In the Dark

SUBHEAD: The value of money and the cost of borrowing money are, at last, completely detached from reality.

By James Kunstler on 10 September 2017 for Kunstler.com -
(http://kunstler.com/clusterfuck-nation/in-the-dark/)


Image above: An SUV moves through the darkened streets of Miami as Irma hits. From (http://www.abc.net.au/news/2017-09-11/car-drives-in-hurricane-irma-in-miami/8890806).

[IB Publisher's note: Kunstler wrote this piece before we knew exactly where and how badly it would strike Florida. As it turned out it wasn't as apocalyptic as expected. But that does not mean the situation is not dire.]

The stock market is zooming this morning on the news that only 5.7 million people in Florida will have to do without air conditioning, hot showers, and Keurig mochachinos at dawn’s early light Monday, Sept 11, 2017.

I’m mindful that the news cycle right after a hurricane goes kind of blank for a day or more as dazed and confused citizens venture out to assess the damage.

For now, there is very little hard information on the Web waves. Does Key West still exist?

Hard to tell. We’ll know more this evening.

The one-two punch of Harvey and Irma did afford the folks-in-charge of the nation’s affairs a sly opportunity to get rid of that annoying debt ceiling problem. This is the law that established a limit on how much debt the Federal Reserve could “buy” from the national government.

Some of you may be thinking: buy debt?

Why would anybody want to buy somebody’s debt?

Well, you see, this is securitized debt, i.e. bonds issued by the US Treasury, which pay interest, and so there is the incentive to buy it. Anyway, there used to — back in the days when the real interest rate stayed positive after deducting the percent of running inflation. This is where the situation gets interesting.

The debt ceiling law supposedly set limits on how much bonded debt the government could issue (how much it could borrow) so it wouldn’t go hog wild spending money it didn’t have.

Which is exactly what happened despite the debt limit because the “ceiling” got raised about a hundred times though the 20th century into the 21st so that the accumulated debt stands around $20 trillion.

Rational people recognize this $20 trillion for the supernatural scale of obligation it represents, and understand that it will never be paid back, so, what the hell?

Why not just drop the pretense, but keep on working this racket of the government borrowing as much money as it wants, and the Federal Reserve creating that money (or “money”) on its computers to infinity.

Seems to work so far.

Rational people would also suspect that at some point, something might have to give.

For instance, the value of the dollars that the debt is issued in. If the value of dollars goes down, then the real value of the bonds issued in dollars goes down, and as that happens the many various holders of bonds already issued — individuals, pension funds, insurance companies, sovereign wealth funds of foreign countries — will have a strong incentive to dump the bonds as fast as possible.

Especially if backstage magic by the Fed and its handmaidens, the “primary dealer” banks, keeps working to suppress the interest rates of these bonds at all costs.

Would the Federal Reserve then vacuum up every bond that others are dumping on the market? They would certainly try. The Bank of Japan has been doing just that with its own government’s bonds to no apparent ill effect, though you kind of wonder what happens when a snake eating its own tail finally reaches its head.

What’s left, exactly, after it eats that, too? My own guess would be three words: you go medieval. I mean literally. No more engines, electric lights, central heating….

In this land, we face a situation in which both the value of money and the cost of borrowing money would be, at last, completely detached from reality — reality being the real cost and value of all goods and services exchanged for money. Voila: a king-hell currency crisis and the disruption of trade on the most macro level imaginable.

Also, surely, a massive disruption in government services, including social security and medicare, but extending way beyond that. And then we go medieval, too. The mule replaces the Ford F-150. And The New York Times finds something to write about besides Russia and trannies.

The value of money and the cost of borrowing it is about as fundamental as it gets in a so-called advanced economy. You can screw around with a lot of things running a society, but when that goes, you’re flirting seriously with anarchy.

In the meantime, we’ll see how the social glue holds things together in those parts of Florida that are entering a preview of medieval attractions in the electrical blackout days ahead.

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Illinois drops into the gaping maw

SUBHEAD: Court ruling forces state to pay the $2 billion toward its past obligations within a year from today.

