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Barclays fined $2.4 billion for FX manipulation, to fire 8 staff

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Barclays Plc (BARC.L) pleaded guilty to a U.S. criminal charge and was fined $2.4 billion (1.5 billion pounds) by U.S. and British authorities on Wednesday for manipulating foreign exchange rates.
The British bank also agreed to fire eight employees as a result of the settlement, according to the New York Department of Financial Services (NYDFS).
The bank will pay $710 million to the U.S. Department of Justice, $485 million to the NYDFS, $400 million to the Commodities Futures Trading Commission and $342 to the U.S. Federal Reserve. It was also fined a record 284 million pounds, or $441 million, by Britain's Financial Conduct Authority.
Barclays was one of five banks to be fined a total of $5.7 billion by authorities on Wednesday. Its fine was far higher than the other banks, as it did not take part in a group settlement in November, because it wanted to include the powerful NYDFS in its settlement.
Barclays had set aside $3.2 billion for potential fines related to past FX trading. It could face further punishment related to electronic systems used in FX trading, which the NYDFS said it will continue to investigate.
Benjamin Lawsky, New York superintendent of financial services, said a number of Barclays employees involved in the misconduct were no longer employed by the bank and four were fired last month, including its global head of FX spot trading in London and a director on the FX spot trading desk in New York.

Lawsky ordered the bank to fire another four staff who it still employed, including a vice president on the emerging markets trading desk in New York and two directors on the FX spot trading desk in New York.

Barclays Settles ISDAFIX Manipulation Charges for $115M – Analyst Blog

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Barclays PLC 
BCS

 is set to pay a penalty of £74.2 million ($115 million) to the U.S. Commodity Futures Trading Commission (CFTC) to settle charges of manipulating U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX). Notably, the UK-based bank became the first to be hit with a penalty regarding manipulation of the USD ISDAFIX.


Apart from payment of the penalty, Barclays is also required to cease and desist from further violations as charged, and undertake remedial actions as specified and to improve internal controls. 

USD ISDAFIX is a global benchmark, used for setting values of interest rate swaps, and used as a valuation tool for a number of financial products. CFTC's finding stated that during the aforementioned period Barclays was engaged in executing interest rate swap spread transactions in such a manner so as to influence the published USD ISDAFIX and derive benefits in its derivatives positions. Further, the UK based banking giant tried to manipulate USD ISDAFIX through its employees by providing false and misleading USD ISDAFIX submissions. 

Also, Barclays announced the settlement over the prolonged industry-wide probe into the foreign exchange market manipulation. The regulators involved were CFTC, the New York State Department of Financial Services, the U.S. Department of Justice, the Board of Governors of the Federal Reserve System and the UK Financial Conduct Authority. The company pleaded guilty for violating an US anti-trust law. 

Separately, per a Bloomberg report, Barclays failed in its attempt to dismiss a lawsuit by U.S. regulators for alleged manipulation of trades on electricity contracts. Per the court ruling, "the Federal Energy Regulatory Commission (FERC) has alleged both a sufficient factual and legal basis to support its claim of manipulation." The lawsuit claims $488 million in fines. 

Bottom Line 

We remain encouraged by Barclays' efforts in gradually resolving its legal issues. Also, the recent settlements are not likely to impact its financials in the upcoming quarters as these are covered by the company's existing provisions. 

http://www.nasdaq.com/article/barclays-settles-isdafix-manipulation-charges-for-115m-analyst-blog-cm479435

Ukraine hikes rate to 30%, to avert hyperinflation and currency plunge

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The National Bank of Ukraine is raising its benchmark interest rate to 30 percent from 19.5 percent, the biggest increase in 15 years. It reflects the bank’s attempt to save the collapsing economy from hyperinflation that some estimate at 272 percent.
The new refinancing rate becomes effective from Wednesday, Ukraine’s National Bank said Tuesday.
This is the second rate increase this year, as the bank raised it in February to 19.5 percent from 14 percent.
The decision was taken because the bank saw the "threat of inflation had risen strongly due to negative consequences from currency market panic," the National Bank chief Valeriya Gontareva said in a media briefing.
The bank also kept in place the requirement for companies to sell about 75 percent of their foreign currency earnings, which is also hoped, will stabilize the hryvnia. Gontareva hopes it will return the currency to a level of 20-22 to the US dollar "quickly".

