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The Birth of a Monster

The Birth of a Monster

The Federal Reserve’s doors have been open for “business” for one hundred years. In explaining the creation of this money-making machine (pun intended — the Fed remits nearly $100 bn. in profits each year to Congress) most people fall into one of two camps.

Those inclined to view the Fed as a helpful institution, fostering financial stability in a world of error-prone capitalists, explain the creation of the Fed as a natural and healthy outgrowth of the troubled National Banking System. How helpful the Fed has been is questionable at best, and in a recent book edited by Joe Salerno and me — The Fed at One Hundred — various contributors outline many (though by no means all) of the Fed’s shortcomings over the past century.

Others, mostly those with a skeptical view of the Fed, treat its creation as an exercise in secretive government meddling (as in G. Edward Griffin’s The Creature from Jekyll Island) or crony capitalism run amok (as in Murray Rothbard’s The Case Against the Fed).

In my own chapter in The Fed at One Hundred I find sympathies with both groups (you can download the chapter pdf here). The actual creation of the Fed is a tragically beautiful case study in closed-door Congressional deals and big banking’s ultimate victory over the American public. Neither of these facts emerged from nowhere, however. The fateful events that transpired in 1910 on Jekyll Island were the evolutionary outcome of over fifty years of government meddling in money. As such, the Fed is a natural (though terribly unfortunate) outgrowth of an ever more flawed and repressive monetary system.

Before the Fed

Allow me to give a brief reverse biographical sketch of the events leading up to the creation of a monster in 1914.

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

Doug Noland: Central Banks Are “Hostages Of Market Bubbles”

Doug Noland: Central Banks Are “Hostages Of Market Bubbles”

Doug Noland’s weekly Credit Bubble Bulletin is always required reading. The latest – befitting the amazing things that have happened lately – is more necessary than usual. But at 10,000 words it’s also a lot longer than usual. So while everyone should definitely read the whole thing, here are some excerpts to get you started:

I wonder if the Fed is comfortable seeing the markets dash skyward – the small caps up 16.4% y-t-d, the Banks 15.9%, the Transports 15.2%, Biotechs 18.5% and Semiconductors 17.0%. Or, perhaps, they’re quickly coming to recognize that they are now fully held hostage by market Bubbles.

Similarly, I ponder how Beijing feels about January’s booming Credit data – Aggregate Financing up $685 billion in the month of January. Do officials appreciate that they are completely held captive by history’s greatest Credit Bubble? 

Bubbles have become a fundamental geopolitical device – a stratagem. Things have regressed to a veritable global Financial Arms Race. As China/U.S. trade negotiations seemingly head down the homestretch, each side must believe that rallying domestic markets beget negotiating power. Meanwhile, emboldened global markets behave as if they have attained power surpassing mighty militaries and even nuclear arsenals.

China’s banks made the most new loans on record in January – totaling 3.23 trillion yuan ($477bn) – as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy.

January’s record China new bank loans were 11.4% higher than the previous record from January 2018 – and 15% above estimates. Total Bank Loans expanded 13.4% over the past year; 28% in two years; 45% in three years; 91% in five years; and an incredible 323% over the past decade.

“The San Francisco Fed put out a white paper about the benefits of negative interest rates. I hope that’s not where we’re going, but we can only cut rates about 225/250 bps to be at zero” — Kyle Bass, Hayman Capital Management.

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

Get Used to the “Powell Put”

Get Used to the “Powell Put”

In the land of the Federal Reserve and its market-manipulating mechanisms, there’s now an unofficial market term called the “Powell Put” or the “Powell Pivot.”

It is in direct reference to Fed chairman Jerome Powell. Before he became chairman, Wall Street referred to prior heads’ policies with terms like the “Greenspan Put” the “Bernanke Put” and the “Yellen Put.”

In layman’s terms, what the term means is that if the markets fall by too much, the Fed will swoop in and try to save the day, the month, or the year. A “put” in options terminology is insurance against a drop in prices. Nowadays, the “Powell Put” is the market’s insurance that the Fed will act to stimulate the markets if necessary.

Markets had been waiting for it to materialize. But Powell had previously talked about the need to raise rates to give the Fed “enough ammunition to fight the next crisis.” The size of the Fed’s balance sheet would also have to be reduced enough to provide it enough room to grow if needed.

Markets began to worry the Powell Put might never materialize when he raised interest rates in December, when the market was in the middle of a severe correction (that nearly culminated in a bear market). He also said the balance sheet reductions, or quantitative tightening, would run on “autopilot.”