By Tyler Durden on 1 July 2017 for Zero Hedge -
(http://www.zerohedge.com/news/2017-07-01/horrific-catastrophic-court-ruling-send-illinois-financial-abyss)


Image above: Looking down the throat of a hungry steer. From (http://pixdaus.com/cow-yawning-cow-gaping-maw-yawning/items/view/81009/).

First Maine, then Connecticut, and finally late on Friday, confirming the worst case outcome many had expected, Illinois entered its third straight fiscal year without a budget as Republican Governor Bruce Rauner and Democratic lawmakers failed to agree on how to compromise over the government’s chronic deficits, pushing it closer toward becoming the first junk-rated U.S. state.

By the end of Friday - the last day of the fiscal year - Illinois legislators failed to enact a budget, and while negotiations continued amid some glimmers of hope and lawmakers planned to meet over the weekend, the failure marked a continuation of the historic impasse that’s left Illinois without a full-year budget since mid-2015, and which, recall, S&P warned one month ago will likely result in a humiliating and unprecedented downgrade of the 5th most populous US state to junk status.

Then came the begging.

According to Bloomberg, on Friday Illinois House Speaker Michael Madigan, a Democrat who controls much of the legislative agenda, pleaded with rating companies to "temporarily withhold judgment” as lawmakers negotiate. “Much work remains to be done,” the Democrat said on the floor of the House Friday, before the chamber adjourned for the day. “We’ll get the job done.”

Meanwhile, the state remains without a spending plan, its tax receipts and outlays mostly on "autopilot", leaving it with a record $15 billion of unpaid bills as it spent over $6 billion more than it brought in over the past year, and with $800 million in interest on the unpaid bills alone.

The impasse has devastated social-service providers, shuttering services for the homeless, disabled and poor. The lack of state aid has wrecked havoc on universities, putting their accreditation at risk.

However, in a "shocking" development, just hours remaining before the midnight deadline to pass the Illinois budget, and Illinois' imminent loss of its investment grade rating, federal judge Joan Lefkow in Chicago ordered Illinois to come up with hundreds of millions of dollars it owes in Medicaid payments that state officials say the government doesn’t have, the Chicago Tribune reported.

Judge Lefkow ordered the state to make $586 million in monthly payments (from the current $160 million) as well as another $2 billion toward a $3 billion backlog of payments - a $167 million increase in monthly outlays - the state owes to managed care organizations that process payments to providers.

While it is no secret that as part of its collapse into the financial abyss, Illinois has accumulated $15 billion in unpaid bills, the state's Medicaid recipients had had enough, and went to court asking a judge to order the state to speed up its payments.

On Friday, the court ruled in their favor. The problem, of course, is that Illinois can no more afford to pay the outstanding Medicaid bills, than it can to pay any of its $14,711,351,943.90 in overdue bills as of June 30.

The backlog of unpaid claims the state owes to managed-care companies directly, as well as to the doctors, hospitals, clinics and other organizations “is crippling these providers and thereby dramatically reducing the Medicaid recipients’ access to health care,” Lefkow said in her ruling.

The case is Memisovski v. Wright, 92-cv-01982, U.S. District Court, Northern District of Illinois. To see full court ruling see original article here.

Friday’s court ruling, which meant that the near-insolvent state must pay an additional $593 million per month, may have been the straw that finally broke the Illinois camel's back.

“Friday’s ruling by the U.S. District Court takes the state’s finances from horrific to catastrophic,” Comptroller Susana Mendoza, a Democrat, said in an emailed statement after the ruling.

As a result of the court decision, “payments to the state’s pension funds; state payroll including legislator pay; General State Aid to schools and payments to local governments -- in some combination -- will likely have to be cut.”

"As if the governor and legislators needed any more reason to compromise and settle on a comprehensive budget plan immediately, Friday's ruling by the U.S. District Court takes the state's finances from horrific to catastrophic," Mendoza said in a statement. "A comprehensive budget plan must be passed immediately." Realizing where all this is headed, she said that payments to bond holders won't be interrupted (more below).