The domestic currency, the hryvnia, has lost about 70 percent since the start of the Maidan unrest a year ago. On Tuesday it was trading at 26 hryvnia to the Dollar, while a year ago a greenback bought 8 hryvnia.
This is pushing up inflation, with official numbers showing prices are rising by 28.5 percent in annual terms. However, separate research by Johns Hopkins professor Steve Hanke suggests the real inflation rate is 272 percent, the world’s highest, and well above Venezuela’s 127 percent rate

Ukraine and China ink $2.4 bn currency swap

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Ukraine and China have signed a currency swap agreement worth $2.4 billion, according to the National Bank of Ukraine (NBU). Ukraine expects it will relieve pressure on its currency which has lost above 40 percent against the US dollar in a year.
The three year agreement was signed in Shanghai by the governor of the National Bank of Ukraine(NBU) Valeria Gontareva and the governor of the People's Bank of China Zhou Xiaochuan, according to NBU’s press release published on Friday.
Ukraine will provide some 54 billion hryvnia and China 15 billion yuan within the swap line.
"This agreement is extremely important for our countries, being strategic partners, and will promote the economic development of both countries. The funds received under the agreement may be used to finance commercial operations and direct investments between the two countries,” Gontareva said.
The practical implementation of currency swap arrangements will cut the demand of importers for foreign currency, which will lower the pressure on the hryvnia exchange rate and help stabilize the situation in the domestic money market, she added.
The hryvnia has lost about 44 percent since last May standing at 20.9 against the US dollar on May 15.
The agreement will come into effect in June when the previous agreement, concluded in 2012 expires. It will enable companies from both countries to use national currencies for export-import operations and to conduct settlements in national currencies without involving the currencies of other countries.
Ukraine’s economy is currently facing tough times; the country’s foreign debt totaled $72.9 billion at the beginning of 2015. Ukraine’s National Bank reserves have fallen dangerously below $5.5 billion in March, and the national currency, the hryvnia, has lost more than half its value in 2015.
Ukraine and China agreed on economic and technical cooperation worth $8 million in January. Ukraine’s exports to China reached $2.7 billion last year while import amounted to $5.4 billion.

The New Order Emerges

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China and Russia have taken the lead in establishing the Asian Infrastructure Investment Bank (AIIB), seen as a rival organisation to the World Bank and the Asian Development Bank, which are dominated by the United States with Europe and Japan.
These banks do business at the behest of the old Bretton Woods order. The AIIB will dance to China and Russia's tune instead.
The geopolitical importance was immediately evident from the US's negative reaction to the UK's announcement this week that it would join the AIIB. And very shortly afterwards France, Germany and Italy also defied the US and announced they might join. In the Pacific region, one of America's closest allies, Australia, says she is considering joining too along with New Zealand. The list of US allies seeking to join is growing. From a geopolitical point of view China and Russia have completely outmanoeuvred the US, splitting both NATO and America's Pacific alliances right down the middle.
This is much more important than political commentators generally realise. We must appreciate that anything China does is planned well in advance. Here is the relevant sequence of events:
• In 2002 China and Russia formally adopted the founding charter for the Shanghai Cooperation Organisation, an economic bloc that today contains about 35% of the world's population, which will become more than 50% when India, Pakistan, Iran, Afghanistan and Mongolia join, which is their stated intention. Russia has the resources and China the manufacturing power to develop the largest internal market ever seen.
• In October 2013 George Osborne was effectively summoned to Beijing because China wanted London to be the base to develop renminbi-denominated financial instruments. London has served China well, with the UK Government even issuing the first renminbi-denominated foreign (to China) government bond. The renminbi is now on the way to being a fully-fledged international currency.
• The establishment of an infrastructure bank, the AIIB, will ensure the lead funding is available for the rapid development of road, rail, electric and electronic communications throughout the SCO, ensuring equally rapid economic development of the whole of the Asian continent. It could amount to the equivalent of several trillion dollars over time.
The countries that are applying to join the AIIB realise that they have to be members to access what will eventually become the largest single market in the world. America is being frozen out, the consequence of her belligerence over Ukraine and the exercise of her hegemonic power through the dollar. America's allies in South East Asia are going with or will go with the new AIIB, and in Europe commercial interests are driving America's NATO partners away from her, turning the Ukraine from a common cause into a festering liability.
The more one thinks about it, the creation of the AIIB is a masterstroke of tactical genius. The outstanding issue now is China and Russia will need to come up with a credible plan to make their currencies a slam-dunk replacement for the dollar. We know that gold may be involved because the SCO members have been accumulating bullion; but before we get there China must manage a deliberate deflation of her credit bubble, which will be a delicate and dangerous task.
Unlike the welfare-driven economies in the west, China has sufficient political authority and internal control to survive a rapid deflation of bank credit. When this inevitably happens the economic consequences for the west will be very serious. Japan and the Eurozone are already facing economic dislocation, and despite over-optimistic employment numbers, the US economy is faltering as well. The last thing America and the dollar needs is a deflationary shock from China.
The silver lining for us all is a peace dividend: it is becoming less likely that America will persist with a call to arms, because support from her allies is melting away leaving her on her own.

