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The Terrifying Truth About Negative Interest Rates

The Terrifying Truth About Negative Interest Rates

Pushing interest rates below zero is both an act of desperation and something that in theory should have a huge, immediate impact of the behavior of borrowers and savers. The fact that negative rates have become the new normal in big parts of the world but haven’t caused the expected behavior change should scare the hell out of everyone. 

To understand why this is so, think of the rate of interest as the price of money. It’s what an individual or business has to pay to get credit with which to buy and invest. As with anything else, when the price of money is high, we tend to acquire less of it and when the price is low we acquire more. So making money not just cheap, not just free, but actually profitable to borrow, while making savings unprofitable to hold should, according to conventional Keynesian economics, create a scene in the credit markets reminiscent of those Black Friday Wal-Mart videos where fistfights break out over the last remaining Barbie Doll. Businesses in particular should be borrowing and investing like crazy, igniting an epic capital spending boom. 

But that hasn’t happened. In Europe, for instance, negative rates have been in place for five years …

negative interest rates Europe

… and instead of a rip-roaring post-Great Recession recovery, the result has been the kind of anemic growth that conventional economics would predict for a tight-money environment. Business capital spending, the engine that in theory should be propelling Europe’s economy, looks like the opposite of a boom.

Europe capital spending negative interest rates

This translates into seriously boring GDP growth:

Europe negative interest rates Europe

 …click on the above link to read the rest of the article…

Blain’s Morning Porridge – May 21st 2019

Blain’s Morning Porridge – May 21st 2019


“He knew everything about literature, except how to enjoy it…”

Waves of negative news headlines battering markets. Might have to wear a hat..

Huawei – Trade War Threat Level Rises

The Huawei embargo raises the trade war threat from undeclared to imminent shooting match. While it’s not quite “bullets fired at Archduke’s car”, it’s getting close. It feels like there is something of a tedious inevitability developing – a bellicose Trump realises his political future depends on winning, and the Chinese refuse to lose face. Is it already too late to rein back?  

Huawei being effectively barred from Occidental markets has triggered all kinds of market fears: a “digital iron-curtain”, the threat of an economic cold tech war, broken global supply chains, and knock-on effects we can only begin to imagine. It’s the End of Globalisation – scream the media. The Chinese hint at reprisals. The “temporary exemptions” granted last night by the US are just that – temporary: they won’t undo the sudden need of millennials to dump their Huawei phones. The damage has been done.  Who will the Chinese punish in return? 

Markets are now rife with speculation about “ripple” effects damaging tech dependent initiatives from autonomous cars, streaming, digitisation, and booking apps, triggering all kinds of real-world economic pain in sectors like tourism and luxury goods. While the market is fretting about how America will shod itself as tariffs are slammed on shoes made in China, it might be time to reassess market sectors where we expected long-term and ongoing China expansion, rising domestic consumption and demand to drive growth – I’m think areas from aviation, autos, machinery and plant, and energy. And, what are the implications for the UK – where the Chinese are building our nuclear power stations? 

This doesn’t end well…

 …click on the above link to read the rest of the article…

How Central-Bank Interest-Rate Policy Is Destabilizing Banks

How Central-Bank Interest-Rate Policy Is Destabilizing Banks

Broadly speaking, banks operate under the concept of maturity transformation. Banks take short-term – less than one year – financing vehicles, such as customer deposits, and use that to finance long-term – more than one year – returns. These returns range from the most commonly understood loans, such as auto loans and mortgages, to investments in equity, bonds and public debt. Banks make money on the interest spread between what they pay to the owners of the money and what is earned from the operations. Banks also make money on other services, such as wealth management and account fees, though these are relatively small compared to the maturity transformation business.

In terms of assets, the primary asset a bank holds is the demand deposit, also referred to as the core deposit. These are your everyday savings and checking accounts. Banks also sell Wholesale Deposits, such as CDs, have shareholder equity and also can take out debt, such as interbank lending. As these assets are owned by someone else, each of them demands a return for the use of those assets. These are part of the costs of operation for a bank. There are also more fixed operating costs, such as employees, buildings and equipment that must also be financed.

