211 Trillion) up from about one third of total Financial Assets (US$90 Trillion) prior to the Financial Crisis.
  2. Financial Assets have increased from 4x Global GDP in 2008 to 5x GDP in 2017.  
  3. From 2008 to 2017 the world has "created" US$151 Trillion "new" Financial Assets in exchange for an additional US$17 Trillion of GDP, or US$9 of Assets for every dollar of GDP.  (As a side note, much of China's unproductive GDP is wasting away in vacant residential housing.  If we apply a "productive GDP" factor the figure is probably about US$12 of Assets for ever dollar of PGDP )  
  4. We must keep in mind that the data is more than a year old.  It's unlikely that a decade long trend has suddenly reversed, so we can assume that the Asset values are much higher (i.e. the problem is much worse) today. 
Going back to "The Big Debt Crisis", Ray's analysis dissected and identified the impact that each set of policy choices had on each individual economy.  In his numbers, the amount of internal and external debts and the impact policy adjustments had on the respective country's financial system were always identifiable and quantifiable.  Off-Shore, Tax Haven Financial Assets, at the current level are a relatively new phenomenon and a decade ago (with the exception of Switzerland and Hong Kong), were a fraction of what they are today.

Where is all of this new "fake" money coming from and why is it there?  

The simple, logical, Occam's Razor-esque answer is that a significant chunk of these anonymous, Off-Shore Assets are actually controlled by the Chinese Communist Party.  There is no other rational, logical explanation for it.

The chart below describes the impossible relationship between the USD/RMB exchange rate in relation to US and China money supply growth.  While the Chinese money supply skyrocketed in relation to the US Money Supply, the exchange rate remained rock solid.  In economic terms this should be an impossible condition.  When the relative "supply" of a commodity (RMB) increases, the price of that commodity (exchange rate) should fall and the currency (RMB) should weaken.  Again, this hasn't happened....not at all.
      



How has the CCP been able to accomplish this FOREX prestidigitation?  After running decades of capital/current account surpluses, resulting from the CCP's meteoric rise as the slave/child labor funded "factory to the world" they controlled the exchange rate by keeping their currency (RMB) off the world stage.  There's comparatively little RMB used in international trade (<2%) of all settlements are in RMB (nobody wants RMB because they can't spend it anywhere) and the total RMB held offshore has actually been falling even though the Chinese money supply has been skyrocketing.  Offshore (internationally usable) RMB is probably less than 0.5% of total RMB in circulation now.



This protection and overvaluation of the RMB, enabled by a continually increasing balance of payments surplus, is the cornerstone of China's master plan.  The CCP has no/little external funding requirement or debt.  

Remember Ray's discussion of "Deflationary Depressions"?

Deflationary Depressions -  Debt restructuring and austerity dominate, without being balanced by adequate stimulation (especially money printing and currency depreciation).  Deflationary depressions typically occur in countries where most of the unsustainable debt was financed domestically in local currency, so that the eventual debt bust produces forced selling and defaults, but not a currency or a balance of payments problem. (i.e. The "Great Depression" 1929 and China 2019 - ?) 

Today, the CCP has been able to avoid a depression because they've already accomplished the "money printing" part of the stimulation, something that wasn't done by the FED in the "Great Depression" of 1929.  In other words, they are "printing" in advance of the Depression in order to avoid it altogether.  They've also been able to avoid an RMB devaluation because, to be blunt, they've not let anybody use it.  To date, the world doesn't seem to care all that much about the value of the currency since it can't be used in a meaningful way.  The RMB remains locked on-shore in the mainland.  Up to this point, the CCP has managed to keep its domestic financial system walled off from the rest of the world.  According to Ray's thesis, China's current condition can't possibly result in a currency or balance of payments problem, until, of course they "uncage" their currency.   

Luckily, everyone in the world uses the US dollar.  It's the currency of choice for every international trade and financial/capital transaction.  In God, and America, we trust.

What could possibly go wrong? 


Case Study: FRANCE

Interestingly enough, for the first time in economic history, and since the above described monetary tides are ebbing and flowing across the globe, we actually have a current "control group" test case study brewing, describing in vivid, certain terms, what can happen to a proud, old money economy when "local" capital begins to flee to a better/safer, more preferable place and it's not replaced by, some other source.  (i.e. Perhaps in a hypothetical case, somewhere else in the world, anonymous CCP capital might be used to prop up asset values and fund another struggling economy, but this hasn't happened in France.)

Ladies and gentleman, for your pleasure, I present to you.....(drum roll).....

THE REPUBLIC OF FRANCE!

Image result for france yellow vest riots

Now, the first question you are probably asking is "What in the world does the French government have against school crossing guards?....and why are there so many of them?....is the French economy really in that big of a mess?"  And you'd be correct to ask!  There is definitely an oversupply of unemployed, highly pissed-off, school crossing guards running amok on the streets of "Gay Paree" right now. 
  

