EPISODES / WEEKLY COMMENTARY

Move Along Citizen, Nothing To See Here (But Deposit Theft)

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Feb 18 2020
Move Along Citizen, Nothing To See Here (But Deposit Theft)
David McAlvany Posted on February 18, 2020
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  • AITS (Average Inflation Targeting) new acronym for negative interest rates
  • Commercial Banks will be complicit with FED in next crisis
  • Malcolm Bryan on inflation policy: “Hold still, little fish! All we intend to do is gut you”.

 

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Move Along Citizen, Nothing To See Here (But Deposit Theft)
February 19, 2020

“Trust me, hyperbole is not my favorite form of expression, but the casino dynamics are already afoot today, complemented by erasing the lower bound for rates. If that is what we are going to be doing, erasing the lower bound, and give latitude to take the Fed funds rate deeply negative, it introduces a radically different speculative backdrop than we have seen – I can’t even say for a long, long time – maybe ever.”

 – David McAlvany

Kevin: David, we just got out of a meeting with some people who are very special to us. Your dad and mom have been working with orphanages for years. Your personal assistant, who worked for you and actually worked for the company for quite a while, ultimately became someone who lives in an orphanage and runs an orphanage in India. She and her husband and their kids came to visit us to tell us the update of what is going on in India. I think it is an amazing place to be able to work here and see the history – what did she say? 17, 18 years of history leading up to being in India and helping hundreds of kids, getting them out of trafficking, that type of thing.

David: We went from that meeting to her oldest son sitting in the seat that I’m in right now.

Kevin: He’s what – 8, 9 years old?

David: And he looked over my notes and looked into the mic and started reading. And he wanted to talk about inflation. And he wanted to talk about inflation targeting. And it is amazing, he is just following through the outline because that is what I do each week on Tuesday morning is put together an outline so that we have some structure to our conversation.

Kevin: When he walked into the room he said, “Wow, is this a studio?” I said, go ahead and put the headsets on, and we were doing the mic test, so you said, “Just go ahead and read into the mic,” and he started reading some of your notes.

David: It was fantastic. And you just never know where things start for someone. Will he be a broadcaster (laughs) in India someday? It was just really priceless.

Kevin: He seemed thrilled to record, but it reminds me of something you just told me. You were watching a show about people who make the decision young to become an astronaut. That is a decision that sometimes occurs about that same age, 8 or 9, and then it is a commitment that may not pay off for decades, if ever.

David: I watched a master class this weekend while I was on the bike trainer, and it was on space travel. It was fascinating. But 26 years of hard work and dedication, commitment and sacrifice, starting at the age of nine, and finally this man becomes an astronaut. And he started very young. What are the exposures that set us on a life trajectory? I think it is worth considering the people in our lives and just those small moments. As I was watching his little mic check this morning, I thought, maybe this is it. Maybe this is one of those things that you define bright lights in the big city, or you define what ultimate trajectory is by some vision, dream, or perception, at a young age, and you say, “Yes, that’s what I want.”

Kevin: Dave, you had mentioned that this astronaut, as he was clearing the tower on his first ride in space, 20-some odd years later, he reminisced at that moment, just thinking, “That’s how long it took.”

David: He had been working on this and waiting for this moment for 26 years.

Kevin: One of the things that you and I have talked about recently is just how much noise there is, when you are riding the train or you are running on the treadmill, you said Fox News was on the other day. Actually, there were three televisions in the sports club that you were in and they had the news on. You were just reading the closed caption words on the bottom and realizing that even though there were a lot of lights and cameras and voices and everything else, with the volume turned down the actual information that is coming across is sparse and repetitive, and actually, there is not much to it, and it just drones on and on and on. It is very hard these days to find signal or new information in all the noise.