So, a bank will take assets and formulate loans on them. Like most of the world, the US operates on a fractional reserve system, one where banks originate loans in excess of the deposits on-hand. Take a look at the balance sheet of a large regional bank, 5/3 Bank, for example. For the 2018 fiscal year, 5/3 reported non-capital assets of $94 billion and a deposit base of $108 billion. However, the cash and cash equivalent component of these assets stood at $4.4 billion, or just 4% of demand deposits.

 …click on the above link to read the rest of the article…

Central banks are buying gold at the fastest pace in six years

Central banks are buying gold at the fastest pace in six years

Earlier this month the World Gold Council published its quarterly report– and it shows that central banks and foreign governments from around the world are buying up gold at their fastest pace in six years.

This is pretty big news, and it says a LOT about the future of the dollar.

Remember, central banks and foreign governments hold literally TRILLIONS of dollars of reserves… and traditionally they do this by buying US government debt.

It sounds strange, but to big institutions, banks, etc., US government debt is equivalent to cash. They use it as a form of money.

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More importantly, they hold US dollars because that’s the global standard: the US dollar has been the world’s primary international reserve currency for seventy five years.

So US debt is extremely liquid. In fact, the $22 trillion US debt market is the biggest and most liquid market in the world.

But foreign governments have started breaking with the tradition of buying treasuries.

As the World Gold Council’s report showed us, foreign governments and central banks have been buying a LOT more gold than in previous years.

Net gold purchases in Q1/2019 among foreign governments and central banks was nearly 70% greater than Q1/2018… and the highest rate of first quarter purchases in six years.

The Chinese in particular, have been stockpiling gold faster than ever, while at the same time, Chinese ownership of US treasuries as a percentage of total holdings has been gradually declining over the past years.

And it’s not just China.

 …click on the above link to read the rest of the article…

Peter Schiff: The Uber IPO Fiasco and the Writing On the Wall

Peter Schiff: The Uber IPO Fiasco and the Writing On the Wall

Uber launched its IPO on Friday. It was less than ideal.

Meanwhile, the Federal Reserve is talking about how it wants to tweak its quantitative easing program when the next recession rolls around.

Peter Schiff talked about how these things relate — and the “writing on the wall” for the economy in his latest podcast. 

Instead of buying some fixed amount of Treasurys and mortgage-backed securities, the central bankers have floated the idea of pegging a yield during the next economic downturn. For example, it would try to hold the interest rate on a one-year bond at, say, 1%.  As Peter pointed out, this is essentially price-fixing.

They’re saying, ‘We don’t want the interest rate that is being determined in the market. We want to interfere in the market so that the interest rate is lower than the market would set.’”

The central bankers are basically admitting that this is not capitalism. They don’t want the free market discovering a rate because they don’t like the rate the market would choose. When you interfere with the market-clearing price – and an interest rate is simply the price of money – then you create surpluses or shortages. This is a basic supply and demand function.

As Peter said, this constant Federal Reserve suppression of rates is the source of our problems.

The reason the Fed constantly feels that it has to artificially suppress interest rates is because we have so much debt as a result of the artificial suppression of interest rates in the past.”

That’s the irony of the Fed suddenly running around warning about high levels of corporate debt. It’s a problem it created!

 …click on the above link to read the rest of the article…

Stocks Crater – 3.5 Trillion Dollars In Global Market Cap Wiped Out – China Considers “Dumping U.S. Treasuries”

Stocks Crater – 3.5 Trillion Dollars In Global Market Cap Wiped Out – China Considers “Dumping U.S. Treasuries”

Wall Street responded to our escalating trade war with China by throwing a bit of a temper tantrum.  On Monday the Dow Jones Industrial Average was down 617 points, and that was the worst day for the Dow since January 3rd.  But things were even worse for the Nasdaq.  It had its worst day since December 4th, and overall the Nasdaq is now down 6.3 percent in just the last six trading sessions.  Of course it isn’t just in the United States that stocks are declining.  Since last Monday, a total of approximately $3.5 trillion in market cap has been wiped out on global stock markets.  And since it doesn’t look like we are going to get any sort of a trade deal any time soon, this could potentially be just the beginning of our problems.