Of course, I could waste your time and talk about all of the "little" stuff.  Housing, labor, credit availability, the short work week, lagging GDP, politics, the rise of populism, the continuing epic struggle between the elite "haves" and the bourgeois "have nots", etc. etc. but unfortunately, there's one and only one reason the French school crossing guards are in the pickle they are in today. 

I've been told that nobody wants to hear this (especially the pissed-off school crossing guards).  They want to blame Macron, the Brits and the rest of the "crooked" European politicians and anyone else who looks like they have some level of authority/culpability, but the real problem (at least right now) is not politics.  The real problem is that years of really bad ECB Monetary policy, with no recognition of what "free market" capital movement can do to an otherwise healthy economy, has irreversibly and finally come home to roost.  

Simply put, years ago French wealth began to leave the country for easily accessible tax haven destinations, primarily Luxembourg, the Netherlands and Switzerland, with very little coming back in. (Apparently the Chinese aren't fond of escargot).  This is of course, a double headed swinging guillotine.

As domestic money leaves, it both erodes the tax base and stifles the economy.  Fleeing capital means no new investment, no new innovation, no new jobs and no new hope.  As we've seen, It apparently does indeed lead to scores of pissed off, fire bombing, school crossing guards.
  
Ironically, this dramatic capital flight took place under Super Mario's Near-ZIRP decade of monetary expansion and unprecedented stimulus.  Unfortunately, the stimulus just wasn't going to the French people....it was going to Luxembourg, the Netherlands and Switzerland....some/much of the wealth is still owned by French elite, but invested somewhere else anonymously, perhaps in NYC Condos or US Tech Stocks, at probably more than a few basis points higher than it could have earned at home.  Rich people, as we all know, are always willing to sell out their homeland for a few basis points and a tax cut.

Let's refer to and review the figures from the FSB Report, shall we?  If you'll notice, the outlier on the previous chart above, the only global region to actually show a decrease in financial assets since the 2008 Financial Crisis is the "Old Money" Great Britain. Germany and France region.  Although the decrease isn't much, it's enough by comparison.  The above photos are a stark reminder of the political, social and economic impact wrought by money fleeing these domiciles to off-shore tax havens, when there isn't anything replacing it.  The more Mario "prints" the faster it leaves.

What we see is that over the last few years capital has been flowing out of France like foie gras through a goose.  From 2008 to 2017 Financial Assets in Germany, France and Britain have been reduced from US$69.1 Trillion to US$66.7 Trillion causing corresponding (negative) adjustments to investment, tax base and growth.  If I can be bold enough to give some advice to the highly pissed-off-school-crossing-guard gang, although I understand your anger and frustration....your antics are not helping to get this capital flowing back.  

Luckily, nothing like this could ever happen in America.  Even though they are heavily armed, America's school crossing guards are highly compensated professionals, always in a good mood and the envy of the free world.

God Bless America.....and....

Vive' la France!


Why the CCP Pump & Dump will Eventually Break the Dollar

Deng Xiaoping often referred to “Tao guang yang hui” or roughly translated.....

 “Hide your brightness, bide your time.” 

We "invisible hand", "free market Westerners waving the flag of individual rights, freedom of choice, and government intervention only as a last resort, collectively, truly don't understand what we're up against here.  We Westerners can't conceive of markets without individual choice and independent capital flows. Let me be clear, the "rise" of China is NOT now, nor has it ever been an "opening up" of ideas, markets and financial freedom.  That's not up for debate.  That statement is an etched in stone, unchallengeable, unimpeachable fact.

Propping up the RMB in order to artificially increase its purchasing power, acquiring Western Assets on the cheap, is the cornerstone of the master plan.  

All of the financial devices, shell companies, subsidiaries, and entities created with newly printed, anonymous Tax Haven money, managed, directed and owned by China's new "entrepreneurs" are the cleverly disguised genesis of a centrally planned, monolithic, financial "death star" under construction, with its primary weapon locked and loaded on the Western Financial System.  




Let's pause and let that sink in for a minute....

Ok, deep breath....let's carry on....So how did all of these CCP Controlled Assets accumulate in the Western banking systems?  I covered the "Boomerang Greenback" in a prior post entitled "The New Phone Books are Here! a while back (feel free to refresh your memory).  I've defined "Boomerang Greenbacks" as Western Currency paid for Chinese goods and services where the currency never makes its way back to the Chinese Mainland.  It's never exchanged/converted to RMB and hence never used to benefit the Chinese economy.  The chart below illustrates "Boomerang Greenbacks" using Apple/Foxconn familiar logos, but the model is virtually the same for every importer of Chinese goods.  Whether the goods go to Walmart or Amazon and/or their respective "off the books" storefronts, or Mom & Pop retailers who sell clothes, shoes and "plastic stuff", all the money goes back into the continually recirculating CCP coffers, to be reinvested in Western Financial Assets.