De-Dollarization Accelerates As More Of Washington’s “Allies” Defect To China-Led Bank

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The global de-dollarization trend continues as it appears the UK’s move to join the China-led Asian Infrastructure Development Bank has indeed shown other US “allies” that spurning Washington’s advice is actually acceptable and concerns about the institution’s “standards” may simply be a diversion aimed at undermining China’s attempt to exercise more influence in its own backyard. Here’s more from the NY Times: 
Ignoring direct pleas from the Obama administration, Europe’s biggest economies have declared their desire to become founding members of a new Chinese-led Asian investment bank that the United States views as a rival to the World Bank and other institutions set up at the height of American power after World War II.
The announcement on Tuesday by Germany, France and Italy that they would follow Britain and join the Chinese-led venture delivered a stinging rebuke to Washington from some of its closest allies. It also called into question whether the World Bank and the International Monetary Fund, which grew out of a multination conference in Bretton Woods, N.H., in 1944 and established an economic pecking order that lasted 70 years, will find their influence diminished.
The announcement by Germany, Europe’s largest economy, came only six days after Secretary of State John Kerry asked his German counterpart, Frank Walter-Steinmeier, to resist the Chinese overtures until the Chinese agreed to a number of conditions about transparency and governing of the new entity. But Germany came to the same conclusion that Britain did: China is such a large export and investment market for it that it cannot afford to stay on the sidelines.
South Korea, another US ally that the Obama administration has not-so-subtly lobbied to stay out of the AIIB for the time being, is reportedly reconsidering a bid to join and although reports that Seoul had already committed to the venture appear to have been a bit premature, the country will make a decision this month and is expected to discuss specifics this weekend at a meeting with Chinese and Japanese officials. Here’s FT: 
The foreign ministers of China, Japan and South Korea will meet in Seoul this weekend for the first time in three years, in an effort to calm tensions in the region.
The trio have strong economic ties but frosty relations. International angst about this state of affairs among the regional superpowers has been further piqued by the Asian Infrastructure Investment Bank, a Chinese-led initiative sparking alarm in Washington and proving divisive elsewhere.
Meanwhile, even Europe’s own “magical fairyland” is taking the plunge. Via Bloomberg: 
China welcomes Luxembourg’s application to be a founding member of the Asian Infrastructure Investment Bank, China’s finance ministry says in a statement on website.

Rate Hikes Already Priced into the US Dollar Index

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Buy the Rumor, Sell the News
All those bemoaning what rate hikes could potentially portend for the US Dollar need to get a grip, the rate hikes are already priced in.  That`s how markets work, buy the rumor and sell the news or actual event. Moreover, not just one 25 basis point rate hike, taking a look at that chart, several rate hikes have already been priced into the US Dollar Index.  

A Perfect Dollar Storm
It really has been the perfect storm for the US Dollar Index from struggling emerging markets to the oil and commodities meltdown to the strong economic data here in the states and Europe finally initiating a QE Program. But the trade has gotten way ahead of itself, probably the most crowded trade on the street right now, and definitely due for a pullback. The momentum resulting from the start of European QE being the primary catalyst with the Euro cratering far beyond the fundamentals of historical relationships between the two currencies. It too is overdone to the downside and due for a snapback rally either this week or next, and the coiled nature of that trade suggests the snapback will be rather sizable.