China fired a shot that was heard around the world on Monday when they announced that they would be dramatically raising tariffs on U.S. goods

China will raise tariffs on $60 billion in U.S. goods in retaliation for the U.S. decision to hike duties on Chinese goods, the Chinese Finance Ministry said Monday.

Beijing will increase tariffs on more than 5,000 products to as high as 25%. Duties on some other goods will increase to 20%. Those rates will rise from either 10% or 5% previously.

According to CNBC, these new tariffs are going to be particularly damaging for U.S. farmers…

The duties in large part target U.S. farmers, who largely supported Trump in 2016 but suffered from previous shots in the Trump administration’s trade war with China. The thousands of products include peanuts, sugar, wheat, chicken and turkey.

 …click on the above link to read the rest of the article…

Chapter 8: Negotiable Debt, A Bit of History

CHAPTER 8: NEGOTIABLE DEBT, A BIT OF HISTORY

This chapter is a quick summary and clarification of what happens when debt becomes negotiable. The focus is on money, but other aspects are referred to, highlighting the general undesirability of making debt negotiable. There will be some repetition of material previously covered, for the sake of assembling it all in one place.

We all know what money is: a special, universal kind of property whose purpose is to be exchanged for things that are up for sale. Because money can buy almost anything, hijacking the money supply is an obvious objective for any person or class that wishes to become massively wealthy and/or powerful.

Thousands of years ago, when money was valuable metal, a simple way of doing this emerged. Having accumulated a quantity of the metal, a person or institution could issue promises-to pay, and these promises-to-pay could circulate as money. While their promises circulated, nothing needed to be paid out: the promises themselves acted as money. And because the promises were valuable, they could be lent at interest.

The promises were, of course, a form of debt. The issuer owed (in theory) the amount written on the note, or represented by numbers in an account, to anyone owning a ‘promise’.

Debt lent at interest! It’s an idea that still seems strange and unfamiliar, even though it has dominated the world of wealth and power on and off for thousands of years.

This strange hybrid of debt and money is known today as ‘credit’. We are all familiar with ‘credit’; when we have money at the bank, we are ‘in credit’. Legally, the bank owes us money. The bank’s debt circulates as money, so it is best referred to as ‘circulating credit’.

 …click on the above link to read the rest of the article…

“China’s JPMorgan” Seeks Money From Its Employees To Avoid Collapse

“China’s JPMorgan” Seeks Money From Its Employees To Avoid Collapse 

Ever since Beijing allowed private Chinese companies (even certain state-owned enterprises) to officially fail for the first time in 2015, and file for bankruptcy to restructure their unsustainable debt loads, it’s been a one-way street of corporate bankruptcies, one which we profiled last June in “Is It Time To Start Worrying About China’s Debt Default Avalanche” (the answer, by the way, was yes), and which culminated with a record number of Chinese onshore bond defaults in 2018, as a liquidity crunch sparked a record 119.6 billion yuan in defaults on local Chinese debt last year.

But if 2018 was bad, 2019 is set to be the biggest by far for defaults in China’s $13 trillion bond market, highlighting the widening fallout from the government’s campaign to rein in leverage and China’s accelerating economic slowdown. According to Bloomberg, in just the first four months of the year, companies defaulted on 39.2 billion yuan ($5.8 billion) of domestic bonds, some 3.4 times the total for the same period of 2018. The pace is also more than triple that of 2016, when defaults were more concentrated in the first half of the year, unlike 2018.