 
Since it's impossible to determine with any precision (because of our wonderfully constructed global banking system) the exact level of financial assets held or controlled by the CCP, let's throw around some numbers and make some SWAG assumptions based on the above described FSB/PBOC figures.

First, we must assume that the lions share of the global asset growth is the result, either directly or indirectly, of Chinese fake money printing, the exchange rate anomaly and its proliferation around the world.  We must assume that the CCP is acting as a highly coordinated team.  Again, there is no other explanation for it.  No other Central Bank is expanding their money supply anything close to what the Chinese have done.  The FED, ECB, BOJ and BOE are no longer leading the monetary expansion.  They are following it.

Next, we can assume that a significant portion of the "Tax Haven Assets" and the "Other" (as well as a significant, unidentifiable amount of US & European Domiciled Assets) are controlled or influenced by the CCP through these offshore devices and Chinese citizens directly/indirectly in a coordinated effort.  For fun, let's just guess that the number is roughly 20% of the Tax Haven and "Other" Assets (20% of US$ 58.7T plus $66.7T) or about US$25 Trillion give or take.  Further, let's assume that the CCP, because they know a bargain when they see one, also focused on owning non-financial assets (Real Estate) purchased in cash deals (i.e. no Financial Assets involved, just a deed/title transfer) to a Chinese citizen living in America, deploying capital and acting on behalf of the CCP.  These are the 35 year old "Crazy Rich Asians" who are given newly "printed" CCP funded bank accounts and told to go to America and buy all those $1 million condos with cash.  So let's assume, again just for fun, maybe a few hundred billion dollars globally for real estate. (This figure is probably low as well, but it's chump change for the CCP)

So now we have roughly US$25+ Trillion (probably a low number) Anonymously Invested in Western Assets by the Chinese Communist Party as a result of the West's naive acceptance a fake RMB exchange rate.   

Now that the CCP has provided US$25 trillion of funding to US and global markets (demand), bidding up prices for these financial assets, what happens if the CCP starts selling off these US$25 Trillion in assets?...well, currently US M3 (Broad Money) is only US$14.3 Trillion.  Like any "Pump & Dump" the CCP is probably going try to be the first one out.

My guess is that if the Chinese start selling, the CCP will decide to leave the proceeds of the sales of equities, real estate, bonds and businesses in "cash and USD equivalents".  They would remain flexible.  The cash paid to the CCP from the sale of these assets will have to come from Western sellers.  There will be a stealth liquidity crunch, depending on where and how they redeploy the cash.  It will remain sitting in CCP controlled accounts, essentially removed from the economy, waiting to be invested at the lower/reset asset values.