Markets tanked on his comments. But then on Jan. 4, after stocks fell nearly 20%, the “Powell Put” finally materialized.

In comments addressing the American Economic Association, Powell said he was “prepared to adjust policy quickly and flexibly.”

And about the balance sheet reduction policy that was on autopilot in November, he said

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

Peter Schiff: ‘This Is The Beginning Of The End’ For The Economy

Peter Schiff: ‘This Is The Beginning Of The End’ For The Economy

Peter Schiff, the President and CEO of Euro Pacific Capital, and one of the few who predicted the 2008 Great Recession before it happened has said that what we are experiencing now is “the beginning of the end.” Schiff made his comments during his keynote speech at the Vancouver Resource Investment Conference.

The economic guru says that the Federal Reserve has made the decision to halt interest rate hikes in order to attempt to save the flailing stock market – the key indicator for far too many of how “healthy” the economy is at current. According to Seeking Alpha, the markets responded to the Fed’s decision in a positive manner, leading many to think we are “out of the woods” and no longer in danger of a recession.

However, Peter traces the moves of the Federal Reserve all the way back to the first rate hike of December 2015 and shows how the central bank has put the United States on a path toward a financial crisis that will be bigger than 2008. Peter insists he’s been right about what would happen all along, it’s just taken us a little longer to get to the actual financial disaster than he expected.

“The reason that I originally said that I did not expect the Fed to raise rates again was because I knew that raising rates was the first step in a journey that they could not finish, that in their attempt to normalize rates, the stock market bubble would burst and the economy would reenter recession.

Normalizing interest rates when you’ve created an abnormal amount of debt is impossible.

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

What Caused the Recession of 2019-2021?

What Caused the Recession of 2019-2021?

The banquet of consequences is now being served, but the good seats have all been taken.As I discussed in We’re Overdue for a Sell-Everything/No-Fed-Rescue Recession, recessions have a proximate cause and a structural cause. The proximate cause is often a spike in energy costs (1973, 1990) or a financial crisis triggered by excesses of speculation and debt (2000 and 2008) or inflation (1980).

Structural causes are imbalances that build up over time: imbalances in trade or currency flows, capital investment, debt, speculation, labor compensation, wealth-income inequality, energy supply and consumption, etc. These structural distortions and imbalances tend to interact in self-reinforcing dynamics that overlap with normal business / credit cycles.

The current recession has not yet been acknowledged, but this is standard operating procedure: recessions are only declared long after they actually start due to statistical reporting lags. Maybe the recession of 2019-21 will be declared at some point in the future to have begun in Q2 or Q3, but the actual date is not that meaningful; what matters is what caused the recession and how the structural imbalances are resolved.

So what caused the recession of 2019-21? Apparently nothing: oil costs are relatively low, U.S. banks are relatively well-capitalized, geopolitical issues are on the backburner and stocks, bonds and real estate are all well-bid (i.e. there is no liquidity crisis).

This lack of apparent trigger will mystify conventional economists who generally avoid the enormous structural imbalances in our economy because those imbalances are the only possible output of our Neofeudal Power Structure in which a New Nobility/Oligarchy dominates financial and political power and skims the vast majority of gains the economy generates.

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

Fed Warns Dollar “Might Not Retain Its Dominance Forever”

Fed Warns Dollar “Might Not Retain Its Dominance Forever”

When the TBAC published the minutes to its quarterly refunding decision two weeks ago, the most interesting part of the discussion was the “unique challenges” faced by the Treasury over the medium term, especially the possibility of significant financing gap over next 10 years amounting to over $12 trillion and the potential need for more domestic investor participation if foreign reserve growth slows.

Here, among other things (which potentially include the Green New Deal, with its $6+ trillion cost) the TBAC cautioned that the Treasury’s financing needs are expected to increase significantly even without factoring in recession possibilities over the next decade. The TBAC warned that deficits to the tune of $1-$1.5trn a year, and cumulatively over $12trn, over the next decade, are coming and will have to be funded in the bond market. Meanwhile, the CBO stubbornly refuses to forecast a recession during the next decade, instead projecting a steady 1.5-2% real GDP growth over the next 10y. While the TBAC did not take a position on this laughable assumption, it warned that deficits typically rise 2-5% of GDP in recessions, which would translate to additional deficits of $0.5-1trn at current GDP levels, and warns that “these borrowing needs have to financed in the context of already high global dollar debt exposure.”

But the bigger problem is that in the context of soaring deficit funding needs, the TBAC is also increasingly worried that “foreign investors already hold significant dollar debt” which is why the US will have to increasingly rely on domestic savings to fund its future budget deficits.