However, whereas for much of 2018 Chinese defaults affected largely less meaningful companies with little to no systemic impact, in 2019 the defaults started hitting dangerously close to the beating heart of China’s massive, $40 trillion financial system (roughly three times China’s GDP). As we reported back in February, a giant Chinese borrower missed its payment deadline when Wintime Energy – which in 2018 became the latest Chinese bond defaulter as the coal miner failed to pay scheduled interest – didn’t honor part of a restructured debt repayment plan, setting the scene for even more corporate defaults, and as Bloomberg put it, “underscoring the risks piling up in a credit market that’s witnessing the most company failures on record.”

 …click on the above link to read the rest of the article…

Central Banks Don’t Matter

Central Banks Don’t Matter

Central Banks Don’t Matter

“There is no money in monetary policy.”

Could it be true? Is there no money in monetary policy?

Yesterday we argued the Federal Reserve cannot even define money… much less measure it to any reasonable satisfaction.

Today we venture upon a heresy deeper still — that central bank “monetary” policy has no actual existence.

No money stands beneath it, behind it, beside it.

The emperor is well and truly nude.

Who then actually controls monetary policy today?

The answer may very well lie hidden in the “shadows.”

The details — the shocking details — to follow.

Monetary Policy Is Actually About Credit and Debt

First moneyman par excellence Jeff Snider — author of today’s opening quotation — rams a sharp stake through the heart of the monetary myth:

Monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the ’60s), so economists just gave up trying… 

Money as it relates to “monetary” policy is not really money at all. What monetary policy refers to in contemporary terms is something wholly different… When the Federal Reserve… act[s] on monetary measures, they seek not to increase the supply of money to the economy but rather the supply of credit… Monetary policy in the modern sense of the word actually has little to do with money. Instead, it is always and everywhere about credit and debt…

All money is debt-based money in today’s lunatic and preposterous world.

The dollar in your wallet you consider an asset. But only someone else’s previous debt fanned it into existence.

Technically it is a Federal Reserve note. A note is a debt instrument.

None of the foregoing will stagger or flabbergast Daily Reckoning readers.

 …click on the above link to read the rest of the article…

The Company Store

The Company Store

Leaves almost nothing to live on

In the song Sixteen Tons by Merle Travis (and made famous by Tennessee Ernie Ford), the idea of the ‘company store’ referred to a system of debt bondage that effectively trapped workers within an unfair system designed to harvest all of their labor at very low cost.

You load sixteen tons, what do you get?

Another day older and deeper in debt

Saint Peter don’t you call me ’cause I can’t go

I owe my soul to the company store

       Sixteen Tons – Merle Travis

How exactly did the company store system operate?

Under a scrip system, workers were not paid cash; rather they were paid with non-transferable credit vouchers that could be exchanged only for goods sold at the company store. This made it impossible for workers to store up cash savings.

Workers also usually lived in company-owned dormitories or houses, the rent for which was automatically deducted from their pay.

(Source – Wiki)

This model was simple enough to understand.  “Pay” your workers with scrip vouchers, then sell them your marked up goods at the company store, pocketing a nice profit. On top of that, force your employees to live in company housing, too,  also at terms very favorable to the company.

Add it all up and the workers found themselves in perpetual service to their employer. No matter how hard and long they toiled, there was nothing left for their own private benefit after all was said and done.  The company succeeded in skimming off any and all  ‘excess’ for itself.

This vast unfairness eventually led to the formation of unions as well as to regulations providing protection to the workers.

 …click on the above link to read the rest of the article…

Endgame: Starting In 2024, All US Debt Issuance Will Be Used To Pay For Interest On Debt

Endgame: Starting In 2024, All US Debt Issuance Will Be Used To Pay For Interest On Debt

While it is common knowledge that the US budget deficit is soaring even though the US economy is allegedly growing at a brisk, mid-2% pace, resulting in recurring bond trader nightmares about funding the growing twin US deficits (Budget and Current Account), what few people know is the increasingly ominous composition of this budget deficit.

