Eric's 3D Financial Blog

Progressivism's Failures: From Minimum Wages to the Welfare State

Sat, 03 Apr 2021 14:07:33 GMT

. . . inflating the money supply during recessions only erodes the paychecks of low-income earners.

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The Property-Based Social Order Is Being Destroyed by Central Banks

Sat, 03 Apr 2021 13:53:30 GMT

Loose money leads to loose morals and loose people . . . .

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Why Beijing Wants a Digital Yuan

Wed, 31 Mar 2021 01:13:12 GMT

Were the dollar ever unseated, it would drastically alter the ability of the US to maintain its present deficits

In his 2011 book On Russia, former US secretary of state Henry Kissinger used the ancient Chinese game of Weiqi, or Go, as it is also commonly known, as an extended metaphor to conceptualize and explain the decisions of the Chinese regime in both foreign and domestic policy. A game of strategic domination akin to chess, Go is won by building and maintaining key positions around the board, rather than by any strategy of outright attrition. Understood as one of the stones placed upon the board, the digital yuan joins the Belt and Road Initiative (BRI), the Regional Comprehensive Economic Partnership (RCEP), and militarization of the South China Sea as part of a strategy for squeezing US positions both internationally and domestically.

In the struggle to dominate the multidimensional board of geostrategy, space, cyberspace, air, land, and sea, the digital yuan poses a new and unique challenge to the US regime. Though there has long been speculation, even serious discussion, of the dollar being replaced or eventually displaced as the world reserve currency, it has remained the overwhelming currency of choice, due in part to institutional inertia but also because of the continued relative economic predominance maintained by the US. As Tim Morrison pointed out in Foreign Policy a little over a year ago, this “exorbitant privilege” entails many advantages for Washington. Chief among them is the US's ability to cheaply and immediately finance its own deficit spending, as well as disproportionate power in imposing economic sanctions.

Though the most recent burst of covid-19-related spending in the US has rekindled talk of the demise of the dollar, over 80 percent of all international settlement transactions continue to be conducted in dollars . As to how the full-scale launch of the digital yuan (DC/EP) may undermine this standing, it provides the Chinese regime two immediate advantages. The first is that in the age of ubiquitous mobile-phone service and devices, millions of rural Chinese will gain access to banking services previously unavailable, upping demand and circulation of the yuan and enhancing the integration of rural Chinese into the larger Chinese economy. Second, unlike cryptocurrencies like bitcoin, the digital yuan is controlled by the Chinese regime and will allow it a clear, real-time picture of the Chinese economy, providing greater ease for the regime to centrally manage and plan its fiscal and monetary policies. Combined with their investments and involvement in Africa and Central Asia via the BRI, it is not difficult to imagine such immediate access to China's legal tender. This is key, as no other digital currency is yet so recognized by any state, potentially sending demand for digital yuan soaring across Central Asia and Africa and increasing its use in settling international transactions.

Though it had reigned uncontested for a century, it took comparatively little time for the British pound to lose its place as the global reserve currency. In the age of acceleration, the dollar’s fall could be even more abrupt and the fall more precipitous. The Global Financial Crisis signaled the end of an economic order. The next iteration of that order has yet to be determined. Were the dollar ever unseated, it would drastically alter the ability of the US to maintain its present deficits, which show no sign of abating, and which are the foundation of the US fiscal-military state.

Though arguably still preponderant, Washington's relative economic and geopolitical power continues to decline compared to that of Beijing. The digital yuan is likely to continue this trend. Digitizing the dollar, as Morrison suggested in his Foreign Policy article, is an obvious and necessary countermove—from the US regime's perspective—to the arrival of the digital yuan. 1 The Trump administration did nothing to that effect, however, and the Biden administration has articulated no clear vision of the future of cryptocurrency or a digital dollar in the US besides vague indications of coming regulations. There's certainly nothing so sweeping as the digitization of the dollar. For now, this limits Washington's ability to compete with Beijing in terms of seizing the benefits of a regime-approved digital currency.