And here the TBAC made a surprising, tongue-in-cheek observation, namely that reserve managers have been very gradually increasing allocation to other currencies, and that the USD share of FX reserves has steadily come down from 72% in 2000 to 62% now even though the “USD is still the dominant reserve currency.”

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

Reason #437 to own gold: The Fed wants Negative Interest Rates

Reason #437 to own gold: The Fed wants Negative Interest Rates

And just like that, it seems we’re headed back to quantitative easing…

After cutting interest rates to nearly zero following the 2008 crisis, the Federal Reserve starting raising rates near the end of 2015 (from 0.25% to 2.5% today).

Following the most recent hike in December 2018, Chairman Powell seemed hell bent on further tightening, saying “some further gradual increases” were in the cards.

Then the stock market promptly fell nearly 20%. 

Investors were in panic mode and calling for the end of the world.

The pain was too much…

Last month, the Fed left rates unchanged… and Powell removed any language about further hikes.

Already Powell is capitulating.

The new chief economist for the International Monetary Fund praised the move, saying she sees “considerable and rising risks” to the global economy.

And no surprise here, but Paul Krugman also supported the Fed’s policy. He’s also worried about a possible recession… but more worried the Fed won’t be able to cut rates low enough.

Central banks tried raising interest rates, but the market wouldn’t take it.

Now, the market is putting the likelihood of a rate hike this year at ZERO… and it’s expecting a rate cut next year.

Both the European Central Bank and the Bank of Japan were supposed to start tightening policy and raising rates… now, they are both considering cutting interest rates even deeper into negative territory.

And after a 20% drop in US stocks, the Fed has taken its foot off the pedal. But the people still want more…

The President of the Federal Reserve Bank of St. Louis thinks current interest rates are “too restrictive.” He too wants lower rates.

The San Francisco Fed agrees – they were singing the praises of negative interest rates in a recent research paper, saying they would have helped the economy recover even faster after 2008.

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

Rant Alert

Rant Alert

Warning. Rant Alert: The global central bank easy money experiment has failed and it is past time that central bankers stopped bullshitting us and just admitted it. Europe is about to enter a recession and rates are still negative, the US Fed just tried to reduce its balance sheet with the greatest economic backwind in years (tax cuts, record buybacks, 3% GDP growth) and still they failed miserably, forced once again to halt all rate hike efforts. After 10 years of being non stop “accommodative” the Fed tried for 3 months to not be accommodative and it blew up in their face as the bottom dropped out of markets.

Only emergency liquidity calls from Cabo by Treasury Secretary Mnuchin and a complete 180 degree reversal by the Fed stopped the bleeding. Again.

And so once again the Fed is asking us to play chase the dot plot. Always dangling higher rate forecast targets that never come to fruition:

Not playing anymore. For 10 years we’ve watched the dot plot being moved further and further into the future only to see it all flat line again now with a renewed halt in rate hikes and an end to reducing the balance sheet. The conclusion is pretty clear:

The Fed is trapped, the ECB is trapped, the BOJ is trapped all doomed to intervene forever and ever amen always afraid to see markets go through a process of repricing and squeezing out the artificial asset inflation that 10 years of permanent intervention have wrought.

All are too afraid of the next recession and aim to avoid it at all costs. And who can blame them? The prospect of entering a global recession without enough ammunition to deal with it is a frightening prospect.

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

For the First Time Since 2007, Central Banks Are Net DRAINING Liquidity

For the First Time Since 2007, Central Banks Are Net DRAINING Liquidity

Yesterday was a wake up call for the bulls.

Unfortunately it’s only going to get worse. The fact is that no matter what verbal interventions Central Banks or the political elite issue, liquidity is now rapidly leaving the financial system.

The Fed continues to drain $50 billion in liquidity via its QT program every month. The ECB is no longer engaged in QE, which means it too is now draining liquidity as bonds on its balance sheet come due.

This leaves the Bank of Japan, which is running out of assets to buy, resulting in it not being able to expand its QE program (the one that has been running since 2013). Finally, China is attempting to launch its own version of a QE program, though given the insane leverage in its financial system (the country is issuing $25 in new debt for every $1 in GDP growth) this will have little effect.

Bottomline: for the first time since 2007, Central Banks are NET draining liquidity rather than adding it.

No matter how you spin this, it means stocks are on borrowed time.

And the markets KNOW it.

Indeed, we’ve broken the bull market trendline from the 2009 lows. The ultimate downside for this collapse is at best 2,000, and more likely than not we’ll go to the high 1,000s (think 1,750-1,800).