As we first pointed out one month ago, when looking at the US ‘income statement’, most concerning by far is that for the first four months of fiscal year 2019, interest payments on the U.S. national debt hit $221 billion, 9% more than in the same five-month period last year, with the rate of increase breathtaking (see chart below). As a reminder, according to the Treasury’s conservative budget estimates, interest on the U.S. public debt is on track to reach a record $591 billion this fiscal year, more than the entire budget deficit in FY 2014 ($483 BN) or FY 2015 ($439 BN), and equates to almost 3% of estimated GDP, the highest percentage since 2011.

It only gets worse from there.

As part of today’s Treasury Presentation to the Treasury Borrowing Advisory Committee, there is a chart showing the Office Of Debt Management’s forecast for annual US debt issuance, broken down between its three component uses of funds: Primary Deficit, Net Interest Expense, and “Other.”

That chart is troubling because while in 2019 and 2020 surging US interest expense is roughly matched by the other deficit components in the US budget, these gradually taper off by 2024, and in fact in 2025 become a source of budget surplus (we won’t be holding our breath).

 …click on the above link to read the rest of the article…

All That’s Missing Is a Black Swan

All That’s Missing Is a Black Swan

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
– Ludwig von Mises

The Federal Reserve chart above only goes back to 1970, but its message is clear, nevertheless. The velocity of money has dropped below that which was necessary to maintain a productive economy in 2009 and has never recovered.

The velocity of money can be defined as, “the rate at which money circulates or is exchanged in an economy in a given period.” It’s generally measured as a ratio of gross national product (GNP) to a country’s total money supply.

No money turnover… no economy.

But, if that’s so – if the chart is correct and the money turnover is by far the lowest since 1970 – why did the economy recover after 2010 and why are we in a bull market? Surely, the quantitative easing programme initiated by the Fed corrected the problem and happy days are here again.

Well, actually, neither of those commonly-held assumptions is correct. Quantitative easing didn’t pump money back into the failing economy and, more to the point, it wasn’t intended to. Most of the money that was created through quantitative easing never actually hit the streets.

To back up a bit, in 1999, the Fed, then under Alan Greenspan, convinced the US government, then under President Bill Clinton, to repeal the Glass Steagall Act, an act created in 1933 to assure that banks would never again recklessly create loans to the public that could never be repaid.

 …click on the above link to read the rest of the article…

“Everyone Is Thinking It’s The Shanghai Accord All Over Again”

“Everyone Is Thinking It’s The Shanghai Accord All Over Again”

Back on January 9, when the S&P500 was just inches away from its Christmas Day bear market lows, we asked a simple question: is the Shanghai Accord 2.0 coming? Now, with the S&P back at all time highs, China unleashing a historic torrent of new credit after launching monetary and fiscal easing that shocked even the most cynical China skeptics and sent Chinese stocks soaring, and every central bank in the world reversing in the Fed’s footsteps and scrambling to cut rates as the global race to the currency bottom entered what may be its final lap, we have the answer.

Or do we?

For those who are rightfully confused, because while there are countless similarities between the “2016 scenario” and current markets, there are also some very specific differences, here is a great recap of the similarities and differences, excerpted from the latest weekend note by One River asset management’s CIO, Eric Peters:

Deja Vu

“Everyone’s thinking it’s 2016 all over again,” said the CIO. A global growth scare, equity weakness, dollar strength and commodity declines prompted central bankers to hash out the Shanghai accord in early 2016 that dramatically reversed these trends. “They’ve seen China ease this year, the Fed pivot, equities rebound,” he said. By late-April in 2016, the S&P 500 had jumped 17% from the Jan 2016 lows (this year it rallied +20%), and by late-April 2016, Chinese stocks rose +16% (this year +40%). “They’ve looked at this and said green light, risk on.”

