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This Fed is on a Mission

This Fed is on a Mission

QE Unwind starts Oct. 1. Rate hike in Dec. Low inflation, no problem.

The two-day meeting of the FOMC ended on Wednesday with a momentous announcement that has been telegraphed for months: the QE unwind begins October 1. It marks the end of an era.

The unwind will proceed at the pace and via the mechanisms announced at its June 14 meeting. The purpose is to shrink its balance sheet and undo what QE has done, thus reversing the purpose of QE.

Countless people, worried about their portfolios and real estate investments, have stated with relentless persistence that the Fed would never unwind QE – that it in fact cannot afford to unwind QE.

The vote was unanimous. Even no-rate-hike-ever and cannot-spot-housing-bubbles Neel Kashkari voted for it.

The Fed also telegraphed that it could raise its target range for the federal funds rate a third time this year, from the current range of 1.0% to 1.25%. There is only one policy meeting with a press conference left this year: December 13, when the two-day meeting ends, remains the top candidate for the next rate hike.

This has been the routine since the rate hike last December: The FOMC decides to change its monetary policy at every meeting with a press conference: December, March, June, today, and December.

Even hurricanes won’t push the Fed off track.

The Fed specifically mentioned Harvey, Irma, and Maria. No matter how destructive, they won’t impact the economy “materially” over the “medium term” and therefore won’t impact the Fed’s policies:

Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

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

Further Thoughts on Gibson’s Paradox

“The paradox is one of the most completely established empirical facts in the whole field of quantitative economics.” – John Maynard Keynes

“The Gibson paradox remains an empirical phenomenon without a theoretical explanation” -Friedman and Schwartz

“No problem in economics has been more hotly debated.” – Irving Fisher


Introduction

Two years ago, I found a satisfactory solution to Gibson’s paradox.i The paradox is important, because it demonstrated that between 1750-1930, interest rates in Britain correlated with the general price level, and had no correlation with the rate of price inflation. And as Friedman and Schwartz wrote, a theoretical explanation eluded even eminent economists, so economists preferred to assume the quantity theory of money was the correct guide to the relationship between interest rates and prices. Therefore, the consequence of resolving the paradox is that the supposed linkage between interest rates, the quantity of money and the effect on prices is disproved.

Gibson’s paradox tells us that the basis of monetary policy is fundamentally flawed. The reason this error has been ignored is that no neo-classical economist has been able to establish why Gibson’s paradox is valid, as the introductory quotes tell us. Consequently, this little-know but very important subject is hardly ever discussed nowadays, and it’s a fair bet most of today’s central bankers are unaware of it.

The relationship between interest rates and the general level of prices held until the 1970s. This article summarises why Gibson’s paradox functioned, why interest rates do not correlate with price inflation, and the reasons it failed to be evident after the 1970s.

For ease of reference, here are the two charts reproduced from my original paper that the paradox refers to, the first illustrating the correlation between interest rates and the price level, and the second the lack of correlation between interest rates and the inflation rate in Britain, the only country where such a long run of statistics is available.

Gibson's Paradox

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Bank of America Stumbles On A $51 Trillion Problem

At the end of June, the Institute of International Finance delivered a troubling verdict: in a period of so-called “coordinated growth”, total global debt (including financial) hit a new all time high of $217 trillion in 2017, over 327% of global GDP, and up $50 trillion over the past decade. Commenting then, we said “so much for Ray Dalio’s beautiful deleveraging, oh and for those economists who are still confused why r-star remains near 0%, the chart  below has all the answers.”

Today, in a follow up analysis of this surge in global debt offset by stagnant economic growth, BofA’s Barnaby Martin writes that he finds “that as global debt has been mounting to more than $150 trillion (government, household and non-financials corporate debt), global GDP is just above $60 trillion.” His observation is shown in the self-explanatory chart below.

As a result, both the global economy and central banks are now held hostage by both the unprecedented stock of debt injected into capital markets over recent years to offset the financial crisis depression, and the record low interest rates associated with it.

As Martin writes, “the global fixed income market (as captured by the GFIM index) is now above the $51trillion mark“, which means that “more than $51 trillion at risk if rates vol spikes and yields move higher” and adds that “amid a record amount of assets acquired by the central banks we have seen the global fixed income market growing to the largest size it has ever been.” This is shown in the left panel on the chart below, while the right side chart shows the accompanying housing bubble: “amid record low funding costs the housing market is also experiencing rapid price gains in some regions as prices are now higher than pre-GFC levels. All main housing markets (US, Europe, Japan and UK) are above the 2007 highs, propped-up by record low yield levels.”

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

Money Multiplier is Really About Credit Out of “Thin Air”

According to traditional economics textbooks, the current monetary system amplifies the initial monetary injections of money. The popular story goes as follows: if the central bank injects $1 billion into the economy and banks have to hold 10% in reserve against their deposits the initial injection of $1 billion will become $10 billion i.e. money supply will expand by a multiple of 10. Note that in this example the central bank has actively initiated monetary pumping of $1 billion, which in turn banks have amplified to $10 billion.