Some of the things I'd expect the CCP to start doing once Xi clicks the SELL BUTTON:
  1. The CCP will probably avoid "clicking the button" until they are absolutely sure they can pull it off.  Only the CCP knows how much money they have under control in Western Economies.  Western Central Bankers can't possibly have a clue, since we've designed the infrastructure to support anonymity.  There's no system in place to identify the origin and real ownership of the funds.  I'd guess that the CCP has very talented people in a war room somewhere tracking this project to the dollar.  The question they are asking themselves is two fold: 1.) How much do we need to break the dollar and consequently the US/Global economy?  2.) Do we have enough yet?  Despite their odd, intentionally misleading statistics, financial statements and press releases, Chinese folks are generally very smart and really good at math.
  2. Once they "click the sell button" there will be no going back.  Remember, they had "printed" the money to buy the Western Assets in the first place, their economic basis/cost is relatively small, so paper losses on the Western Assets are irrelevant, since they've not paid much for them in the first place.      
  3. I'd imagine that they would try to sell the less liquid assets (Real Estate, businesses, private equity, etc.) first.  (HNA's Deutsche Bank stake, Dalian Wanda's AMC, Anbang's Waldorf/Starwood, Tencent's gaming, etc. etc.)  We can expect to see real weakness in the NYC, Bay Area, Vancouver, Toronto, Sydney, etc. Real Estate markets as Chinese buyers disappear and Chinese owners start selling.  You won't see any Chinese sellers selling to Chinese buyers.
  4. We can expect to see the yield curve fully invert as the CCP parks increasing levels of money in short term Dollar/Euro/Yen cash equivalents.  They will, of course, stop buying bonds and keep the money in short/cash equivalents, ready to buy some assets back once the price seems right.  Since they are in control of the liquidity, there is a great chance that they will be able to "call the bottom".  In any case, "usable liquidity" will start to dry up.  When the dust settles, the CCP will buy it all back and own a much greater percentage of Western Assets than when they initially "pushed the sell button"....they will have "sold high and bought low".
  5. In America, we cherish and revere property rights, no matter whose property it is.  If an American Banker sees lots of CCP LLC controlled cash sitting on his/her bank's balance sheet, it will simply look like Tier 1 Capital, to be immediately re-deployed and loaned out under the rules of our wonderfully efficient fractional banking system, even though that capital funding the new loans can be "wired out" in the blink of an eye.  
  6. As the CCP Capital is redeployed, there will be really confusing dislocations and liquidity issues with Western banks.  Generally, the more intimately a bank is involved with the CCP, the more vulnerable it may be.  Let's say, just for example, that you're a bank like JP Morgan, which has a longtime, close relationship with Chinese Communist "Investors".  Today, JP Morgan has got $350 Billion of Cash & Equivalents on the Balance Sheet, significant for JPM but not so much for the CCP.  Suddenly, like a bolt from the heavens, JPM Bankers around the globe start getting a series of seemingly unrelated anonymous requests to transfer hundreds of billions of US Dollars (Coming from anonymous CCP controlled accounts) to Hong Kong, Caymans and Singapore Banks.  In America, since we believe in the sanctity of property rights, in this particular case, JPM, with it's "fortress balance sheet" a term I've always chuckled at, for an entity levered at a 13:1 (based on tangible assets), will make the transfers (or not) and immediately flunk every banking safety ratio you can think of.....and looking for an overnight bail-out....yet again.  (American voters will LOVE THAT!)  The CCP will effectively be able to determine which US Banks live and die by moving money around.  I would imagine, in the CCP Financial War Room they've got a list of "high value targets" on the board.  The bankers and regulators won't be able to tell who's moving the money or why.  All they'll see is that a bunch of off-shore LLC's with "funny" sounding names want their money back.  
  7. We'd also expect to see confusion at the FED.  It will look like there's plenty of liquidity in the system, popping up here and there, but since it's controlled by the CCP, it won't be "available", or it may be re-deployed in unexpected, nonsensical ways.  "Hey....let's mess with Citi today!"  These "false signals" will prevent the FED from implementing or understanding proper policy.  They'll spend their days putting out fires, effectively handcuffed and won't be able to throw a lifeline to the "real" economy.  
  8. As CCP liquidity is removed, with real estate and equity markets collapsing, the economy will follow.  Businesses with supply chains dependent on the Chinese "factory to the world"  will fail.  Apple, Walmart, and most retailers will be mired in operational issues with their respective supply chains disrupted as their source for cheap inventory evaporates.  Imagine Walmart and Amazon as well as nearly every publicly held retailer, with half of their current SKUs at double the price.  I'm thinking that might put a damper on earnings.  US Farmers will keep shipping soybeans to China though....the Chinese people will still need to eat.  
  9. The only viable option, Ray's "Monetary Policy #3 - Helicopter Money" will be unavailable, at least for a time, because of the inherent confusion, finger pointing, political differences, debates and delays.  By the time a scaled down version is finally implemented the economy will be needlessly, irreparably slowed/harmed.            
  10. Stock Markets will continue their fits and starts as money managers continue to "buy the dip" redeploying newly printed money from "loans" mistakenly made based on CCP "collateral".  After all, that's what these money managers have been trained to do and it's worked flawlessly (with a few bumps along the way) since 1932.  Money will continue to be destroyed as equity prices decline and loans default, the FED will keep printing/replacing it and it will be immediately redeployed back into equities.  Investors, convinced that this was just another "mini-bear" market, will jump back in and the money will then be re-destroyed as markets re-collapse.  Because of the CCP catalyst, market behavior will resemble the period from 1929 through 1932, when the DJIA dropped nearly 90%, the "buy the dip" financial gurus will be dead wrong, because they won't understand what's really happening.  Take a look at the "mini bull" markets described in the chart below (+20%, +30%, +40% and more) embedded in the Bear Market. (Dalio, Big Debt Crisis -  pg, 71)   




Though painful for our Communist friends, the CCP will be able to accomplish all of these things without destroying their own economy, again because the RMB is currently isolated.  Remember the graph of what China's currency looks like today?  (I know you remember it from above but I wanted to reemphasize it here)  I've long opined that the condition can't exist.  Again, I've long said that the RMB should be valued at 20:1 and it will have to devalue.  Traders have been crushed on this trade for years.



I want to be clear here:

I WAS WRONG!  

The RMB isn't going to devalue.  That's not what the clever Chinese Communist Bankers are up to.  Their diabolically clever plan is to force Western economies to reset asset values through the ultimate "Pump & Dump", requiring the Western Central Bankers to print money like there's no tomorrow.  As the Western money supplies increase, the CCP will slowly remove the PBOC SAFE/Currency/Capital controls while (hopefully) keeping everything in balance.  Through this carefully constructed mechanism, the RMB won't weaken toward the Western currencies, Western currencies will weaken toward the real, current, intrinsic, economic value of the RMB.  