David: Yes, it’s fascinating because I was sitting there, and minute by minute is going by and it’s painfully slow, and I couldn’t figure out why. Maybe it was because it was early morning, maybe it was because I was on the treadmill for quite a while. But it was minute by minute torture. And I realized later that when you take away the noise, and literally, the sound effects, and all the things that go on to create this production which is news today, actually, there wasn’t much meaning. There wasn’t a lot of content.

And so as we have talked about noise and signal, there wasn’t a lot of signal. I think that is one of the things that is just very obvious. If you’re just reading the message and ignoring everything else, which when you’re on a treadmill and you’re trying to focus on just the words, all of a sudden everything else is pushed aside and it is vacuous, it’s empty. I got to compare CNN on one screen, and Fox News on another. There really wasn’t much difference qualitatively.

Kevin: Just droning on. You know, you and I both met a man a few years ago who works for the defense department. He is a stochastic mathematician engineer. What he does – he couldn’t talk much about what he does, but really, you could discern after he gave a few hints, that he works out the mathematics of cutting through the noise of the enemy and just finding that pure signal. One of the things you and I talked about last night when we were meeting about the Commentary is that we want to make a commitment. If, as a listener, you are going to listen for 45 minutes, maybe even longer, that is critical, important time in your life that you will never get back. So we want to make sure that what we are bringing to you as an audience, speaking to the listeners now, is signal and not noise.

David: I don’t know that we always deliver on that, but it is certainly our intention to try.

Kevin: I want to bring something new up. You had sort of a play on words, Dave – “AITS is the cure, not the disease.” You’re going to have to explain that a little bit. That’s what this week’s Commentary, hopefully this week’s signal is, to the listener.

David: AITS is the cure, not the disease. That is A-I-T-S, not A-I-D-S. Inflation persisting below the 2% target remains a Fed and central bank concern, a fixation, and it is almost inconceivable how this could be the case to them, when employment numbers are the strongest in 50 years and wages are rising ever so slowly. So they are now creatively on the hunt for how to maintain the target rate, which for them is this 2% number, through the ebbs and flows of the economy. And what I love about this is there is in the ebbs and flows of the economy their inability to sort of manage that. There is an implicit admission that the business cycle exists, and that is not under their thumbs. So that point is amazing.

Kevin: So the AITS that you are talking about is Average Inflation Targeting.

David: That’s right. So in preview we are going to explore Average Inflation Targeting, or AIT – AITS, as I’m going to pronounce it for the program – and you are supposed to be excited to receive this.

Kevin: As we have talked about, a past guest of ours, and hopefully a future guest, Tomas Sedlacek, wrote the book, The Economics of Good and Evil, and he talked about how you have cycles, rises and falls, but we have become almost worshippers of continual growth. That’s part of this inflation targeting, isn’t it?

David: It’s an utterly fascinating thing because Tomas Sedlacek points out that we are now going into debt just for excess consumption. We aren’t going into the debt to sort of save the day. This is not a rescue mission and therefore we need a little credit extended.

Kevin: Just keep spending money, please.

David: Right. It’s so that we can create problems like obesity. It’s not that we’re underfed, we’re overfed. Unless we have diet problems a food crisis is not, in this era, not having enough food, it is having too much. And he would say the same thing about credit. We have pursued growth to such an extreme that we have lost track of what normal and healthy is to the point where now we look at overcapacity, global overcapacity

Kevin: Well, if you build it, they will come, is sort of an attitude sometimes. Like look at China. How many things China built that never were occupied.

David: But this is one of the reasons why inflation targeting has failed. When we think about global overcapacity, having the means of production that exceeds global demand, as a structural impediment to lifting consumer price inflation, that is one aspect. We have also talked about the post Cold War peace dividend, which persists to this day and it stems from the inclusion of Russia and China and Eastern Europe into the global workforce. What that did is it had the effect of holding wages to a lower level, and thereby increasing corporate profitability on the one hand, but depressing wage growth. So the depression of wage growth and structural overcapacity are two real factors fighting against the Fed and other central banks and their aspiration of, behind the scenes, what it really is, is nominal GDP growth targeting.