Economists from the post-Keynesian school of economics (PK) have expressed doubt about the validity of this popular framework of thinking[1]. One of the advocates of this school, Bill Mitchell, in an article on his blog – Money Multiplier and other Myths – wrote that,

It (money multiplier) is also not even a slightly accurate depiction of the way banks operate in a modern monetary economy characterised by a fiat currency and a flexible exchange rate. In the present monetary framework, it is held the job of the central bank is to ensure that the level of cash in the money market is in tune with the interest rate target.

According to Mitchell,

The way banks actually operate is to seek to attract credit-worthy customers to which they can loan funds to and thereby make profit.

Furthermore, according to Mitchell,

So the idea that reserve balances are required initially to “finance” bank balance sheet expansion via rising excess reserves is inapplicable. A bank’s ability to expand its balance sheet is not constrained by the quantity of reserves it holds or any fractional reserve requirements. The bank expands its balance sheet by lending. Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank.

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

Debt Nightmare: Does Anyone Actually Care That Our Exploding National Debt Is Destroying Our Future?

Debt Nightmare: Does Anyone Actually Care That Our Exploding National Debt Is Destroying Our Future?

When will America finally wake up?  The borrower is the servant of the lender, and we now have a colossal 20 trillion dollar chain around our collective ankles.  We have willingly enslaved ourselves, our children and our grandchildren, and yet our addiction is so insatiable that we continue to add more than 100 million dollars to our debt load every single hour of every single day.  The national debt is sitting at a grand total of $20,162,176,797,904.13 at this moment, but now that the debt ceiling has been lifted that number is expected to shoot up very rapidly toward 21 trillion dollars by the end of the year.  The national debt had been held down by accounting tricks to keep it under the debt limit for many months, but every time this has happened before we have seen the national debt absolutely explode back to projected levels once the debt ceiling was raised.

But very few of our “leaders” in Washington seem to care that we are in the process of committing national suicide.  There is no possible way that we will be able to continue to be the most powerful economy on the planet if we continue down this road.  During Obama’s eight years in the White House, we added more than 9 trillion dollars to the national debt.  That certainly improved things in the short-term, because if we could go back and take 9 trillion dollars out of the economy over the past 8 years we would be in an absolutely nightmarish economic depression right now.

But even with all of this borrowing and spending, our economy has still only grown at an average rate of just 1.33 percent a year over the last 10 years.

And by going into so much debt, we are literally destroying the future for our children and our grandchildren.

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

Why Governments Expand the Gap Between Rich and Poor

QUESTION: Mr. Armstrong; You said at your Frankfurt the ECB policy of negative interest rates is actually creating a wider gap between the poor and the rich. Could you elaborate on that comment?

Thank you. Hop you come back to Frankfurt. You do realize that you get twice the crowds here than anyone.

OT

ANSWER: Lowering interest rates to negative was really brain-dead. The rich can move their move and export it to the USA. The poor, lack the sophistication and cannot export their labor no less their meager savings. The people who drive the economy have different roles. The rich provide the capital and create jobs. The middle class to poor are the people who form the foundation and it is their consumer spending that create the underlying economic growth. Attacking the rich always reduces investment and jobs, but lowering the interest rates to negative causes the rich to leave and the poor to middle class suffer lacking the sophistication export both their labor and savings.

The key message from President Mario Draghi’s press conference of the ECB was ro say he was getting ready to slow its QE stimulus, but he’s not in a rush.

Draghi tried to be as vague as possible, because he is trapped. He knows this cannot go on forever. He realizes that once he stops, the bond market crash and there is a risk that the Eurozone government are forced to pay real interest rates and that will blow out the entire EU budget system. Draghi does not know what to do. He confirmed that the governing council had begun ‘very preliminary’ talks about how the quantitative easing might be changed; how much longer it might run, and how much it might pump into the euro economy. He actually said:

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

Toronto Home Price Bubble Descends into Bear Market

Toronto Home Price Bubble Descends into Bear Market

With surprise rate hike, Bank of Canada turns against housing market.

Home sales in the Greater Toronto Area, the largest housing market in Canada, plunged 34.8% in August compared to a year ago, to 6,357 homes, with sales of detached homes and semi-detached homes getting eviscerated:

Sales by type:

  • Detached houses -41.6%
  • Semi-detached houses -37.3%
  • Townhouses -27.5%:
  • Condos -28.0%.

Even as total sales plunged, the number of active listings of homes for sale soared 65% year-over-year to 16,419, with 11,523 new listings added in August, according to the Toronto Real Estate Board (TREB).

“The relationship between sales [plunging] and listings in the marketplace today [soaring] suggests a balanced market,” the report explained, adding hopefully:

“If current conditions are sustained over the coming months, we would expect to see year-over-year price growth normalize slightly above the rate of inflation. However, if some buyers move from the sidelines back into the marketplace, as TREB consumer research suggests may happen, an acceleration in price growth could result if listings remain at current levels.”