One Word Folks: Entitlements
Therefore all those worried about the appreciation of the US Dollar Index being the end of the world can take a deep breath and relax.  The Fed can still raise rates and the US Dollar Index will probably weaken on the news from current levels. There has been a lot of bullish optimism for a country that continues to push out an unbelievably high level of government debt each year to be financed and subsidized outside of its cash inflows. The US Dollar isn`t always going to be this strong versus global currencies, even with much higher short-term interest rates.

Australia Survived a Strong Currency & High Interest Rates
However even if the US Dollar continues to appreciate, big freaking deal, it has happened before in this country and the economy didn`t fall off a cliff. In fact just the opposite occurred, a strong dollar means the US economy is competing on the global stage in a very robust manner. This is a good thing, like cheap energy and a robust job market, nothing too complain about! How did Australia survive all those years when their commodity based economy was performing so well and ahead of its peers? They had a strong currency and much higher interest rates, and their economy didn`t fall off a cliff due to either of those factors in having higher interest rates and a stronger currency than most of their global peers. This is how finance and currency crosses are supposed to work in a market based global economy.

Whiners going to Whine
All this whining about a strong US Dollar Index and Rate Hikes is really about the end of government handouts, corporate welfare programs for the 1%, and just plain weak mindedness in general. Like they cannot possibly succeed on the world stage without the psychological crutch of a weak dollar! The ironic part of this whole consternation over the appreciating dollar is that most of these same people were complaining about the disastrous effects of the weak dollar just a couple of years ago. You know oil is going to 200 dollars a barrel, inflation to 6%, and the purchasing power of the US Consumer being eroded indefinitely, not to mention how expensive it was to travel to other counties for Americans.
Glass Half Full
Quit looking at the world as glass half empty, currency crosses fluctuate with global economics and relationships between countries. There is a constant give and take that goes on based upon the business cycles and development stages of the local economies.  Having weak and strong currencies serves an economic purpose, and function as natural forces on correcting inefficient and uncompetitive country practices. This is how finance and economics work. Thank goodness the US has finally gotten the upper hand the past couple of years after really taking it on the chin from the BRIC`s when they had their robust economic growth cycle.
Always Good to be Strong
In short, a strong dollar is good. In this case it is a sign of strength and confidence in the business prospects of the economy, and a vote for capitalistic principles in a globally competitive marketplace. There are many advantages to having a strong US Dollar.  It helps attract capital, it lowers overall inflation, while providing stronger purchasing power for US Consumers, making travel more affordable.  It is a sign of a robust economy relative to its global peers. I am sure Australia wishes they could time travel back to the glory days of the commodity boom based upon the emerging market parabolic growth phase led by China. They would gladly take a stronger currency, higher rates and all the good benefits that go along with an outperforming economy versus their current state of affairs represented by a much weaker currency, lower interest rates and much weaker business prospects.

Currency Investors Already Front Running the Fed on Interest Rates
The US should thank its lucky stars investors value the US Dollar, and consider it a good place to invest in relative to our global peers because currencies move in cycles, and trust me this will not always be the case. But the appreciating currency is telling investors the inevitable that a strong US Dollar is indicative of a strong economy and rising rates are already being factored into the appreciation. Wall Street and Global investors don`t wait for the Fed to raise rates, they already are voting via the currency markets that rates are going to rise in the US, and much of these rate hikes are already being priced into the currency. Look at it this way, investors in the currency markets are already miles ahead of the fed front-running their rate hikes. Their analysis is that interest rates are going to rise in the US over the next quarter, and this is part of the tremendous run-up in the US Dollar. Subsequently forget about the ramifications of the Fed raising interest rates on the US Dollar Index, it has already been factored into the market by currency investors. The real news would be if for some reason the Fed didn`t raise rates over the next quarter!

http://www.zerohedge.com/news/2015-03-12/rate-hikes-already-priced-us-dollar-index

Plunge Protection Exposed: Bank Of Japan Stepped In A Stunning 143 Times To Buy Stocks, Prevent Drop