Kevin: But how twisted is it, really, in the scheme of things, where we are trying to raise the prices of everything all the time? That’s part of a model, I know, that is just treated as the truth, but shouldn’t we have really benefitted from falling prices versus continually trying to figure out a way to keep prices rising?

David: Yes, and there is a benefit to falling prices. Consumer price deflation is not something to be afraid of. What we could, or should be, afraid of is asset price deflation. That is certainly the boogey-man that the world central banks are trying to fight, is asset price deflation. In a world of so much debt, if you begin to see a recalibration of the value of those assets – remember debt is some banker’s asset.

Kevin: So do they want inflation for inflation’s sake?

David: We come back to this issue of inflation – when they say they are targeting inflation what they are really targeting is nominal GDP growth. That is what they are targeting. So inflation is just a part of the equation. Do they want inflation for inflation’s sake? Good question. No. They want it for what a series of equations suggest about inflation, that it boosts nominal GDP growth. Of course, go downstream, it also boosts, if you are increasing nominal GDP growth you are also increasing tax revenues, which helps when you are massively in debt and need to increase your revenue each year. So how does this work?

Kevin: So what we’re talking about is something new, average inflation targeting versus inflation targeting. Sounds like whack-a-mole to me where they are basically saying, if it’s too low we’re going to do this. If it’s too high we’re going to do this. But we’re going to go beyond, we’re going to create an extreme so that we can average the inflation at 2% – is that what they are saying?

David: That’s right. So instead of having a set target, now you can sort of get an average to get the number. According to economists that have previously worked at the Federal Reserve and now do research and write for the Peterson Institute, AIT, or Average Inflation Targeting, is seen to offer a crucial innovation. This is what they say: “When inflation has been running below the target rate, it would have the Fed aim for above the target inflation in the future in order to bring average inflation up toward the target.

Now this, of course, gets interesting. It is interesting to me, at least. If we assume that the Fed rate can be cut to accommodate the markets and the economy, when the markets and the economy are under stress, that’s where the Fed funds rate – where it is tells you how much fire power you have from a rate cut perspective. Now we are accustomed to additional tools like large scale asset purchases and other kinds of stimulants or stabilization tools, but rate cuts are a huge factor, a huge tool, that the Fed intends to use to sort of resolve the next recession.

Kevin: How powerful a tool is it when you are down to 2% already, Dave? Do we even have room to maneuver unless they are talking about negative rates?

David: Fed funds is sitting close to 2%, you have the ten-year treasury well under 2%. You only have about 200 basis points to cut to get to what is known as the effective lower bound, or zero, basically. You probably recall from past episodes of distress that the average that the Fed has, in fact, cut rates – again in the middle of each of the last recessions – has been about 500 basis points. That’s 5 full percentage points.

Kevin: Which we don’t have without going -3.

David: That’s right. So up to this point the limiting factor has been the ELB. That’s the acronym for Effective Lower Bound, and the implication of playing with an average inflation target is that you expand the range, not only for inflation, it may be a higher number to get to an average. Today, let’s say it’s 1.8%. Well, to get to 2 you might have to have overshoot your target to get to the average. But it is also the implication of what you consider to be the effective lower bound.

Kevin: So what you are saying is, we can call zero ELB. Let’s say I came in and I worked all day and I went to get my paycheck and it was zero. Well, you might have an acronym for it, but to me it is still zero.

David: (laughs) So to have a conversation on AIT, on AITs, as it were, is to open the theoretical model to not only reconsidering zero as the limiting number in your interest rate policy – again, this is kind of like the economist’s game of limbo.

Kevin: How low can you go?

David: (laughs) Exactly. But also, it brings in what behavioral modifications would be required amongst savers for that policy move to be implemented across the financial system.