1. Apart from the threat such a situation poses to the position of the dollar internationally, Beijing's launch of the digital yuan also throws further into question the future of bitcoin and other existing cryptocurrencies. The majority of bitcoin mining is done in China. As such major existing cryptocurrencies, themselves opaque to external surveillance and unable to be controlled by the Chinese regime, now compete directly with the digital yuan, there exists the threat that China may abruptly follow India in considering banning all other cryptocurrencies . It has, after all, done so in the past and has hinted it may do so again . As corporations and institutional investors in the United States and Europe have, in the past year, begun taking substantial stakes in some of these cryptocurrencies, like bitcoin and ether, a sudden shock brought about by Beijing fiat banning those currencies in China could trigger unknown volatility and risk to US and global financial markets as these institutions hemorrhage untold billions.

Author:

Joseph Solis-Mullen

A graduate of Spring Arbor University, J.S. Mullen is a current graduate student in the political science department at the University of Illinois. An author and blogger, his work can be found at http://www.jsmwritings.com.

How a Small Rise in Bond Yields May Create a Financial Crisis

Sun, 21 Mar 2021 17:57:28 GMT

There are a lot of problems when entire markets have based their valuations on inflationary policies not generating inflation.

How can a small rise in bond yields scare policymakers so much?

Ned Davis Research estimates that a 2% yield in the US 10-year bond could lead the Nasdaq to fall 20%, and with it the entire stock market globally. A 2% yield can cause such disruption? How did we get to such a situation?

Central banks have artificially depressed sovereign bond yields for years. Now, a small rise in yields can cause a massive market slump that evolves into a financial crisis.

Quantitative easing was designed as a tool to provide liquidity to a scared market and benefit from exceptionally attractive valuations of the lowest-risk assets, sovereign bonds. Central banks would cut rates and purchase these high-quality, low-risk assets from banks, thus allowing financial entities to lend more to the businesses and families and strengthen confidence in the economy. Once financial conditions improved, central banks would reduce their balance sheet and normalize policy. This never happened.

Central banks started purchasing sovereign bonds at rock-bottom valuations and continued buying them when they went from being underpriced to massively overpriced, regardless of the state of the economy, maintaining purchases in growth periods. This led to the European Central Bank purchasing sovereign bonds even when governments were enjoying negative real and nominal yields in their issuances. Bond yields became so low that the gap between bond prices and the reality of risk and solvency of the issuer widened to extreme levels. Southern Europe sovereign bonds “traded” at all-time high prices and historic-low yields despite worsening deficits and weaker economic conditions.

The Federal Reserve did the same. Throughout the growth periods, Yellen and Powell continued with aggressive asset purchases and low rates, bringing the 10-year sovereign bond yield to an abnormal level for a growing or recovering economy.

What happens when the central bank makes the highest-quality and lowest-risk asset extremely expensive? That savers take more and more risk for lower yields in other assets and that the perception of risk is clouded, driving investors to take too much risk in equities and bonds because the central bank is manipulating the most important risk signal: rates.

Interest rates are the price of risk. Eternally and artificially depressed rates create bubbles and the roots of the next crisis.

Central banks tell us that rates are low because the market demands them. However, they will not allow rates to float freely and when bond yields rise with a mild bounce in inflation expectations central banks immediately step up purchases and yield curve management policies, which shows that such excuse is simply false.

Think about this for a second. A mild increase of US 10-year bond yields to 2%, a more than logical move considering inflation expectations and the recovery of the economy, may cause a financial crisis not because of this modest rise, but because of the massive level of risk built into the economy from the prior artificial depression of those yields.

A small bounce in yields would simply collapse the massive deck of cards of risk built into the economy when rates were manipulated down at any cost.

What mainstream economists call a “rate tantrum”—rates go up, markets down as investors unwind risk-on bets—is in reality a “rate hangover”—waking up from a binge-drinking fest of disproportionately low rates for too long. The worst is that rates are so abnormally low anyway and risky bets so high that even a set of dovish messages from central banks cannot prevent a correction.

Why? A 2% yield in the US 10-year bond would generate a massive outflow of capital from emerging markets, driving their bond yields to unsustainable levels because in the past years these economies have been accustomed to believing that twin deficits and massive imbalances are the way to go.