Here's the total guess of a graph of what I think is going to happen once Central Banks around the world are forced to print money and monetize their debts......just as the CCP/PBOC has already done domestically.





















As the SAFE controls are relaxed and the RMB begins to work its way into the global financial system, moving toward full convertibility, I'd expect its usage in global settlements to increase and that the off-shore supply would also increase to facilitate the usage.  

After a few years, the Dollar will no longer be the world's Reserve Currency.  The RMB, through the greatest financial shell game in history, will have replaced it as the primary global settlement vehicle. That's the ultimate end game.

I've been posing this "theory" to very smart people over the last few weeks and their universal, immediate response is: 

That can't be possible....Why would the CCP do this?  

My answer is: They are doing it because they have to.  They have no choice.  They have painted themselves into a suffocating debt corner with their incredible domestic monetary expansion.  They are pulling the best possible policy rabbit from a hat filled with really bad bunny turds.  Unless they cause the Western currencies to devalue they will be caught in Ray's Archetypal "Deflationary Depression" dominated by forced selling and defaults.  The "Pump and Dump" is actually the best possible alternative (for the CCP) because it minimizes their domestic pain.  Conversely, it's the most painful path for the US and Western Economies. (Remember Ray's "ability to both inflict and endure pain" discussion?)

Financial War Games (in general)
        
I've always thought (and I'd be surprised if this wasn't happening at least at some level) that, like our CIA, we have a highly skilled team of cracker-jack analysts at the Treasury and the FED that would spend their days conducting simulated Financial War Games, assigning probabilities to events and coming up with pre-determined responses.  I'd also presume that the Treasury might launch occasional clandestine (financial) "first-strikes" when the need arose, similar to a financial version of what  Kermit Roosevelt Jr. and the CIA did in Iran (Also see All the Shah's Men - Kinzler - Great read) with limited bloodshed of course.  Bankers, economists and accountants are generally a peaceful lot, they just tend to take your money and/or home away when you least expect it.   

Generally, I presume in a financial war game exercise, the scenario would go something like: 

1.) We see something happening in a part of the world that doesn't align with our interests.
2.) We come up with a financial plan to fix it.
3.) We Deploy Resources (funds, bankers, etc.)
4.) We analyze outcomes and react to unplanned collateral damage.
5.) We reassess and repeat.

Hypothetically, here's a discussion that may or may not have taken place surrounding these hypothetical Financial War Games as they may or may/not pertain to Venezuela.

Treasury Operative #1: "Ok....here's the thing....Maduro isn't playing ball...gotta get him out of there..."

Treasury Operative #2: "Yeah.....I'll get with Larry....he'll loan that Commie dope a ton of money they can't pay back, crash the Economy, the masses revolt, we back the opposition and Maduro leaves with whatever he can take.  We get the oil....shit we've got Ciitgo on the ground there already...piece of cake...Regime change brought to you by Blackrock...."

Two years later....

Treasury Operative #1: "What do you mean the Chinese are in?  Maduro's not gone?  WTF?"

Treasury Operative #2: "Things went sideways....that One-Belt-One-Road bullshit is a pain in the ass....don't worry....I'm on it...this one's easy....it's not like it's France....."

My assumption is that these Financial War Games are going on and these "operations" are being conducted all over the planet by major Central Banks, behind closed doors.  The masses (you and I) are oblivious to what's happening.  I'd also be really shocked if the Chinese Central Bank wasn't participating, at least on some level.  I'm eagerly awaiting a plausible public denial from the SCMP, along with some goofy article on how badly the US Banks are ruining the Chinese financial landscape, followed by a few thousand emails from Chinese trolls telling me how ignorant and far off base I am.  If I'm correct, that this is all part of a monetary covert-ops game plan, it stands to reason that if Central Bankers weren't involved in this type of counter intelligence driven financial warfare, they'd be risking the health of their respective economies.  The only thing we can do, as card carrying members of the great unwashed, on a personal financial level, is block/hedge for these "War Games" as best we can and hope we survive the carnage and ultimate fallout.

Here's the behind the scenes (Freedom of Information Act) video of a conversation between Treasury Analyst #1 and an unnamed Blackrock Executive.  Please be discrete, parental discretion advised:




Oh....and Venezuela a few days ago....or is it Baltimore?....crap....I gotta keep my notes straight....




The Big War Game (Financial WW I)

In order to truly understand what's happening today we have to go back to the "good old days" of the 2008/2009 US Financial crisis, tracking the frequent trips that Hank Paulson, first in his role as CEO of Goldman Sachs and later as Treasury Secretary under George W. Bush.  Hank was making dozens of trips, along with teams of prominent US Investment Bankers, to Beijing in order to first, "open up" the US Economy to Chinese Investment and later, as the banking crisis began to unravel, ostensibly to "save the US economy" from complete collapse, reaching out, hat in hand to Wang Quishan and the PBOC, like the stunned debtors they were, praying for a bail out.