Kevin: Do you remember that IMF report that you published back in June? The IMF had written it talking about behavioral modification. If you read all 83 pages, which most people didn’t, toward the end it was all about how do we sell this to people, because they’re not going to like it otherwise.

David: And the fixation was on commercial banks. So beware the commercial bank complicity in helping to orchestrate the next crisis period Fed policies.

Kevin: In other words, it won’t be the Fed this time, it will be actual individual banks.

David: Yes, so as one client recently experienced, getting your money out of a large institution – Vanguard comes to mind, 6 trillion in assets – you wouldn’t think that would be an issue, but it can be a challenge even under the best of circumstances, no stress and strain today. You would think a wire transfer is a straightforward request, but not when the institution prefers to maintain control of the asset. So I come back to this issue. Beware the commercial bank complicity in helping to orchestrate the next crisis period of Fed policy.

Kevin: This brings us back to signal versus noise. You have to find out and pick who is going to actually go through the news for you and pick what you should be reading? Not Fox News, not ABC, not CNN. I think about Doug Noland. He is someone that you have read for decades, and now you have hired. He picks through what you read.

David: For many years I would go to prudentbear.com, and he managed that site, and would publish this sort of curated list of articles that were pointing to issues that you needed to be aware of. If you’re balancing risk and reward as an investor, it’s pretty easy to balance the reward side of the equation, but understanding the current risks in the marketplace, sometimes that is more ignored by most investors because you want the good news. How am I going to make money today? What have you done for me lately?

Kevin: How often do we sit down and ask each other, what have you been reading? You have a have a few people in your life where you can ask that question and then go read what they read.

David: So Doug Noland, who provides a healthy risk management perspective to all our asset management decisions and also manages our Tactical Short Product, which I think should be a consideration for anyone concerned with bubble dynamics and financial market frailty. It is a phenomenal product. But he does all of us a very valuable service every week, compiling a series of articles and references for the market’s activities that day. And then through the Credit Bubble Bulletin a summation of what has happened that week. And this informs the conversations that we have internally, both when we are discussing the reward or unit allocations within our portfolios, but also the risk-oriented mitigation decisions which are an ongoing part of our process. It is very helpful to share that.

Kevin: You share that with anybody who wants it. We have it on the site.

David: Yes, so one of the articles that he posted, and I think you should be going to mwealthm.com every day. Get these linked articles. It is a massive timesaver. Financial Times, CNBC, Reuters, Wall Street Journal, New York Times – you get the best curated source of information imaginable. I would take Doug Noland’s posts over Matt Drudge any day of the week. In fact, I do. So Doug posted a Reuters article this last week from the 9th discussing the Federal Reserve Vice Chairman Richard Clarita’s comments on a current review of the monetary policy strategy and the framework being used by the Fed. And there is an anticipation here. The anticipation of announcements of a shift in strategy, likely by mid-year.

Kevin: Do you think that is going to be instead of inflation targeting this new AIT average?

David: That’s exactly what it is. The shift is described as evolutionary, not revolutionary. Read the article from Reuters. The FOMC has been having discussions about switching inflation targeting to average inflation targeting, AIT.

Kevin: So for the listener who says this sounds really boring, what we are telling you is this. Over-shooting – what they are basically saying is, we can use whatever interest rate, even deep negative interest rates, to get inflation to where we want it.

David: Right, so you’re saying to yourself, “Ah, there is a reason you are talking about AITs today. You hung on long enough to find out why. Thank you for sticking with us. The article notes Chairman Powell saying this: “This would represent an important regime shift for the central bank. The purpose would be to correct the downward bias in inflation and reset expectations at a number closer or above 2%, so that the actual target can be hit.”

Here is my interpretation of it. If you were at a gun range, at this point you might adjust the sights. If it were you or me and recognize we’re not hitting the target, so something is off here. Or you could just recognize you’re a terrible shot and go home. Can’t hit the target, maybe move the target closer, whatever. The Fed is, in essence, saying, “We’re just going to aim far enough above the target that the arc of interest rate destiny will be bound to find its target. Just aim high. Aim high. You can almost hear the enthusiasm as if you were at a high school commencement ceremony. Aim high and you’ll hit your target.