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Since 2010, The Bank of Japan has 'openly' - no conspiracy theory here - been a buyer of Japanese stock ETFs. Their bravado increased as the years passed and Abe pressured them from their independence to 'show' that his policies were working to the point that in September 2014, The BoJ bought a record amount of Japanese stock ETFstaking its holdings to over 1.5% of the entire market cap, surpassing Nippon Life as the largest individual holder of Japanese stocks. However, as WSJ reports, The BoJ has now gone full intervention-tard - buying Japanese stocks on 76% of the days when the market opened lower.
The Bank of Japan’s aggressive purchasing of stock funds has helped Japanese shares climb to multiyear highs in recent months. But some within the central bank are growing uncomfortable about the fast-paced rally and the bank’s own role in fueling it.
Since Gov. Haruhiko Kuroda took office in March 2013 and introduced monetary easing of what he called a “different dimension,” the central bank has sharply increased its buying of baskets of stocks known as exchange-traded funds. By directly underpinning the market, officials have tried to encourage private investors to follow suit and put more money in stocks in the hope of stimulating the economy and increasing inflation.
During the past two years, the central bank entered the stock market roughly once every three days, picking up a total of ¥2.8 trillion ($23 billion) of ETFs that track Japan’s major stock indexes, according to Bank of Japan records. That distinguishes it from the U.S. Federal Reserve and European Central Bank, both of which have bought bonds to pump up the economy but haven’t directly bought stocks.
Analysts say the bank’s action has been a significant driver of Japan’s stock-market rally in recent months, combined with hefty purchases by the $1.1 trillion Government Pension Investment Fund. Their buying has often countered selling pressure from individuals in the market and made up for a weaker appetite among foreign investors.
The central bank has stepped in mostly when market sentiment was weak. Three-quarters of the central bank’s buying occurred on days when the benchmark Topix index opened lower, according to a Wall Street Journal analysis of BOJ data.
So much for independence...
BOJ officials used to be cautious about purchasing ETFs, worried that it could distort market activities and put the central bank’s own financial health at risk. But under pressure from politicians following the global financial crisis, the bank changed its stance in late 2010.
“We led the cows to water, but they didn’t drink it, even though we told them it tasted good,” Miyako Suda, who was a board member then, wrote in a 2014 book discussing monetary easing at that time. “So we thought we should drink it ourselves, showing them it was tasty.”

http://www.zerohedge.com/news/2015-03-11/how-boj-stepped-143-times-send-japanese-stocks-soaring

David Stockman Warns “It’s One Of The Scariest Moments In History”

