Kansas City Shuffle
One of the movies I remember with more emotion is Lucky Number Slevin.
n. The film itself is not Oscar worthy or anything like that, but it's one of those that because of the way it is and the moment it hits you that I didn't see coming. It was able to surprise me in a way that later stories have failed to do, I guess because the gimmick can't work when you've seen it too many times.
The story revolves around what they call a Kansas City Shuffle, a very unique ruse in which the victim has to do his or her part to make the deception work. It could be argued that in all confidence games, scams and so on, some degree of cooperation is needed on the part of the victim, but the Kansas City Shuffle is different because the victim knows he is being duped and it is his action in the face of the deception he believes he is undergoing that allows the actual deception to be completed.
For it to work perfectly, therefore, the scammer will try to disorient the target so that the target is under the impression that he has figured out the game and uses his knowledge to beat the scammer and prove that he is smarter than him. It is just by retaliating that the target performs an action that helps the scammer to carry out the plan.
You need to understand the dynamics of the Kansas City Shuffle because you are the target of one.
Central banks, governments, sell the idea that they are striving to create a stable economy in which all citizens feel confident and capable of getting ahead. Also, reassured in the knowledge that if everything goes wrong for them, there are mechanisms to keep them from falling into oblivion.
The average person is aware that, despite their best efforts, sometimes the system does not work as it should, but as long as they do not break too much or lose too much, trust is not lost.
In the last few years of high inflation, central banks and governments walked the wire, close to seeing that trust break down. Too many people began to lose access to too many things and had it not been for the prompt response of central banks raising rates and slowing the economy, control might have slipped from their grasp. But no, it can be said that they not only contained the unsustainable levels of inflation but more importantly, they gained confidence in front of the public by presenting themselves as saviors capable of controlling something like the economy and inflation, arcane terms to most mortals.
You can see that the Fed has been reducing its balance sheet by selling U.S. Treasury bonds that it was buying in its quantitative easing (QE) periods and mortgage-backed securities (probably those bought after the 2008 crisis) and above all by allowing the bonds to mature off its books without replacing them with new bonds, which is what they usually do. In fact, when I talk about the deficit tending to grow, it is a little bit because of this: governments do not pay their debt but issue new debt to replace the old one, so everything that is new debt enlarges the hole.
This is the chart that the central bank shows to the interested public to show where the success against inflation comes from: "Look, we are taking money out of the market, that's why things don't go up in price as much anymore". Well, that’s true, not "as much".
Situation under control, then. With this you fool the majority and set the stage to start the Kansas City Shuffle with which you intend to bamboozle the investment community.
The educated investor sees what is really going on here. You don't believe that the central bank is reducing the amount of money in circulation because if that were the case, we would have recession. And we couldn't be further away, particularly in the US. No, the educated investor hears the Fed say it's going to keep rates higher for longer and it's going to keep destroying liquidity and he doesn't believe it. Not only does he not believe it, but he warns other educated investors that there is something fishy going on. He warns with graphs, of course.
The higher the number here, the looser the financial conditions, i.e., the easier it is to obtain money.
The graph below shows total liquidity in the market:
Liquidity is not going down, it is going up. This is the only way to explain this bonanza situation.
Armed with this information, they are confident in their understanding of what is really happening, they understand the game and act, thinking they are smarter than the central bank. They take the step that starts the Kansas City Shuffle: they stop buying government bonds. Just what the trickster wanted to make his plan work.
No uncaptured investor is going to voluntarily decide to buy an asset such as public debt in a context where he knows that this asset is going to multiply enormously. It would be like deciding to trade diamonds for aluminum, or bitcoin for euros. An irrational decision in the investment framework. Therefore, the educated investor stops buying government bonds. First, he simply buys less than he used to, and gradually buys less and less until he stops buying. During this transition, what is called "fiscal dominance" begins to become apparent, which simply means that it is the treasury, understood as the state budget, that is in charge (the one that sets the tone for the market by its actions).