Kevin: The problem is, when you’re aiming high you are basically stealing deposits of the depositors because you’re going negative on the interest rates to do that.

David: That’s right. Brookings Institute quotes a Fed official, John Williams, on AITs, and I quote: “The central bank purposefully aims to achieve an above-target inflation rate in good times when the lower bound is not a constraint. Properly designed and implemented, such an overshoot can offset the inflation undershoot during bad times so that the longer run average inflation rate and inflation expectations are in line with the target.

Kevin: I know we talked about analogies, but you’re talking raising the aim at a shooting range. I think about shooting an apple off someone’s head. It works fine as long as you hit the apple, right?

David: (laughs)

Kevin: But actually, what you’re talking about, if you’re aiming high it’s a little bit like saying, hey, stand with the apple between your knees, we’re going to aim high, but trust me.

David: It’s a little uncomfortable. Why do we reference the lower bound, why do we reference commercial banking, why do we reference interest rates and trajectory of interest rates when we are really talking about inflation? Very excellent question, Watson. I love asking and answering my own questions. Because as you look through the research, and this is an excellent paper, highly recommend it if you are interested in this stuff. The Petersen Institute put together a 13-page policy brief back in November of 2019, and their conclusion is that AIT is not a good idea. But what you will find is that the implied federal funds rate, looking back at the 2008 and 2009 timeframe, in order to revive an economy and stimulate average inflation to the 2% target, would have taken the federal funds rate from (drumroll) prior to the global financial crisis positive 5% to the middle of the crisis, they would have had to take rates -5% and by at least one measure, nearly 7%.

Kevin: That’s a 10% swing, and the problem is, to do that, that is interest coming out of depositors’ deposits. In other words, you’re negative at that point.

David: We discussed world negative rates, and you even have right now some European countries who are throwing in the towel on their negative rate policies saying that they haven’t worked as effectively as we hoped. But it’s not as if that memo was circulated to the Fed. “Average interest targeting would justify deeply negative rates to aid in counteracting deflationary forces in the economy and revive that inflationary trend.”

Kevin: We’ve talked about Vaulted as an option for a savings account and part of it, Vaulted is really just owning gold as a savings account where you can move from your bank account into gold, and then back out of gold into the savings account. I would imagine before a deeply negative interest rate type of environment you would want to be sitting in Vaulted, not in savings.

David: Right. Vaulted.com, the sole purpose was to create a reliable destination for savings. That is exactly right. So welcome to a brave new world, young depositor, where the Federal reserve is talking about AITs, as, again, a cure for your problems and not a disease. When in fact, part and parcel to this is, according to their modeling, and this is the Petersen Institute’s modeling, you would have needed a -5 to -7% fed funds rate to get to your 2% inflation target. This is massively insane. Oh, welcome to a brave new world, old goat that thought retirement would be easy.

Kevin: And this isn’t just people who were managing their own funds. Think about it. If you are an insurance company, an annuity promising 3%, 4%, how do you promise 3-4% when you have a Federal Reserve that can say, “Hey, look, we can take it -10 if we want?

David: But we already see the evidence, and a lot of your financial structures, banks in Europe, and insurance companies in Europe are paying a price. It’s not just a question of net interest margin. NIM goes from net interest margin to no interest margin. (laughs) When you’re dealing with zero, it is no interest margin. Interest rate risk – how do you do this? How do you manage, as an investor, interest rate risk in a world where the fed funds rate, the target rate, can pull rates down 1000 basis points, 10%, and in theory, can go up that much as well? If you can imagine this, should normalization ever be allowed.

Kevin: So let me ask you about volatility. Does it increase in this environment or did they just kill it?