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"The Fed is out of control," exclaims David Stockman - perhaps best known for architecting Reagan's economic turnaround known as 'Morning in America' - adding that "people don't want to hear the reality and the truth that we're facing." The following discussion, with Harry Dent, outlines their perspectives on the looming collapse of free market prosperity and the desctruction of American wealth as policymakers "take our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that's been built up and created by the American people over decades and decades." The Fed, Stockman concludes, "is a rogue institution," and their actions have led us to "one of the scariest moments in our history... it's a festering time-bomb and we're not sure when it will explode."
Key Excerpts from the detailed interview:
David Stockman: People don't want to hear the reality and the truth that we're facing. But I think there is an enormous appetite out in the country to get a different perspective than what you have from the media day in and day out, so I say the fed is out of control. Its balance sheet is exploded. It's printing money like never before.
Zero interest rates for 70 months have basically destroyed the pricing function in the financial markets. I said that as a result of this, Wall Street has become a huge casino which basically rewards gamblers, but it is not functioning as a capital raising, capital allocating instrument, which really is what the financial markets should do in a free market system. I warned about the size of the federal debt. I'm an old budget director from the Reagan days. We had a trillion dollar national debt, a 3 trillion economy when I started. Today, it's 18 trillion. Eighteen fold gain in the last 35 years versus maybe a fourfold gain in the economy. So all of these trends are taking our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that's been built up and created by the American people over decades and decades.
So people don't want to hear the warning. They don't want to hear the truth in the establishment, in Wall Street, in Washington, but I think out in the country they must.
*  *  *
David Stockman: Well it's obvious that Wall Street is addicted to cheap money and unlimited flow of new liquidity into the markets. Traders can then borrow money on an overnight basis for five basis points, which is nothing. Buy anything with a yield like a ten-year or five-year bond or speculate in stocks that they think might be going up or even get fancier and go into derivatives or commodity futures or whatever. And then capture the profit or the spread between the cheap money that the fed is putting into the overnight market and the yield or profit they're making on the asset, and they're leveraging way up.
You know, 90 percent, 95 percent in many cases. So obviously, the whole financial market is dependent on this, but it comes at a cost. It is destroying savers in America. If you worked a lifetime and saved $100,000.00, you're making $400.00 a year in interest from a lifetime of savings. I think there will be a revolt sooner or later of the American public against this disastrous crushing of the saver in order to essentially accommodate Wall Street's appetite for liquidity.
*  *  *
David Stockman: Well you know, the problem is the fed, I've described, is a rogue institution. It's operating beyond any of the legislative intent or statutory authority that's been given to them over the years. They have essentially become a national monetary planning agency that has decided they can drive the daily, weekly, monthly movement of the economy by manipulating interest rates and the yield curve by putting a put under the stock prices by essentially trying to drive the entire 18 trillion or 17 trillion US economy from Wall Street. That is fundamentally at variance with the requisites of a healthy capitalist economy. You need an honest financial market. Not a manipulated one.
You need price discovery by people that have their money at risk, not the central bank.
Harry Dent: Actually, it's a centrally planned economy, isn't it?
David Stockman: Right, exactly.
*  *  *
So David, do you think the republican congress can save us from this economic sundown that we've been discussing today?
David Stockman: Well I would like to think so, and they talk a good game, but unfortunately when push comes to shove, they're in the consensus with everyone else in the beltway in Washington and are unwilling to take on the hard issues. We are borrowing still $600 billion in the last year, six years after allegedly the great recession ended, and we are setting ourselves up for trillion dollar deficits again, the next time the economy stumbles or we have a recession or some other dislocation. The fact is the fed is not abolished the business cycle. The fed has not made the world completely safe from these kinds of dislocations. So therefore, we need to look at what's driving this huge deficit, and the answer is big entitlements and big defense spending, and the republicans are unwilling to take on the Pentagon. They want more, and they're afraid to take on Social Security and the entitlements because they believe that is going to be problematic politically.
So therefore, nothing is being done about the structure of this deficit problem, and we're just basically stumbling our way into another huge crisis in ballooning national debt.
*  *  *
David Stockman: Well, it's one of the scariest moments I think in our history, but also we need to recognize we're in uncharted waters. No central bank has ever printed this much money this long, kept interest rates at zero, fueled so much speculation. Not just here, but worldwide. Not just in the normal stocks and bonds, but the whole shale boom, for instance, in the United States was massively funded by cheap debt based on oil prices that weren't sustainable, and now that's all coming unwound. We have never had deficits of ten percent of GDP back to back, or even still four or five percent four or five years into a recovery.
We have a runaway budget where the population is getting older and older, 10,000 people are retiring every day. Nothing is being done about Social Security. It's a festering time bomb, and we're not sure how it will explode, but we know it isn't sustainable. We have a Wall Street that is more addicted to pure overnight gambling and trading and speculation for the ultra short run that is driven by robo traders, the so-called HFT money, like never before. It's unstable. That's why we see things happen like the overnight 40 percent gain with the Swiss Franc when the Swiss National Bank pulled the pay.
Forty percent overnight – not overnight, but in a couple of minutes or seconds when there were hundreds of billions of short positions in the Swiss Franc. All of these things have never existed simultaneously, not only in the United States, but worldwide. All the central banks are doing it. We're reaching the point where it's unsustainable, things are going to give and break, but the good thing is it's going to be more a disaster in the financial markets in my view, less some kind of Great Depression impact on Main Street. It will be difficult on Main Street, but Wall Street is in the gun sites of this disaster coming.