These dozens of visits are wonderfully described in the prologue of Richard McGregor's "The Party", an epic book shedding some much needed light on the Rise of China's political and financial system, as well as the mood and tenor of the Sino-US relationship at the time.  Hank's visits were initially described as a hands across the water quest for opportunity, to show Chinese financiers how to develop a sophisticated financial system (for hefty fees) in exchange for access to China's rapidly evolving consumer markets, but as the US Financial System spiraled out of control, as Treasury Secretary, Hank's visits quickly morphed into a cry for help.

What Hank had not counted on was the ability of his new, motivated students to grasp the rules of the game as quickly as they had.   Not surprisingly, Wang Quishan, Vice Premier of the financial sector and Lou Juwei, the head of China's Sovereign Wealth Fund and the rest of Hanks Chinese counterparts were conscientious, motivated students.  While Hank was reaching out for a helping hand he was also inadvertently teaching these CCP Financiers the intricacies of global investment banking and putting them in touch with the very US Investment Bankers which would help spearhead their foray into the global financial markets.  Hank's pals (again, for hefty fees) taught the Chinese bankers about off shore accounts, Tax Haven anonymity and off-the-books Currency Swap financing.  They showed them how to launch hundreds of IPOs using VIE's on US Exchanges (US$2.7 Trillion in Market Cap at their high point in the Spring of 2018).  The eager Chinese students learned all about the USD as a Reserve Currency and how to issue dollar debt obligations to eager third world banana republic "customers" in exchange for bartered steel, cement, services and labor.  They learned how to subvert third world economies with One Belt One Road, by following the US playbook, throwing them into un-repayable dollar debt and foreclosing on assets and access in lieu of dollars if repayment wasn't possible.  They learned how to prop up their currency by closing off their capital accounts and keeping "boomerang" Dollars, Euros and Yen anonymously offshore, using this secret Tax Haven money to invest in Bay Area real estate, NYC Condos, Hotel Chains and Western Businesses, again, all with the help of their new Investment Banker friends (for even heftier fees).

The CCP also quickly learned that through their very lucrative continued association with Hank's Investment Banker friends and their lawyers and lobbyists, that with the right financial incentives, they could actually have American laws changed to to their benefit, accelerating their quest for eventual reserve currency status.  With the right lobbyists, and the help of Citizen's United, with their sales pitch to legislators masquerading as a quest for openness and globalism, ostensibly benefiting the US Consumer/voter, along with the proper political contributions, they could get the US Post Office to ship their packages of eCommerce name-brand knockoffs, Opioids and Fentanyl for next to nothing direct to the homes of American citizens.  They learned they could build Amazon and Walmart into gigantic economic engines by sending shipping container loads of their cheap goods produced by Chinese slave/child labor into the American heartland, destroying small towns, retail and manufacturing jobs and any hope of opportunity for these good people in the process.  The Chinese bankers learned all of this and small town, fly-over America never knew anything about it.

"Joe lunch bucket" Americans (us) and politicians alike just assumed that the world was changing, it was all about "technology" or some such load of crap du jour, they didn't (and still don't) understand.  Even as their towns were deteriorating and their jobs were going away they still had no idea what global monetary policy was or does.  They blindly assumed things were getting tougher and they had to work harder to make a buck.  How did the Chinese people do it?  Suck it up America!  Like the French school crossing guards today, you either get on board, get left behind or eventually....start burning shit down.

Thanks a bunch Hank.....nice work.

Davos!....Let's solve the world's problems!

So here we are today.  Of course, I'd be remiss in this post if I didn't mention Davos at least once.  For those of you peasants that couldn't make it (...the $300 hot dogs and beluga relish were to die for!) ....the global playground of the elite, where the rich and famous gather to discuss the plight of the downtrodden bourgeois (us), was a tad bit melancholy this year.  I pulled one of my favorite video clips (below) where Ray, a Swiss Banker and two representatives of the CCP Public Relations Team talk about all of the incredible opportunities that the CCP is dangling in front of the world...if only the world is just foolish enough to grasp them.  I have to say these two, young, energetic Chinese folks really know how to work the crowd.  The charming, sincere young lady, I believe her Chinese name translates to "Cruella" if I'm not mistaken, I'm sure will make some unsuspecting Politburo party boss a wonderful ex-wife someday.

Moving along, the only time that the currency problem I've described above comes up is Ray's mention of it in minute 39:00 of the video clip (below).  I was expecting him to give a "WTF are you talking about?" commentary/rant, but I imagine he felt that Davos just wasn't the time or place to challenge the veracity or methods of the Chinese Communist Party...probably better to tackle it on safer, more secure American soil.  Actually, I probably would have done the same thing, being the risk adverse individual that I am.  I wouldn't want my jet to experience CCP inspired "mechanical problems" on the way home to Cleveland.