This would not just happen in emerging markets. The riskiest assets, high-yield bonds and cyclical equities, as well as those sectors that benefitted the most from low rates and high liquidity, technology, would suffer together. This reaction would make it impossible to hide from an abrupt market correction because the correlation built in the past ten years is simply too high. Falling tech stocks? Falling “value” stocks as well.

What worries me the most is that the message from most consensus comments is that central banks should accelerate financial repression to avoid a market slump. Instead of paying attention to the risks built in the past decade due to abnormal rates and bond valuations, instead of raising the alarm on the numerous bubbles we can see in markets, most are asking central banks to inflate the bubble further at any cost.

However, this time it may not work. Why? Because this time inflation is actually rising, and rates rise even with central bank dovish policies and financial repression. You wanted inflation, you got it. What is the problem of a bounce in inflation if the economy is recovering strongly? The problem is that, for years, investors have been told to take massive and rising risk betting on one thing and the opposite: That the economy is going to grow, and inflation recover but central banks will keep low rates and high liquidity regardless.

An economy can function without a serious crisis for many years with a 2% US 10-year bond yield in normal conditions of a growing economy with 2% inflation. On the other hand. there are a lot of problems when entire markets have based their valuations on inflationary policies not generating inflation.

The risk of a financial crisis does not come from rising bond yields. The risk of a financial crisis was created by lowering bond yields to unrealistic and unjustifiable levels in the first place.

Author:

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

He is a professor of global economy at IE Business School in Madrid.

Cashless Societies and Security Concerns

Wed, 13 Jan 2021 14:14:59 GMT

There are numerous concerns with the inevitable move of going cashless, but the biggest one by far is security. We're breaking down the concerns, and exploring what's at risk.

You’ve probably been prepared for the coming of a cashless society since Y2K. For the young ones among us, that’s the year 2000.

Even if you’ve never heard of the Y2K phenomenon and all the supposed futuristic aftermath, you’ve probably experienced a cashless life in some way or another.

You might be one of those people who rarely even carry or use cash. You might spend your day ordering food, catching shared-ride services, and buying whatever you need — all without cash.

With the rise of cashless payment options like Apple Pay, Zelle, and similar contactless payment methods, you might think a cashless society is inevitable, if not already here.

Plus, the rise of cryptocurrency (i.e. bitcoin, litecoin, etc.) makes it seem like it’ll be just a matter of time until you can use your bank-connected subdermal microchip to check out at the grocery store.

Before you schedule your microchip implant, you should know that there are problems with a totally cashless society that you may not have considered.

Here’s why a totally cashless existence still might be further off than you think.

But first, what is a cashless society?

It’s exactly what it sounds like. It’s a monetary system that would get rid of any physical forms of money. This could include both paper money and metal coins.

A cashless society would depend on electronic and digital forms of payment that could include the use of debit cards, credit cards, and contactless payment methods.

Why a cashless society?

Advocates of a cashless society believe that it could be more convenient for both consumers and retailers to operate without physical currency. Consumers would be able to continue to pay for goods and services even if they are out of cash — whether they’re between paychecks or just without cash at any given moment. Retailers would benefit by giving these consumers cashless ways to purchase goods and services.

Other benefits for retailers using a cashless operation is eliminating the man-hours it takes to reconcile their registers and make deposits at the bank. For some operations, having and moving around a lot of cash could present security issues too.

Sizable security threats might require investing in precautions like a monitoring system or armed security guards which all add to a business’s operating costs.

Foreign Transaction Fees

Mon, 21 Dec 2020 14:14:59 GMT

Credit card foreign currency transaction fees can take a big bite out of your vacation budget. They aren't fun to pay and they are avoidable.

When you take your credit card on an international trip—or simply use it to buy something from an online merchant based overseas—you could pay a foreign transaction fee of 3 percent or more. If you take a vacation and spend $5,000 abroad with a card that has a 3 percent fee, you’ll pay $150 in foreign transaction fees.

What is a foreign transaction fee?

Although credit cards may provide a better currency exchange rate than a money-changing shop in a tourist neighborhood, your U.S. credit card may also change a foreign transaction fee, also known as a FX fee. Foreign transaction fees are different than the exchange rate.