*  *  *
David Stockman: I agree. In the long run, we have to get off this debt addiction. We need to get back to sound finance both in government and households, but beginning between here and there is going to cause enormous pain for millions of households who have been herded into risky investments, junk bond funds, stock market funds, high flying biotech stocks and on and on because they were told it's the only place to be.If you put your money in a CD, you get no return. If you put your money in a safe bond, you get almost no return. Now when the big reset, as Harry calls it, happens, and the stock market drops by large magnitudes, 50 percent, more, those people who were herded into these risky investments late in life – Because remember, we have the baby boom, you know, heading towards their retirement homes, are going to be badly hurt at a time that they can't recover, and it will be a massive injustice that is being done by Washington and the fed to this current generation of middle class Americans. That will produce, in my view, a political reaction, a political revolt that will begin to say, "What's wrong here? Who believed that printing money out of thin air can make a society wealthier? Why did we do that? Who believed that we can actually create jobs and new economic output on Main Street simply by having the fed press a button and create another billion dollars?"
*  *  *
David Stockman: Yeah, I agree with that, and the point to remember is that massive money printing by central banks on a worldwide basis is inherently deflationary for two reasons. One, it fuels massive financial speculation. When we talk about speculation, we're talking about professional gamblers who borrow 95 cents and use that borrowed money that they pay practically nothing for to buy stocks or bonds or commodities or derivatives or biotech stocks and so forth as I indicated. All of that buying power is artificial. That is not coming from production today, real effort in the economy. That's coming from newly minted credit.
So it takes asset prices to unreasonable, unsustainable levels. They crash, and that creates a negative economic cycle. Secondly, massive money printing makes capital and debt too cheap to the real sector of the economy. So therefore, massive capital investments are made on the basis of cheap cost of capital, not on the basis of the likely return or sustainable return over time.
*  *  *
David Stockman: Yeah, a famous American economist once said anything that's unsustainable tends to stop. My argument is that we're at the stop point. The fed has been printing money like there's no tomorrow really for 25 years since Greenspan took over in 1987. They are now at the point where their balance sheet has become so bloated, so enormous that even the people running the fed are confused about what to do. They've painted themselves into a corner, and they're playing it by the day, and they're going to make a huge mistake. So the money printing thing is near an end.
Secondly, our political system has become totally non-functional. We have a lame duck president who can accomplish nothing, a congress that is totally paralyzed, meaning that before 2017 at the earliest, nothing will be done about our fiscal and entitlement explosion. Finally, the American people have believed falsely that all of this is going to work out. It's not going to. When they find out that the adults so called in Washington had no clue what they were doing, there is going to be a collapse of confidence, and that will flow into the system as well.
*  *  *
So it seems like this bubble bursting is inevitable. How much time do we have? Is it years, months? How will we know? Are there some clues we can look into to make sure that we're prepared?
David Stockman: There's really no magic numbers here, but it's remarkable that these central bank driven bubbles tend to peak after about six years. The dot com bubble started really in mid-1994 with the famous Netscape IPO. It crashed in March 2000, six years. The housing bubble roughly started in 2002. It totally crashed in 2008. Six years. The meltdown on Wall Street bottomed in March 2009. Add six years. 2015. I think we're at the end of this bubble simply based on the fact that they can't expand forever. They reach an asymptotic peak, and then confidence is lost, a catalyst occurs, a black swan appears, the selling begins, and there's nothing under this market. There is no safety net under this market.
*  *  *
Is there anything that can save us?
David Stockman: Yes, there are, and in the short run, that will be painful. There will be great dislocations, both in the financial markets and the real economy. But in the long run, that's a good thing. We have become so dependent on government, we have come to believe that the Federal Reserve drives the economy hour by hour, day by day. None of that is historically true. Real wealth, real prosperity comes from the sweat and from the enterprise and from the invention of people on Main Street, not the politicians on Wall Street who are on the central bank. So I think the big inflection point that we're facing is when the big crash comes, on the other side, maybe we can get back to the private enterprise system and the kind of family self-reliance and thrift and prudence that our prosperity was built on 40 years ago.
*  *  *
David Stockman: Well in The Great Deformation, I said, "We're heading towards a day of reckoning. This isn't sustainable." It's happening in real time, and in the updates, what I try to do is focus on the catalyst events, the catalyzing forces that will warn us when we're really getting to the edge of the cliff.
That is the central banks. Japan's central bank is out of control. I watch that. It's important to know what happens there because if the great money printing debt experience in Japan finally fails, it's going to be noted in markets all around the world. I watch the ECB, European Central Bank. It is divided between Germans who want to try to maintain some semblance of some money and the rest of Europe that would like to print and drown themselves in debt as far as the eye can see. It's important to watch China, which is a giant house of cards, that's on the verge of collapse, and that will ricochet around the world in terms of the countries that supply it. Australia, Korea, the so-called emerging markets, and what it'll do to the theory, which I think is false that China is the engine of growth in the world, it is not. It is the biggest speculative disaster in human history.
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David Stockman: Well, the crisis is unfolding by the day. It is not too late to start preparing right noW. Now is the time to begin to save if you can and minimize your outlays for unnecessary luxuries. This is going to be a devastating crisis, and people will be happy down the road if they take the steps to prepare today.

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