1. China’s “Growth” Model Is Mostly Smoke & Mirrors. Now It’s Breaking Down

    Growth in GDP is conventionally defined as the sum of consumer spending, investment, government spending (excluding transfer payments) and net exports. Most large economies other than oil-producing nations get most of their growth from consumption, followed by investment, with relatively small contributions from government spending and net exports.

    A typical composition would show a 65% contribution from consumption plus a 15% contribution from investment. China is nearly the opposite, with about 35% from consumption and 45% from investment. That might be fine in a fast-growing emerging-market economy like China if the investment component were carefully designed to produce growth in the future as well as short-term jobs and inputs. But that’s not the case.

    Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused.

    What’s worse is that these white elephants are being financed with debt that can never be repaid. And no allowance has been made for the maintenance that will be needed to keep these white elephants in usable form if demand does rise in the future, which is doubtful.

    Chinese growth has been reported in recent years as 6.5–10% but is actually closer to 5% or lower once an adjustment is made for the waste. This article provides a firsthand look at the so-called “ghost cities” that have resulted from China’s wasted investment and flawed development model.

    This wasted infrastructure spending is the beginning of the debt disaster that is coming soon.

  2. We’ve Long Said the Fed Doesn’t Know What They’re Doing. Now They Agree!

    For years we’ve said that the Fed has defective economic models and the worst forecasting record of any major official institution (although the IMF gives the Fed a run for their money in terms of bad forecasts). The facts back up our claim.

    For eight years in a row, from 2009–2016, the Fed’s one-year forward forecast for annual economic growth was off by orders of magnitude. It is only in the past two years that the Fed forecast has become more accurate, and that’s only because the Fed simply trimmed their forecast to the prevailing nine-year trend growth rate of just over 2%. Better late than never.

    Not only was the Fed wrong about growth, but they overestimated inflation and expected wage increases at the same time. There are many reasons for this horrible record, including the use of equilibrium models to describe a nonequilibrium complex dynamic system.

    Perhaps the Fed’s biggest analytic and forecasting blunder is their reliance on the Phillips curve, which describes a purported inverse relationship between inflation and unemployment. The hypothesis is that as unemployment goes down, inflation goes up and vice versa. There is no evidence for this theory.

    In the late 1960s we had low unemployment and rising inflation. In the late 1970s and early 1980s we had high unemployment and high inflation. Today we have low unemployment and low inflation. There is no correlation between employment and inflation at all.

    The Fed has been pondering this lack of evidence as shown in this article. The Fed has concluded that they don’t really understand the relationship between employment and inflation. That’s a start.

    Maybe I can help. The reason they don’t understand the relationship is because there is no relationship. Inflation is not catalyzed by employment or money supply. Inflation is a result of psychological expectations and the behavioral hypersynchronicity of consumers acting on those expectations. If people believe inflation is coming, they will act accordingly en masse, the velocity of money will increase and soon enough the inflation will arrive unless money supply has been severely constricted.

    Just don’t expect the Fed to catch on anytime soon.

  3. This Guy Thinks He Doesn’t Owe IRS Taxes on Crypto Profits. Guess Again


    This would rank as the funniest article of the week if it weren’t so sad for the individual involved.

    We’re all familiar with the IRS Form 1099. That’s the one used to report most income other than regular wages that go on Form W-2. The person paying the income — it could be a bank, broker or any supplier — files a copy of the 1099 with the IRS and sends one to the income recipient. It’s the recipient’s job to report the income on their tax return.

    By the way, IRS computers match 100% of the 1099s they receive with what taxpayers put on their tax returns. It’s a kind of computerized audit.  Those who don’t report the income may not get a knock on the door, but they will definitely receive an official letter asking the income recipient to explain the discrepancy. Cases just escalate from there.

    Coinbase, a major U.S.-based cryptocurrency exchange (not to be confused with Coincheck, the subject of the story above) just sent a Form 1099 to one of its customers identified only by the initial “K” in this story. K was initially freaked out even to be receiving a 1099 from a crypto exchange.