Friday night's legal decision followed a previously discussed ruling, when on June 7, Judge Lefkow ordered lawyers for the state to negotiate with Medicaid recipients to come up with more money, but she stopped short of dictating how much more the state should pay each month, or when. That decision sent Illinois General Obligation bond soaring.

Earlier this week, the parties again went before the judge to say they were at an impasse, with lawyers for Medicaid recipients asking for more than $1 billion a month to cover past and ongoing costs.

While the state was livid over the decision, plaintiffs were delighted. Tom Yates, one of the lawyers who represented the Medicaid recipients. said the judge’s ruling is a “fair result” that will help them have access to care.

“Medicaid is an incredibly important program for 25 percent of the state’s population,” Yates said. It remains unclear, however, where Illinois would find the required funds.

In her ruling, Lefkow said the state must pay the $2 billion toward its past obligations beginning July 1 and ending June 30, 2018. She ordered the state to file monthly reports showing that it’s making the payments consistent with the ruling.

The Judge said she considered submissions by managed care organizations, including The Meridian MCO and Aetna Better Health Inc., in reaching her decision. Meridian is owed $540 million and Aetna is owed $700 million, the judge said. In addition, she considered submissions from doctors and clinics.

Adding insult to crippling financial injury, the judge also ordered the state to file monthly reports showing that they are making the payments consistent with the ruling.

Lawyers for Illinois countered that they could only come up with approximately $75 million more a month, which would translate to $150 million with federal matching dollars.

Although the state is way behind, state officials said in court filings that they have been making more than $1 billion in Medicaid related payments each month in 2017, “including payments to safety net hospitals, MCOs, and other providers.”

While the state was livid over the decision, plaintiffs were delighted. Tom Yates, one of the lawyers who represented the Medicaid recipients said the judge’s ruling is a “fair result” that will help them have access to care.


In her ruling, Lefkow said the state must pay the $2 billion toward its past obligations beginning July 1 and ending June 30, 2018. She ordered the state to file monthly reports showing that it’s making the payments consistent with the ruling.

See also:
Ea O Ka Aina: When the Deal goes Down 6/30/17
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Trump won't cut taxes

SUBHEAD: It demonstrates the monumental magnitude of the Debt Trap that has enveloped the Imperial City.

By David Stockman on 1 April 2017 for Bonner & Partners -
(http://bonnerandpartners.com/reagan-adviser-why-trump-wont-cut-taxes/)


Image above: "The Nightmare" oil on canvas (30"x40") by Mark Bryan who says "The Kraken has been released from the depths, and the Trumpocalypse is at hand. Hang on tight, it’s gonna be a rough ride Back to when things were “great”." Click to enlarge. From (http://www.artofmarkbryan.com/the-nightmare/).

The mules of Wall Street were back at it again, buying the dips after the overnight whoosh downward in the futures market. Apparently, it will take an actual two-by-four between the eyes to break a habit that has been working for 96 months now since the March 2009 post-crisis bottom.

We think it is plain as day, however, that we are in a new ball game that the "stimulus-blinded” mules don’t see coming at all. To wit, they have been juiced for eight years running by the Keynesian apparatchiks at the Fed who needed permission from exactly no one to run the printing presses full tilt or to rescue the market with a new round of QE or an extension of ZIRP whenever the indices began to wobble.

But now, even the money printers have made it clear in no uncertain terms that they are done for this cycle, anyway, and that they will be belatedly but consistently raising interest rates for what ought to be a truly scary reason.

That is, the denizens of the Eccles Building have finally realized that they have not outlawed the business cycle after all and need to raise rates toward 2-3% so that they have headroom to "cut" the next time the economy slides into the ditch.

Instead, they are merely storing up monetary ammo for the next downturn.

But the Wall Street mules keep buying the dips anyway because they are under the preposterous delusion that one source of "stimulus" is just as good as the next.

And since the gamblers have now decreed that the "stimulus" baton be handed off to fiscal policy, it only remains for Congress and the White House to shape up and get the job done with all deliberate speed.
But they won’t.

Not in a million years.

The massive Trump tax cut and infrastructure stimulus is DOA because Uncle Sam is broke and the U.S. economy has slithered into moribund old age.