These foreign transaction fees, often as much as 3 or 4 percent of the purchase in U.S. dollars, can add up quickly.

The thing to watch out for is that every card is different. Even two credit cards from the same bank may charge different foreign transaction fees.

Take two Chase credit cards, for example. The Chase Sapphire Preferred Card has no foreign currency transaction fees and is an excellent choice for international travel. The Chase Freedom card is a great card, but you might not want to take it on your next international vacation because it does charge a 3 percent fee on foreign transactions.

With that fee, as of September 2016, a €100 restaurant tab in Barcelona will cost you about $111.50 plus a foreign currency transaction fee of at least $3.45.

How to avoid paying a foreign transaction fee

To avoid paying forieng transaction fees, you have a couple of options: Use cash or bring a credit card that does not charge foreign transaction fees.

Although you can typically get a good exchange rate by using your debit card at foreign ATMs, it’s never safe to carry a lot of cash while you travel. And you definitely want to avoid using touristy money-changing shops whenever possible.

Fortunately, there are many good travel rewards cards don’t charge a foreign transaction fee, making them the best choices for international travel. Many come with other perks that will be appealing for your international trip—such as global concierge lines or rewards programs that can help you reach your next trip faster.

Your Automatic Investment Plan

Fri, 04 Dec 2020 14:16:32 GMT

An automatic investment plan is the cornerstone

upon which wealth is built.

Many of us delay investing (or fail to start at all) because we’re either intimidated by choosing investments or we’re afraid of the risk. An automatic investment plan can help. One of the techniques I outline here requires zero investing knowledge to

get started—it’s as easy as opening a bank account. And, when you put your investments on autopilot, you take your emotions out of investing, which can temper your fear—or at least limit fear’s ability to cost you money. Let’s look at how an automatic investment plan does this.

The technique of buying a fixed amount of an investment at regular intervals is known as dollar cost averaging (as opposed to investing a big chunk of money at irregular times).

If you were to buy $1,000 of a mutual fund when it’s per-share price is $100, you would own 10 shares.

If, however, you invest $100 a month for ten months and the fund’s price varies from $80 to $120, you may end up slightly more or less than 10 shares depending on the stock prices. As the market climbs, the notion is you will end up buying more shares at a lower price than if you invested in a lump sum. Advocates of dollar cost averaging say this reduces risk, but critics disagree. The market goes up in the long run, so you want to get money in as soon as possible.

If you have a lump sum sitting around that you want to invest, then do it. Get it into the market and don’t worry about spreading it around and definitely don’t try to time the market or wait for the right time.

A National Crisis: Millennial Student Loan Debt

Mon, 09 Nov 2020 13:28:16 GMT

The expansion of federal student aid is often considered a primary cause of rising tuition rates.

America is increasingly concerned about the Millennial struggle with the steep mountain of student debt. But Democrats and Republicans seem to be setting up camp on opposite sides of the base, and once again an entire generation is left to climb alone.

So I went to college for 10 years and at the end of it you see that dollar sign and you’re just like, ‘crap.’ It just was such a shock and I had no idea how I was going to pay it...I thought I was going to die.

- Heather K.

A National Crisis: The Treacherous

Mountain of Millennial Student Debt

Neil tried to follow in the footsteps of his father, also a lawyer. But he ended up with far more debt than he had originally anticipated – $150,000 upon graduating.

And though he was diligent in making at least the minimum payment each month, Neil’s debt ballooned to $200,000 just years later.

Neil is one of the nearly 45 million Americans struggling to pay off a student loan balance. While our collective educational debt has passed the $1.6 trillion mark, this burden isn’t distributed equally among Americans.

Millennials like Neil hold the largest share of student loan debt. They owe, on average, more than $18,000 . In contrast, when Generation X was finishing their studies, they had a 2004 median student loan balance of just $13,000.

Student loan debt has reached astronomical levels in the U.S., with 43 million Americans carrying an estimated $1.5 trillion in federal loan student debt and $119 billion in private student loans. The class of 2018 left school with an average of $29,200 in student loans. The financial burden of student loan debt proves heavier to bear for some borrowers than others.

What's Behind the Student Loan Debt Crisis?