A Crash is coming…

Why Monetary Easing Will Fail

WHY MONETARY EASING WILL FAIL

The major economies have slowed suddenly in the last two or three months, prompting a change of tack in the monetary policies of central banks. The same old tired, failing inflationist responses are being lined up, despite the evidence that monetary easing has never stopped a credit crisis developing. This article demonstrates why monetary policy is doomed by citing three reasons. There is the empirical evidence of money and credit continuing to grow regardless of interest rate changes, the evidence of Gibson’s paradox, and widespread ignorance in macroeconomic circles of the role of time preference.

The current state of play

The Fed’s rowing back on monetary tightening has rescued the world economy from the next credit crisis, or at least that’s the bullish message being churned out by brokers’ analysts and the media hacks that feed off them. It brings to mind Dr Johnson’s cynical observation about an acquaintance’s second marriage being the triumph of hope over experience.

The inflationists insist that more inflation is the cure for all economic ills. In this case, mounting concerns over the ending of the growth phase of the credit cycle is the recurring ill being addressed, so repetitive an event that instead of Dr Johnson’s aphorism, it calls for one that encompasses the madness of central bankers repeating the same policies every credit crisis. But if you are given just one tool to solve a nation’s economic problems, in this case the authority to regulate the nation’s money, you probably end up believing in its efficacy to the exclusion of all else.

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

The next recession could force the Fed to cut interest rates into negative territory. Here’s what that means, and how it could affect you.

The next recession could force the Fed to cut interest rates into negative territory. Here’s what that means, and how it could affect you.

Federal Reserve Chairman Jerome Powell takes the oath of office administered by Federal Reserve Board member Randal Quarles at the Federal Reserve in Washington, U.S., February 5, 2018. REUTERS/Aaron P. Bernstein/File Photo
Federal Reserve Chairman Jerome Powell taking the oath of office.
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  • The San Francisco Federal Reserve recently published a paper indicating that an unprecedented policy step, if adopted, would have helped the economy recover more quickly from the most recent financial crisis. 
  • With the next recession looming, a prominent Wall Street strategist thinks the unpopular tool will be needed to combat it. 

The Federal Reserve’s extraordinary efforts to combat the Great Recession more than a decade ago raised many concerns about what tools it would have left to fight the next crisis. 

One measure that was floated, but largely passed off as improbable, was the use of negative interest rates. The Fed already did the unusual and held its Fed funds rate — the benchmark for all other borrowing costs — near zero from 2009 through 2015. This made it sufficiently cheaper for companies and consumers to access credit and rebuild the battered economy. 

Anything below zero, however, was once considered unthinkable. After all, a negative interest rate means that, for example, savers actually pay banks to hold their money instead of earning interest. 

The mainstream discussion on negative rates has quieted down for a while since Sweden became the first country to cut rates below zero in 2015. But a recent paper from the San Francisco Fed, coupled with widespread concerns about an economic slowdown, are returning the concept to the forefront. 

Vasco Cúrdia, the research adviser who wrote the paper, examined what would have happened had the Fed adopted a negative-interest-rate policy during the most recent recession. 

“Allowing the federal funds rate to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential,” he said.

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

Peter Schiff: This Is the Beginning of the End (Video)

Peter Schiff: This Is the Beginning of the End (Video)

During his keynote speech at the Vancouver Resource Investment Conference, Peter Schiff said we are at the beginning of the end.

The Fed appears to have paused interest rate hikes in order to save the stock market. The markets have reacted positively and a lot of analysts seem to think we’re out of the wood. But Peter traces the moves of the Federal Reserve all the way back to the first rate hike of December 2015 and shows how the central bank has put us on a path toward a financial crisis that will be bigger than 2008. Peter insists he’s been right about what would happen all along, it’s just taken us a little longer to get here than he expected. 

HIGHLIGHTS FROM THE SPEECH

“I have been forecasting that the Federal Reserve would not be able to complete its rate normalization process since before they raised rates for the first time.”

“I still believe if Hillary Clinton won that election, which was widely expected, I think it would have been one-and-done. I don’t think the second rate hike would have taken place had Hillary Clinton won.”

“I think that had Hillary Clinton won, the stock market would have tanked. The conventional wisdom before the election was that if Trump won it was going to be a disaster for the stock market, but if Hillary Clinton won, the market was going to like it. Well, Trump won and the market went way up, the opposite of what was expected. I believe that had Hillary Clinton won, the market would have gone down. Also the opposite of what had been expected. And I believe the US would have entered recession much sooner.”