David: That’s a good question. I don’t know, because these are market dynamics we haven’t seen ever. So volatility is either the defining factor of the future, again, where interest rates can be up or down 1,000 basis points, and you are either making a killing or getting killed, and you don’t really know because this is on a policy basis. This isn’t sort of the market judgment about dynamics. It’s an arbitrary decree from a policy meeting. So volatility is either the defining factor of the future or we are on the cusp of killing volatility as we completely kill price discovery via central bank policy “evolution.”

Kevin: As with all complex controls, it is both. So you kill volatility until it arrives, and when it arrives it is unmanageable.

David: With a vengeance. So there are implications. Number one, you have volatility. Number two, you have even greater asset price bubble dynamics. Number three, completing the shift that we have seen over the last 20 years, where being a long-term investor – you can’t be. If you’re going to be a long-term investor, you are going to be eviscerated. Only gamblers, high stakes gamblers are rewarded.

Kevin: So for the person who fully understands what is going on and they say, 
This is an unsustainable market, this debt is unsustainable.” But guys, I just heard this from a client last week. I’ve had her as a client now for almost 30 years. She said, “You know what, Kevin? You’re right. I’m right. But we’ve been wrong, because this whole thing has been lasting for a lot longer than we thought it would. So for the person who is listening and they are saying, “Yeah, you guys are right, we shouldn’t be doing this,” but the market is going to keep going up if they do. So what is your response to that?

David: My first response is that in a 30-year period you have seen a five times increase in the value of gold.

Kevin: And she was laughing. She stayed in the stock market, always mistrusting it.

David: Right. So the markets are completing this process of becoming a casino. That’s the reality. When the Fed describes AITs as the cure instead of diagnosing it as a sign and a symptom of disease, if you want to see a melt-up in asset prices from here, AITs is going to deliver it, along with the eventual collapse of the financial system. And trust me, hyperbole is not my favorite form of expression. I tend to hold it suspect most of the time. But the casino dynamics are already afoot today, complemented by erasing the lower bound for rates. If that’s what we’re going to do, erase the lower bound and give latitude to take the Fed funds rate deeply negative, it introduces a radically different speculative backdrop than we’ve seen – I can’t even say for a long, long time – maybe ever.

Kevin: When we look at this, we have to say exactly what you’re saying. Is there a disease here? What is the underlying cause for us to have to do AIT? What is that? Is it a function of disease?

David: It was about six years ago that you and I traveled to Argentina and so we have talked on the program about Argentina and how one significant marker of structural economic decay and monetary madness is when shopkeepers are forced to become currency speculators, and to survive have to exist in a parallel universe. So in Argentina the blue market currency exchange rate is parallel to the official rate. The official rate is only relevant to those who are still sucker enough to play by the rules. (laughs) And frankly, whether they know it or not, they are getting gutted like fish. That’s the old quote from the Congressional Register, 1958. Do you remember we had a conversation with Hunter Lewis?

Kevin: Yes, he wrote the book, Where Keynes Went Wrong.

David: He quotes Malcolm Bryan, who was president of the Federal Reserve Bank of Atlanta back in the 1950s. In 1957 he was quoted as saying, “If a government policy of active or permissive inflation is to be a fact, we should have the decency to say to the money-saver, hold still little fish. All we intend to do is gut you.”

Kevin: And that is exactly what AIT does.

David: Not only have we forgotten that inflation is not the same thing as price stability. That in itself is just an absurdity, and that inflation is not our friend, we are tempting ourselves with a mathematics that is believed to deliver heaven on earth. And ironically, it puts the final nail in the coffin for the average consumer, sending them directly to hell, not heaven.

Kevin: I think of inflation, or this AIT, as a form of morphine. When you see a patient injected with morphine, whether they have cancer or maybe someone out on the battlefield that has been shot up pretty badly, a lot of times that is a sign that they are not going to make it. It’s like, we’re going to make this as easy as possible to keep you as comfortable as possible. So let me ask you a question. Is it inflation to the rescue? Is this a form of morphine?