There are several factors that have contributed to the student loan debt crisis in the U.S., beginning with rising tuition prices .

For the 2019-20 academic year, the average cost of tuition, fees, and room and board at a public four-year university totaled $38,330 for out-of-state students. The cost climbed to $49,870 for students at private four-year universities. 529 college savings plans can help with paying college expenses but only 21% of families use them, according to Sallie Mae's 2019 How America Pays for College Report. Instead, 51% of families borrow to pay for college, including loans taken out by both students and parents.

The lure of loan forgiveness may also be seen as a contributing factor. The federal Public Service Loan Forgiveness program offers student loan forgiveness for grads who pursue a career in public service. That's a tempting prospect, which may lead students to lean on loans more heavily, with the expectation that they'll be forgiven later. But, the program isn't permanent and could be altered or canceled, making it risky for borrowers to count on loan forgiveness.

The student loan debt crisis is compounded by the number of borrowers falling delinquent on their loans. As of the fourth quarter of 2019, 11.1% of student loan borrowers were 90 days or more delinquent or in default on their loans.6 This suggests that a substantial number of borrowers are struggling to keep up with their loan payments .

Certain Borrowers More Affected By the Debt Crisis

Student loan debt can take a toll financially, particularly if it keeps borrowers from pursuing other financial goals, or delinquency affects your credit rating. But, not every borrower feels the impact of student loan debt to the same degree.

Women Feel the Student Loan Debt Pain

According to an analysis by the American Association of University Women (AAUW), women own nearly two-thirds of student loan debt in the U.S., totaling almost $929 billion. Compared to men, women are more likely to finance a college degree and they tend to borrow more money to do so. That in itself isn't necessarily problematic, but the real student loan debt crisis happens when those same female grads have to start repaying their loans.

The gender pay gap often prevents women from making the same progress in paying off their loans as men. As of 2019, women working full-time earn approximately 82% of what men are paid. A lower income means less money to apply to student loan debt. Within the first four years after graduation, for instance, men paid off an average of 38% of their outstanding debt, according to AAUW, while women paid off 31%.

That slower debt payoff can make it more difficult for women to get ahead financially. Consider retirement savings . According to the 18th Annual Transamerica Retirement Survey, twice as many men versus women are very confident about their ability to retire with a comfortable lifestyle. Women have a median of $2,000 saved for emergencies, compared to $8,000 for men. Working men have an estimated median of $76,000 saved for retirement while working women have a median of $23,000.

Minorities Also Bear the Brunt of Student Loan Debt

Women aren't alone in the student loan struggle. According to the National Center for Education Statistics, 71% of Black students borrow federal loans to pay for attendance at four-year colleges, compared to 56% of white students. Hispanic and Black students are more likely to graduate with higher levels of debt than white students, and they're also more likely to default on their loans.

According to the AAUW research, Black women take on more student loan debt on average than any other group. Black and Hispanic women also struggled more than other groups with a slower debt repayment rate. Thirty-four percent of women overall and 57% of Black women who were repaying their student loans reported being unable to meet their essential expenses within the past year.

The Broader Economic Impact

Student loan debt can affect more than just individual borrowers; it also has the potential to have a wider economic impact.

The housing market , for example, has made a strong recovery since the 2008 financial crisis but according to one study, student loan debt delays homeownership for borrowers by an estimated seven years. That can cause supply and demand to swing out of balance if more homes go up for sale, but fewer buyers are shopping. That in turn, could lead to lower housing prices.

Student loan borrowers may also be more reluctant to use other types of credit, such as credit cards or car loans, meaning less interest and fee revenue for lenders and banks. When fewer people buy cars or homes, use credit cards or spend in general, which directly affects businesses and can slow down economic growth.

While not necessarily an upside, more students attending a college means a better-educated workforce, which can potentially lead to lower unemployment and higher tax revenues. But, the negative student loan debt crisis can't be ignored.

In the meantime, there's no clear solution to the student loan debt crisis. Finding ways to control rising higher education costs seems like an obvious step but implementing rules and regulations designed to do that is easier said than done. For students, the only recourse, for now, can be to educate themselves as much as possible about the costs of a college degree and the financial implications of taking on student loan debt before they borrow.