“Pulling out the 2016 playbook, people piled into reflation trades,” continued the same CIO. “Short dollar trades, crap beats quality, dash for trash, EM equities and FX, commodities.” By late-April 2016, oil had surged +70% from the Jan 2016 lows (this year +50%), copper rallied +20% then (this year +18%). The dollar index had fallen -6% in 2016 (but this year DXY is up +1%), gold surged +23% (but this year flat). 

 …click on the above link to read the rest of the article…

The US Government Debt Crisis

The US Government Debt Crisis 

This article explains why the US Government is ensnared in a debt trap from which there is no escape. Its finances are spiralling out of control. In the context of a rapidly slowing global economy, the budget deficit can only be financed by QE and bank credit expansion. Do not draw comfort from trade protectionism: it will not prevent the trade deficit increasing at the expense of domestic production, unless you believe there will be an unlikely resurgence in personal saving rates. We can now begin to see how the debt crisis will evolve, leading to the destruction of the dollar.

Introduction

At the time of writing (Thursday April 24) bond yields are crashing, the euro has broken down against the dollar and equities are hitting new highs. Obviously, equities are taking their queue from bonds. But bond yields are crashing because the global economy is sending some very worrying signals. Equity investors will be hoping monetary easing (which they now fully expect) will kick the can down the road once again and economies will continue to bubble along. They are ignoring some very basic economic facts…

Regular readers of my Insight articles will be aware of strong indications that the expansionary phase of the credit cycle is now over, and that we at grave risk of falling headlong into a global credit and systemic crisis. The underlying condition is that economic actors and their bankers accustomed to credit expansion are beginning to realise the assumptions behind their borrowing commitments earlier in the credit cycle were incorrect. 

That’s why it is a credit cycle. It is driven by prior credit expansion which corrals all producers into acting in an expansionary manner at the same time. Random activity, the condition of a true laissez-faire economy, ceases. Instead, credit conditions act on profit-seeking businesses in a state-managed context.

 …click on the above link to read the rest of the article…

Distressed Nation: Each American Would Owe $700,000 To Eliminate Worsening Debt Situation

Distressed Nation: Each American Would Owe $700,000 To Eliminate Worsening Debt Situation

Truth In Accounting (TIA), a 501(c)(3) – focused on government financial information, published a new report that suggests the federal government’s overall financial conditions worsened by $4.5 trillion in 2018. The report also calculates the actual national debt on a per taxpayer basis.

With assets of $3.84 trillion, the federal government’s unfunded obligations and debt total $108.94 trillion, which contributed to a $105 trillion debt burden.

“Our elected officials have made repeated financial decisions that have left the federal government with a debt burden of $105 trillion, including unfunded Social Security and Medicare promises. That equates to a $696,000 burden for every federal taxpayer,” TIA states.

TIA rated the federal federal government with an “F” for its financial outlook and worsening fiscal situation that could trigger a crisis in the not too distant future.

TIA explains that while the $779 billion national deficit is troubling, it doesn’t reflect the true financial situation.

“The overall decline in Net Position presents a better picture of the government’s financial decline,” the report states.

“The federal government’s financial position continued to deteriorate – and much faster than indicated by the government’s own ‘bottom-line,’” TIA’s Director of Research, Bill Bergman, said.

TIA pulled data from the “Financial Report of the U.S. Government” for the fiscal year ending Sept. 2018.

TIA’s “bottom line” measures the government’s unfunded debt, jumped by $4 trillion in 2018, about 4 times faster than the budget deficit or net operating cost.

Interest expenses on the national debt have been one of the fastest growing expenses, “while the government’s estimate of the fiscal gap – the amount of spending cuts and/or tax increases necessary to keep the debt/Gross Domestic Product ratio from rising in the future – doubled,” TIA reports.

“Perhaps the most alarming feature of the government’s release of its annual financial report was the public reaction: deafening silence; zero coverage in the mainstream media,” Bergman added.

 …click on the above link to read the rest of the article…

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