    What happened to the anonymity in the crypto world? Apparently, it doesn’t exist, as I have been warning for years. But when K read the 1099 it got even worse. It showed that he owed $2.4 million in taxes, despite his estimate that he only put $8,000 into cryptos.

    K has decided to sit tight in the belief that he does not owe the taxes. Big mistake. The IRS will take its copy of the 1099 from the exchange and assert that K does owe the taxes. The IRS puts the burden of proof on the taxpayer to show they don’t.

    Courts have backed up the IRS on this burden-of-proof approach. Just ask Al Capone, the notorious gangster who went to Alcatraz not for extortion and murder but for not paying his taxes! K will find this out the hard way, as will millions of other crypto customers.

    The IRS is warming up for a bonanza of tax claims. Cryptocurrency traders should get ready for the mother of all tax nightmares.


  4. This Half-Billion-Dollar Cryptocurrency Nightmare Just Won’t Go Away


    You’ve probably heard about the Coincheck fiasco. Coincheck is a Japanese-based cryptocurrency exchange. The exchange was hacked and about $530 million of cryptocurrencies went missing. This caused the usual “run on the bank” as customers scrambled to withdraw their deposits.

    The exchange had to close its doors and prohibit customer withdrawals. This is similar to the “ice-nine” response I described in Chapter 1 of my book The Road to Ruin where banks, exchanges, brokers, money market funds and others will simply suspend redemptions and freeze your money in the next financial panic rather than engage in bailouts and money printing as they did in 2008. The owners of Coincheck next promised to give customers their money back. Nice try.

    It turns out that it didn’t actually have that much money despite the promise. The exchange is trying to get back to normal, but without much success. Regulators are breathing down their backs. But the nightmare doesn’t end there.

    As this article reports, class action lawyers have filed major lawsuits against Coincheck and their management, demanding that accounts be reopened. Another lawsuit is planned to request damages for losses. Coincheck is just the latest in a string of frauds, hacks and failures that have resulted in billions of dollars of losses to customers.

    The bitcoin advocates keep claiming that this is just the cost of technology development, and exchanges keep claiming they have learned the lessons of past failures. None of it is true. Technology does have glitches in its early stages, but not the kind that cost customers billions of dollars.

    And the lessons clearly have not been learned, because these hacks just keep coming. One more reason to steer clear of bitcoin and unregulated cryptocurrency exchanges.


  5. Trillion-Dollar Deficits Are Coming to U.S. and No One in Either Party Cares


    Remember the “tea party” revolt in 2009–2010 against government bailouts and government spending? Remember the “fiscal cliff” drama of Dec. 31, 2012, when Congress raised taxes and cut spending to avoid a debt default and government shutdown? Remember the actual government shutdown in October 2013 as Republicans held the line against more government spending? Well, congratulations if you do, because everyone else seems to have forgotten.

    The days of caring about debt and deficits are over. In just the past two months, Republicans passed the Trump tax cuts that will increase the deficit by $1.5 trillion on a conservative estimate, and probably much more. Then Republicans and Democrats “compromised” on eliminating caps on defense spending and domestic spending by agreeing to more of both.

    That repeal of the so-called “sequester” will add over $300 billion to the deficit over the next two years. Then there’s a tsunami of student loan debts in default that the Treasury has guaranteed and will have to pay off. Finally, the higher interest rates from this debt will add $210 billion to the annual deficit for every 1% increase in average federal debt funding costs.

    Today we are looking at $1 trillion-plus deficits as far as the eye can see. That’s extraordinary enough. What is more extraordinary is that no one cares!

    This article shows that Democrats, Republicans, the White House and everyday Americans are all united in totally ignoring the fact that America is going broke. This euphoric mood in response to more spending won’t last.

    The growth is not there to pay for the tax cuts, and the economy is not even growing fast enough to keep up with the growth in the debt. Credit rating agencies are preparing reviews that will likely lead to a downgrade in the U.S. credit rating and higher interest costs for the Treasury.

    When the crisis of confidence in the dollar and related inflation arrive, there will be no particular party to blame. The entire system is turning a blind eye to debt, and the entire system will have to bear some part of the blame.