The St. Louis Fed puts it this way:
"Fiscal dominance refers to the possibility that the accumulation of public debt and continued public deficits may produce increases in inflation that "dominate" central banks' intentions to keep inflation low."
The Fed office itself explains that this scenario is not only likely, but practically unavoidable:
"The prospect of this happening soon in the United States is no longer far-fetched. Indeed, if global real interest rates were to return tomorrow to their historical average of about 2%, given the current level of U.S. public debt and the large projected deficits, the U.S. would likely experience an immediate fiscal dominance problem. Even if interest rates were to remain substantially below their historical average, if projected deficits were to occur as projected, there is a significant possibility of a fiscal dominance problem over the next decade."
Fiscal dominance is presented as the evil to be avoided because of the risks it poses, mainly inflationary. In the end, what this regime implies is that the Treasury will issue debt ad infinitum and when it cannot sell it in the market to educated investors, it will then buy it from itself, creating money and fueling inflation. When will this moment be reached?
From the Fed:
"All major inflations in world history are a fiscal rather than a monetary phenomenon. When exactly does fiscal dominance lead to monetization (creation of magic money, for the sake of argument), and to what extent does that threaten the inflation objectives of monetary policy? How much dollar inflation can excessive US government borrowing lead to?
If nominal GDP is $24 trillion (U.S.), and current interest-bearing debt not held by government agencies or the Fed is about $20 trillion, how much more can the debt-to-GDP ratio increase, given our current long-term real interest rate and real growth rate?
It is difficult to say precisely where the fiscal dominance ceiling is because this requires forecasting economic growth, taxes, government spending and real interest rates. As a country approaches the ceiling, the interest rates demanded by creditors increase (as they demand an inflation risk premium) in anticipation of the risk of hitting the ceiling. This means that the perceived risk of hitting the ceiling (once close to it) can become self-fulfilling."
Los inversores, tratando de anticipar la caÃda de la deuda, salen de ella, se regodean en su capacidad de prever el momento en que esta monetización se producirá y ese es el paso que permite triunfar al Kansas City Shuffle de los gobiernos.
¿Cuál es el objetivo último de esta trama? ¿Qué buscan estados y bancos centrales dejando ver a los inversores educados que el plan es arruinarles si mantienen bonos en cartera? ¿Qué ocurre cuando nadie compra los bonos del gobierno salvo el gobierno?
Nada.Â
The victory sought by governments and central banks is to reach the point where all debt is issued and purchased by the government itself, the final stage of fiat money. It's all government money. Modern Monetary Theory, baby. And the government takes care that this does not cause catastrophic inflation by controlling the banks. The same Fed paper shares a measure that works to reduce the potential inflation resulting from a system of total fiscal dominance:
"Policy changes with respect to reserve requirements on banks are likely to occur if fiscal dominance becomes a reality. If the government wants to finance large deficits, it will be easier to do so if it eliminates interest payments on reserves. This potential policy change implies a big shakeout for the banking system's profits."
What banking system? Thanks to the too big to fail policy, there are fewer and larger banks left, easily captured by governments.
Educated investors, who got out of bonds to escape unscathed from this state attack will feel safe in their decision to exchange bonds for equities, real estate and gold, unaware that the state, now omnipotent in its position as creator and destroyer of all money in circulation, will soon capture the returns that can be earned on those assets. Those who tried to escape took the step that allowed the government to seize all power and look unscathed, are now victims of the wilder Kansas City Shuffle and are paying the consequences.
As the example of Japan demonstrates, total government control of the economy results in zero growth. And what government does not sign zero growth? No government is overthrown because of the growth that could have been. Only major crises destroy governments.
The only escape from this Kansas City Shuffle is to get your wealth out of the system and everything capturable and run. Or watch the economy you grew up in slowly sink into entropy. Either way, with Bitcoin you'll breathe easier.