The point Ray made related to the fictional "opening up" of the financial and currency markets and transitioning the RMB toward reserve status.  He clumsily (Sorry for using that adjective Ray but if you review the clip you'd probably agree that your delivery re: these concepts could have been a little better) went into professorial mode through a mini-history lesson of reserve currency and financial center transition from Amsterdam (Dutch Gilder) to London (Sterling) and finally to New York (USD).  Again implying that China wasn't ready to take this on since they don't yet have a "real" financial center and truly functioning markets.

Again, you can judge for yourself, but when talking about the currency, Ray seemed a little flustered or perhaps nervous as he was bringing this up.  Perhaps he didn't want to piss off the wrong people?  Who knows?  He further suggested that this transition might be problematic based on the amount of debt ("bonds are piles of cash paid over time") that America would have to sell/transition to fund current deficits, over the next few years (or to infinity...whichever comes last), if there were a sudden (or not so sudden) change in the status quo.  Ray recommended, as I have discussed, that the Chinese allow the RMB to move within a given range as it marches toward becoming a floating currency, implying that this should/must be done ever so slowly, over time.  That's right..."EVERYTHING IN THE TILL....NO SUDDEN MOVES!


Of course, the Chinese sales team nodded in agreement further indicating that they have no desire to, or ever would consider, doing anything to upset the American apple cart.  Trust us! our numbers are right, we are your friends!  We didn't steal that intellectual property....Huawei??.. ..ZTO?...An Bang?....what about 'em....they're good people!....it's all a misunderstanding!

In substance Ray and I agree, but I believe, much like my take on Ray's comments regarding "Don't Borrow Money to Finance a World War and Lose!" that the human sacrifice, pain and suffering about to be generated by, and attributable to, this inevitable transition, which at some point could spiral into anything but "gradual", will be much greater than a simple movement to an open capital account for the CCP.  God help us, but we might have to recruit Hank to start making those "hat in hand...please sir I want some more" Dickensian trips to Beijing again.  As they say, history rarely repeats, but it often rhymes.

Feel free to listen to Ray's comments for yourself below.




Relevant Dalio comments:
Beginning at Minute 8:00 of the above clip.  His Currency Commentary is at Minute 39:00.  

1.) The world (America, Europe & China) are in the midst of a slowdown and at the end of a mini-debt cycle.
2.) Ray's greatest concerns are: a.) Limitations on the effectiveness of Monetary Policy going forward,  b.) The rise of Populism, Polarity and Antagonism around the globe.
3.) Ray, in his cheery optimistic way, compares the current US macro environment to 1929-1932.  Really, he does....it's not just me saying it.  He describes the 1929 US Market Collapse, the Great Depression followed by "money printing" and the accelerating populism, followed by the rise of a competing power like China. (referring to Hitler's Third Reich). 

Relevant CCP PR Team - Fang Xinghai, China Securities Regulatory Commission vice-chairman and Jin Keyu, London School of Economics professor (aka Highly Compensated CCP Sales People) comments:
Beginning at Minute 16:00, and various comments throughout the the above clip

1.) The general theme of the discussion was that: China's greatest challenge is.... that the rest of the world truly doesn't understand how great China is! I'm not going to go into any details of this incredible, absurd, misrepresented, "opening up" sales pitch because it was a flaming crock, but feel free to watch it if you have the stomach for it. If they were really serious about "opening up" they'd allow my silly little blog to get past the "great firewall". I could use another billion followers or so.....

The questions at the end of the presentation, given the context discussed in this post, were, well, to be blunt, pretty lame.  The "questions" at these events are generally in the format: 1.) "Here's my important sounding title" followed by 2.) My "pontification of some sort designed to show you how smart I am" followed by 3.) Some "off the wall irrelevant shit that the panel doesn't care about".  

The three questions asked were, first, about the PBOC Forex reserves decreasing, (this one was actually Ok).  The next was a question about Latin America (out of context given the panel) and finally the Chairman of JP Morgan Chase International got up, rambled about how "we need to do some policies" and that the "overwhelming subject of risk" faced globally is "the Cyber".  Nobody seemed to know what the hell he was talking about and there was no response from the panel.  Unfortunately, this guy is an actual "decision maker" and is probably in charge of a significant part of the Chinese Laundry, so his lack of context was a little disturbing to me.  His question would have been pretty entertaining if it wasn't also so frightening.  

Final Thoughts

Finally, (Please take me seriously here) I don't want anything discussed herein to be construed as China Bashing, China phobia or "I hate China" rhetoric.  I have a number of Chinese friends and acquaintances who I admire and respect.  I have great admiration for what the Chinese people have accomplished and  empathy for the oppression they've endured over the years.  Today the Chinese people are in relatively the same position as Westerners.  We are all the victims of incredibly shitty egalitarian Monetary policy that's gone woefully amok. 