In that context, it’s not remotely the same as the 12  members of the FOMC sitting behind closed doors for two days jawing about the short-term economic weather; and then at the conclusion of their gabfest, ordering the New York Fed’s open market desk to flood the canyons of Wall Street with cash by buying another $80 billion of bonds with digital credits conjured from thin air.

Au contraire. Fiscal policy is inherently an exercise in herding cats and an especially impossible one when the cupboards are bare.

The essence of the matter at the present state of play is the legislative equivalent of "no ticky, no washy."

Without a 10-year budget resolution for FY [fiscal year] 2018 and associated reconciliation instructions, there is no possibility of passing a tax bill or even an infrastructure spending boondoggle.

But hammering out a budget resolution, passing it in each house, and reconciling the differences in conference would take months under the best of circumstances. But given the parlous state of Uncle Sam’s fiscal condition and the partisan acrimony that already suffuses Washington in the era of Trump, passage of a budget resolution by summer would be a miracle in itself.

Indeed, even the thought of surmounting this next daunting legislative obstacle course puts to rest this week’s particular Wall Street fantasy. Namely that after being burned by the Freedom Caucus on Obamacare Lite, the Trump White House will now "pivot" to the middle and form a coalition with the Democrats to make a deal on corporate tax cuts and infrastructure spending.

Yes, and if dogs could whistle, the world would be a chorus.

That is to say, there is no conceivable fiscal policy menu that could be agreed upon by Speaker Ryan, Nancy Pelosi, Chuck Schumer, and the Donald, and then be shoe-horned into a 10-year budget resolution.


In effect, the Fed is saying to Wall Street: "Price in" a recession because we are!

After all, our monetary central planners are not reluctantly allowing interest rates to lift off the zero bound because they have become converts to the cause of honest price discovery—-nor are they fixing to liberate money rates, debt yields, and the prices of stocks and other financial assets to clear on the free market.

Yet without a budget resolution and reconciliation instructions, there is not a fiscal stimulus "ticky" and no grand bipartisan compromise on building airports and slashing corporate tax rates.

So what lies directly ahead, therefore, is another bumbling attempt by the White House and Congressional Republicans to hammer out an FY 2018 budget resolution and what amounts to a 10-year fiscal plan. And it is there where the whole fantasy of the Trump Stimulus comes a cropper.

There are not remotely 218 GOP votes for what would be a $12 trillion-13 trillion add to the national debt with the Trump Stimulus program over the next decade—-even with all the "dynamic" scoring and revenue "reflows" that are imaginable.

To be sure, this is why the GOP Congressional leadership stoutly insists on a deficit-neutral tax cut. They are keenly aware of the debt monster they have been kicking down the road—-even if the headline-reading robo-traders of Wall Street are not.

What that means, in turn, of course, is that the rapidly fracturing Trump/Republican coalition must find the offsets on the spending side of the ledger.

In short, the whole enterprise amounts to budgetary madness and demonstrates the monumental magnitude of the Debt Trap that has enveloped the Imperial City.

And the “buy the dip” crowd will soon be getting that two-by-four between the eyes.

So now is not the time to buy.


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Made for Each Other

SUBHEAD: Red team and the Blue team are just playing a game of “Capture the Flag” on the deck of the Titanic.

By James Kunstler on 13 February 2017 for Kunstler.com -
(http://kunstler.com/clusterfuck-nation/made-for-each-other/)


Image above: Illustration of the Red vs the Blue team. From (http://www.psychologyofgames.com/2015/02/red-vs-blue-which-should-you-choose/).

Don’t be fooled by the idiotic exertions of the Red team and the Blue team. They’re just playing a game of “Capture the Flag” on the deck of the Titanic. The ship is the techno-industrial economy. It’s going down because it has taken on too much water (debt), and the bilge pump (the oil industry) is losing its mojo.

Neither faction understands what is happening, though they each have an elaborate delusional narrative to spin in the absence of any credible plan for adapting the life of our nation to the precipitating realities.

The Blues and Reds are mirrors of each other’s illusions, and rage follows when illusions die, so watch out. Both factions are ready to blow up the country before they come to terms with what is coming down.