David: A part of this is based on misdiagnosis because we’re talking about credit expansion being a real issue here. If we’re talking about inflation coming to the rescue, I think one of the things we’re ignoring is the greatest contributing factor of all. Why can’t we lift inflation? Why can’t they reach a 2% target rate? This is becoming the perennial malaise to GDP growth. We have too much debt to service and still have sufficient resources left over to direct toward economic activity.

So I guess one of the things we have to factor in here is that a part of what we are counting as GDP growth today comes from government spending. Government deficit spending keeps the growth numbers looking good. But it only layers on more weight for the economy to carry. This is an illness. So again, credit expansion is a part of the problem here. When you misdiagnose and you start saying, “Oh, we don’t know what it is, but we think we need to increase inflation in the system.” Balderdash!

That’s balderdash! Does it strike you as odd – again, this goes back to Sedlacek – does it strike you as odd that our obsession with economic growth, whether that is just, in very plain and simple terms, pain avoidance, or not wanting to see the dark side of volatility – whatever – is creating control of future outcomes? This all comes at a very high price. And that cost is largely ignored by a class of unelected officials that have faith in what boils down to a couple of mathematical equations.

Kevin: So you ask a question that reminds me of an analogy that you gave back in 2013, Dave. You were talking to a group of people. We were in a large conference room, probably 700-800 people there listening. You explained what debt does to a system. The more debt that a system takes on, it is like carrying a bag of concrete. You talked about running across the room from one side to the other. If you had no debt, no concrete, you could do it. Let’s say if I handed you a 40lb bag of concrete.

David: You could still move from one side to the other.

Kevin: You could do it. You would be slower.

David: You’d just move slower.

Kevin: Right, but if I hand you the second one, you could still do it.

David: I’m barely moving.

Kevin: There is a point where, if I hand you a third one…

David: It’s too much.

Kevin: Exactly.

David: It’s nothing for the central bank community to move toward “evolutionary,” not revolutionary measures, as Richard Clarita tells us.

Kevin: Not to scare anybody.

David: And for the citizenry to think this is perfectly okay because we have the deft hands, not the daft, holding the wheel. This is like captains of a great ship. Again, maybe Malcolm Bryan is right. Maybe these are not – switch analogies with me. Captain Ship, maybe it’s the dexterous hands holding the knife and we are, in fact, the fish.

Kevin: And captains of a great ship, remember that ship where that great captain of that great ship that was a cruise liner.

David: 2012?

Kevin: Yes, it was a cruise liner and it beached, if I remember right. It was sinking.

David: Yes, the Costa Concordia, the Italian cruise ship, ran aground in 2012. Credibility – it’s an issue.

Kevin: The captain got off the boat first, if I remember right.

David: Maybe the credibility issue is an issue of misplaced credibility by those in the investment community that want or need to believe in the almighty power of the Ph.D.

Kevin: If you recall with that Costa Concordia, the captain was one of the first guys to get off the ship. The captain is supposed to go down with the ship. There is a reason for that. What it is, is skin in the game. The Federal Reserve, these Ph.D.s, they only have enough skin the game, actually, until they retire. So they are experimenting with a system that actually costs the depositors money, and ultimately their savings.

David: Why does the cost of capital mean anything? Why do we care about that? Why, when we are talking about AITs, or Average Inflation Targeting, why does it matter to us? Because when you lower the cost to borrow, you’re taking skin out of the game. You are basically saying, you can go to the casino and you have nothing to lose here. Is it surprising to see bubble dynamics within the stock market and the bond market when you have changed the feel in the atmosphere to one of rank speculation? Again, this is why I think we are completing the process of becoming a financialized casino. And what is the Fed doing in the context of that? Again, misdiagnosis, and their version of a cure, is AITs.

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