The Chinese people are not the enemies of America....CCP Monetary policy is.  I just prefer that their horrific policy choices don't destroy Western Civilization.  What happens in Beijing should stay in Beijing.

Again, this blog post is about epically bad  financial and monetary policy, historically designed to benefit the "1%", at the expense of the 99%, all over the planet and how to recognize it and deal with it going forward, nothing more.

I also suspect that you are thinking that everything I've discussed above is most likely, dramatically different form what you thought you knew.  I also hope that you take the time to digest all of the the above and let all it all sink in.

Again, as you know, I've been writing for years in this blog about the imbalances in the Chinese currency, overstated/fake economic metrics, gigantic debt burden, "fake" IPOs and massive Off-Shore Tax Haven Asset Build Up.  Consequently, I've been predicting that the Chinese currency will eventually collapse under it's own weight.  I've said the RMB should be valued at 20:1 (or worse) rather than 7:1, for years.

Again, one more time, to be crystal clear, in summary, I was wrong.

I've concluded, over the last few months that it's not the RMB that will collapse.....the path we're on is that Western Currencies will be devaluing to the intrinsic value of the "already collapsed" RMB.  Further, I'm probably the only person saying this.  Most economists wouldn't imagine anything like this could possibly happen until they take a really unconventional, outside the box, look at the numbers.  That's exactly what the CCP is counting on. 

As a result of what's about to happen, the wholesale global sell off of CCP Controlled Tax-Haven Assets and resulting liquidity crisis (See: "When will Xi hit the Sell Button?") Central Banks around the world will be forced to implement Ray's Monetary Policies #1,#2 and #3 as best they can, full blast, printing money, increasing the supply at a breakneck pace, never seen before at any time in history.  The longer they delay, the worse it's going to get.  On an absolute basis, this expansion will make the post WWI Wiemar republic look like run of the mill QE.  Western Currencies will weaken to the current "fake" value of the RMB.  Once money supplies equalize, the "fake" RMB valuation will be realized and the CCP will be able to fully release the peg.  The RMB will then become the "cleanest dirty shirt in the Chinese laundry."  If US leadership allows this to happen, the PBOC will finally be able to let the RMB float......and the US Dollar will no longer be the world's reserve currency.  The CCP will have broken the dollar with a fake, shell game currency scam.....we will have been robbed by little old Chinese guys in a motorized cart.....and we didn't even see it coming!





That, my friends, is China's end game and I believe they are nearing the point where they will have enough off-shore financial firepower to push the button.  Let's just hope and pray that it doesn't happen overnight.     

If we, collectively as Americans (The highly-pissed-off-French-school-crossing-guards or the Venezuelans certainly aren't going to figure it out) don't do something about this mess, the greatest Financial Crime in history could very well go unsolved and America will have forfeited its hegemony because of it.  The US & EU bankers certainly aren't going to admit their culpability today....they have been the enablers and benefactors, or in criminal terminology, they are "accomplices" and/or "accessories after the fact"....."It was just a systemic failure that nobody could possibly have seen coming!" they will opine, even as they had continually lobbied to get banking laws and consumer protections tossed on the regulatory trash heap.  Politicians won't admit or describe their complicity, as that would be tantamount to accepting responsibility for what used to be "criminal behavior" and "collusion with foreign agents" or their accomplices..... and that just doesn't happen anymore.  Everyone is just "making deals".

In a future post I'll be presenting some (relatively) simple, unilateral policy recommendations that should absolutely be implemented, behind closed doors, without political fallout and fanfare, to  EVER SO SLOWLY....NO SUDDEN MOVEMENTS ......begin to reverse what's happening.  It's not too late to save Western Civilization, but we've come way too far down this ugly path for a change in direction to be easy and painless....

Let's hope our DC leadership starts to work together, get focused and make some really good systemic policy decisions, solely in the interest of the American people......

I can't believe I just typed that.....but hey, as my Mom & Dad always told me.....even though I'm sure they never thought they'd be, a generation removed, indirectly instrumental in saving Western Civilization from financial collapse...

"Ya' gotta Aim High.....But remember to celebrate the little successes...." 

PS: Ray, @RayDalio - If you have a chance, please feel free to comment on this thesis.  My guess is that you are most likely conflicted between your love for America, the country that gave you virtually unlimited opportunity to follow your passions, live your dreams and accumulate riches beyond anyone's wildest imagination.....and your desire to make a few bucks on this trade.  Of course, if you are contemplating, or already are going terrifically "short" the dollar (i.e.Western Civilization) and/or "long" China I'd fully understand your continued silence on the topic.  All the best....