What’s coming down is the fruit of the gross mismanagement of our society since it became clear in the 1970s that we couldn’t keep living the way we do indefinitely — that is, in a 24/7 blue-light-special demolition derby.

It’s amazing what you can accomplish with accounting fraud, but in the end it is an affront to reality, and reality has a way of dealing with punks like us. Reality has a magic trick of its own: it can make the mirage of false prosperity evaporate.

That’s exactly what’s going to happen and it will happen because finance is the least grounded, most abstract, of the many systems we depend on. It runs on the sheer faith that parties can trust each other to meet obligations.

When that conceit crumbles, and banks can’t trust other banks, credit relations seize up, money vanishes, and stuff stops working. You can’t get any cash out of the ATM. The trucker with a load of avocados won’t make delivery to the supermarket because he knows he won’t be paid.

The avocado grower will have to watch the rest of his crop rot. The supermarket shelves empty out. And you won’t have any guacamole.

There are too many fault lines in the mighty edifice of our accounting fraud for the global banking system to keep limping along, to keep pretending it can meet its obligations.

These fault lines run through the bond markets, the stock markets, the banks themselves at all levels, the government offices that pretend to regulate spending, the offices that affect to report economic data, the offices that neglect to regulate criminal misconduct, the corporate boards and C-suites, the insurance companies, the pension funds, the guarantors of mortgages, car loans, and college loans, and the ratings agencies.

The pervasive accounting fraud bleeds a criminal ethic into formerly legitimate enterprises like medicine and higher education, which become mere rackets, extracting maximum profits while skimping on delivery of the goods.

All this is going to overwhelm Trump soon, and he will flounder trying to deal with a gargantuan mess. It will surely derail his wish to make America great again — a la 1962, with factories humming, and highways yet to build, and adventures in outer space, and a comforting sense of superiority over all the sad old battered empires abroad.

I maintain it could get so bad so fast that Trump will be removed by a cadre of generals and intelligence officers who can’t stand to watch someone acting like Captain Queeg in the pilot house.

That itself might be salutary, since only some kind of extreme shock is likely to roust the Blue and Red factions from their trenches of dumb narrative. If the Democratic Party had put one-fiftieth of the effort it squanders on transgender bathroom privileges into policy for mitigating our tragic misinvestments in suburban sprawl, we might have gotten a head-start toward a plausible future.

Instead, the Democratic Party has turned into a brats-only nursery school, with the kiddies fighting over who gets to play with the Legos. The Republican Party is Norma Desmond’s house in Sunset Boulevard, starring Donald Trump as Max the Butler, working extra-hard to keep the illusions of yesteryear going.

All of this nonsense is a distraction from the task at hand: figuring out how to live in the post techno-industrial world.

That world is not going to operate the ways we’re used to. It will crush our assumptions and expectations. Lying about everything won’t be an option. We won’t have the extra resources to cover up our dishonesty.

Our money better be sound or it will be laughed at, and then you’ll starve or freeze to death. You’d better hope the rule of law endures and work on keeping it alive where you live. And nobody will get special brownie points for the glory of sexual confusion.

I look for the financial fireworks to start around March – April, as the irresolvable debt ceiling debate in congress grinds into a bitter stalemate, and it becomes obvious that there will be no voucher for the great infrastructure spending orgy that Trump’s MAGA is based on. Elections in France and the Netherlands have the potential to shake apart the European Union, and with that the footing of European banks.

Pretty soon, everybody in all parties and factions will be asking: “Where did the glittering promises of Modernity go…?” As we slip-side into the first stages of a world made by hand.

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Higher Interest and Major Recession

SUBHEAD: We are being set up with higher interest rates, a stock market crash and major recession.

By Michael Snyder on 20 November 2016 for The Economic Collapse Blog -
(http://theeconomiccollapseblog.com/archives/we-are-being-set-up-for-higher-interest-rates-a-major-recession-and-a-giant-stock-market-crash)

[IB Publisher's note: This article mentions Obama setting Trump up for a major recession. I thnk it is more accurate to say that Obama continued the pretense that the economic crash of 2007-8 was over and things are going along fine in a continued recovery. Trump will unmask that falsehood and there will be hell to pay as we face unpayable debts.]