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

Weekly Commentary: No Mystery

Weekly Commentary: No Mystery

January 30 – Financial Times (Sam Fleming): “After putting traders on notice six weeks ago to expect further increases in US interest rates in 2019, the Federal Reserve… executed one of its sharpest U-turns in recent memory. Leaving rates unchanged at 2.25-2.5%, Jay Powell, Fed chairman, unveiled new language that opened up the possibility that the next move could equally be down, instead of up. Forecasts from the Fed’s December meeting that another two rate rises are likely this year now appear to be history. Changes to its guidance were needed, Mr Powell argued, because of ‘cross-currents’ that had recently emerged. Among them were slower growth in China and Europe, trade tensions, the risk of a hard Brexit and the federal government shutdown. Financial conditions had also tightened, he added. Yet the about-face left some Fed-watchers wrongfooted and bemused. Many of those hazards were already perfectly apparent in the central bank’s December meeting, when it lifted rates by a quarter point and kept in place language pointing to further ‘gradual’ increases.”

The Wall Street Journal’s Greg Ip pursued a similar path with his article, “The Fed’s Mysterious Pause.” “Last December, Mr. Powell noted his colleagues thought they’d raise rates two more times this year, from between 2.25% and 2.5%, which was at the lower end of estimates of ‘neutral’—a level that neither stimulates nor holds back growth. On Wednesday, he suggested the Fed could already be at neutral: ‘Our policy stance is appropriate right now. We also know that our policy rate is in the range of the… committee’s estimates of neutral.’ If indeed the Fed is done, that would be a breathtaking pivot. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it?”

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

An Obituary: Fred Credibility

An Obituary: Fred Credibility

As with many terminal patients the initial hope is that aggressive treatment would work and cure the patient. But when the one time emergency round of drugs didn’t cure the patient additional drugs were needed and turned the patient into a hopeless junkie. After multiple injections a sense of dread was making the rounds. QE1 did not cure the patient, QE 2 and 3 were required with a little twist here and there thrown in. But the Fed doctors kept promising all would be well and the addiction could be stopped and the patient returned to normal.

And so it looks promising for a while. There was that scary flare up in 2016 when the patient regressed and the normalization had to be put on hold, but then a miracle drug came along called Tax Cut and suddenly it seemed as if the removal of drugs from the system could be accelerated.

So jubilant and optimistic were the Fed doctors that they promised further rounds of withdrawal and kept pointing to their dot plot of normalization.

Yet here we are, a mere 3 months later and the Fed doctors are at a loss again. Unable and unwilling to admit to the patient the true nature of the disease the Fed doctors once again decided to stop all withdrawal of the drugs, worse, they indicated they may have to administer new drugs to come. The patient begged for more drugs and the Fed doctors absolved themselves of their hippocratic oath and capitulated once again to the patient’s scream for another high, a scream only drowned out by the dying sigh of the Fed’s credibility, the initial casualty in this war on monetary drug dependency.

For it is true, the Fed doctors failed to wean off the patient:

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

Global Collapse Accelerating Buy Gold Now – Chris Martenson

Global Collapse Accelerating Buy Gold Now – Chris Martenson

By Greg Hunter’s USAWatchdog.com

Futurist and economic researcher Chris Martenson says a collapse is “a process, not an event.” Martenson contends the long awaited global collapse, on many fronts, has not only started, but is picking up speed. Martenson says, “Our prediction at PeakProsperity.com is these collapse trends, we have been following for 10 years now, are accelerating and continuing. None of them are reversing at this point in time. These will impact people’s future in a huge way. Environmentally, we see these signs, but we also have $245 trillion of debt in the global economy. We have been accelerating that debt cycle as if we could just keep that trend going forever—we can’t. So, what we see are all these unsustainable trends converging. They are going to happen . . . and people need to be ready.”

Martenson lays out the case to blame central banks for much of the geopolitical and economic friction in the world today. Martenson says, “The economic pie is not expanding anymore. It’s kind of stagnant. So, if you have one tiny group taking their fair share and the pie isn’t growing, it means they are taking from somebody else. This is the essence of central banking. They don’t create wealth, they redistribute wealth. When the Federal Reserve crams rates to zero, the savers lose out, but lose to who? The winners and losers are being picked by the central banks, and they have decided that the .01% should be the winners in this story and everybody else should be the losers. . . . Central bank policies have really benefited the elites at the expense of everybody else. This brings up the most important point and that is central banks are not our friends. They are redistributive organizations.”

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

Olduvai IV: Courage
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