Image above: Chief economic strategist for Donald Trump, Steve K. Bannon (formerly head of Breitbart News) in a moment of refection. for From (https://malialitman.com/2016/11/14/trump-breaks-campaign-promise-appoints-the-head-of-the-swamp-and-palin-sychophant/).

Since Donald Trump’s victory on election night we have seen the worst bond crash in 15 years.

Global bond investors have seen trillions of dollars of wealth wiped out since November 8th, and analysts are warning of another tough week ahead.

The general consensus in the investing community is that a Trump administration will mean much higher inflation, and as a result investors are already starting to demand higher interest rates.  Unfortunately for all of us, history has shown that higher interest rates always cause an economic slowdown.

And this makes perfect sense, because economic activity naturally slows down when it becomes more expensive to borrow money.  The Obama administration had already set up the next president for a major recession anyway, but now this bond crash threatens to bring it on sooner rather than later.

For those that are not familiar with the bond market, when yields go up bond prices go down.  And when bond prices go down, that is bad news for economic growth.

So we generally don’t want yields to go up.

Unfortunately, yields have been absolutely soaring over the past couple of weeks, and the yield on 10 year Treasury notes has now jumped “one full percentage point since July”…

The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!

The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.

As I noted the other day, so many things in our financial system are tied to yields on U.S. Treasury notes.  Just look at what is happening to mortgages.  As Wolf Richter has noted, the average rate on 30 year mortgages is shooting into the stratosphere…

The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”

If mortgage rates continue to shoot higher, there will be another housing crash.
Rates on auto loans, credit cards and student loans will also be affected.  Throughout our economic system it will become much more costly to borrow money, and that will inevitably slow the overall economy down.

In a nascent administration that seems, at best, random in its beliefs, Bannon can seem to be not just a focused voice, but almost a messianic one. Why bond investors are so on edge these days is because of statements such as this one from Steve Bannon:

“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement. It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan.

With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”

Steve Bannon is going to be one of the most influential voices in the new Trump administration, and he is absolutely determined to get this “trillion dollar infrastructure plan” through Congress.

And that is going to mean a lot more borrowing and a lot more spending for a government that is already on pace to add 2.4 trillion dollars to the national debt this fiscal year.

Sadly, all of this comes at a time when the U.S. economy is already starting to show significant signs of slowing down.  It is being projected that we will see a sixth straight decline in year-over-year earnings for the S&P 500, and industrial production has now contracted for 14 months in a row.

The truth is that the economy has been barely treading water for quite some time now, and it isn’t going to take much to push us over the edge.  The following comes from Lance Roberts…

With an economy running at below 2%, consumers already heavily indebted, wage growth weak for the bulk of American’s, there is not a lot of wiggle room for policy mistakes.

Combine weak economics with higher interest rates, which negatively impacts consumption, and a stronger dollar, which weighs on exports, and you have a real potential of a recession occurring sooner rather than later.

Yes, the stock market soared immediately following Trump’s election, but it wasn’t because economic conditions actually improved.

If you look at history, a stock market crash almost always follows a major bond crash.  So if bond prices keep declining rapidly that is going to be a very ominous sign for stock traders.

And history has also shown us that no bull market can survive a major recession.  If the economy suffers a major downturn early in the Trump administration, it is inevitable that stock prices will follow.

The waning days of the Obama administration have set us up perfectly for higher interest rates, a major recession and a giant stock market crash.

Of course any problems that occur after January 20th, 2017 will be blamed on Trump, but the truth is that Obama will be far more responsible for what happens than Trump will be.

Right now so many people have been lulled into a sense of complacency because Donald Trump won the election.

That is an enormous mistake.

A shaking has already begun in the financial world, and this shaking could easily become an avalanche. Now is not a time to party.  Rather, it is time to batten down the hatches and to prepare for very rough seas ahead.

All of the things that so many experts warned were coming may have been delayed slightly, but without a doubt they are still on the way. So get prepared while you still can, because time is running out.

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