And the average price of all homes, at C$732,292 in August, plunged 20.5% from the crazy peak in April (C$920,761). By this measure, it has now entered a bear market.

The average price in April had shot up 30% year-over-year. To cool this nutty business, the Ontario government introduced a laundry list of measures on April 20. It included most prominently a 15% transfer tax on nonresident foreign speculators. That appears to have done the trick.

Given the enormous price gains in recent years, the market remains hyper-inflated, and the four-month downturn into a bear market hasn’t even brought prices back to the year-ago level, with the average price for all types of housing up 3%, and the condo price up 21.4% year-over-year.

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

Loonie Soars After Bank Of Canada Unexpectedly Hikes Rates By 25 bps

Loonie Soars After Bank Of Canada Unexpectedly Hikes Rates By 25 bps 

With only 6 of 33 forecasters predicting a rate hike in today’s Bank of Canada announcement, it was inevitable: the Bank of Canada surprised a good 75% of the market, and triggered massive stop loss orders in the looni, when moments ago it announced it hiked rates by 25bps to 1%, sending the USDCAD lower by nearly 300 pips…

… the biggest spike in the loonie since March 2016, and the highest in two years.

 

According to the BOC statement, “removal of some of the considerable monetary policy stimulus in place is warranted” given stronger than expected economic performance while adding that “future monetary policy decisions are not predetermined” and will be guided by economic data and financial-market developments as they “inform the outlook for inflation.”

The Central bank also said that “close attention will be paid to the sensitivity of the economy to higher interest rates” given elevated household indebtedness. The bank will give particular focus to evolution of economy’s potential and labour market conditions, while highlighting that inflation remains below 2% but has evolved “largely as expected” since July MPR.

In the statement the central bank also highlighted that “excess capacity remains in labour market, wage and price pressures more subdued than historical relationships suggest” while “geopolitical risks and uncertainties around international trade and fiscal policies remain.”

Some analysts have highlighted that in the statement’s forward guidance, the central bank removed its inflation outlook, and replaced it with an outlook on potential output and the labor market.

Finally, the bank expects moderation of pace of economic growth in 2H 2017, but GDP level higher than expected in July MPR.

The full statement is below (link):

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

Don’t Be Fooled – The Federal Reserve Will Continue Rate Hikes Despite Crisis

Don’t Be Fooled – The Federal Reserve Will Continue Rate Hikes Despite Crisis

Though stock markets in general are meaningless and indicate nothing in terms of the health of the economy they still function as a form of hypnosis, or a kind of Pavlovian mechanism; a tool that central bankers can use to keep a population servile and salivating at the ring of a bell. As I have mentioned in the past, the only two elements of the economy that the average person pays attention to in the slightest are the unemployment rate and the Dow. As long as the first is down and the second is up, they aren’t going to take a second look at the health of our financial system.

Historians and economists often wonder after the fact how it was possible for so many “experts” and others to miss the flashing red lights leading into market implosions like that which occurred in 2008. Well, this is exactly how; within any casino there is an inherent bias towards false hope. Meaning, many people will invariably ignore all negative factors and past experience because positivism is more pleasant. Central bankers are keen to take advantage of this condition.

When observing from the outside-in, this attitude rings of desperation. Investors, with no positive fundamental data to turn to in the economy, have now been relegated to scouring press releases and speeches for ANY indication that the central bank might not take the punch bowl away as they have been doing slowly over the past few years. In fact, in most cases negative data has actually triggered spikes in equities because the assumption on the part of investors is that bad data will cause the Fed to second-guess its stimulus reduction policies. In this way, central bankers can, at least for now, fake-out investors with a simple word or phrase released in a strategic manner.

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

IMF Rings The Alarm On Canada’s Economy 

IMF Rings The Alarm On Canada’s Economy 

Shortly after yesterday’s rate hike by the Bank of Canada, its first since 2010, we warned that as rates in Canada begin to rise, the local economy which has seen a striking decline in hourly earnings in the past year, which remains greatly reliant on a vibrant construction sector, and where households are the most levered on record, if there is anything that can burst the local housing bubble, it is tighter monetary conditions. And a bubble it is, as the chart below clearly demonstrates… one just waiting for the pin, which as we suggested yesterday in “”Canada Is In Serious Trouble” Again, And This Time It’s For Real“, may have finally been provided thanks to the Bank of Canada itself.

Now, one day after our warning, the IMF has doubled down and on Thursday issued its latest consultation report, in which it said that while Canada’s economy has regained some momentum, it warned that business investment remains weak, non-energy exports have underperformed, housing imbalances have increased and uncertainty surrounding trade negotiations with the United States could hurt the recovery.

The report – which concerningly was written even before the BOC hiked rates by 0.25% – also said the Bank of Canada’s current monetary policy stance is appropriate, and it cautioned against tightening.

“While the output gap has started to close, monetary policy should stay accommodative until signs of durable growth and higher inflation emerge,” the IMF said, adding that rate hikes should be “approached cautiously”.

Directors noted that Canada’s financial sector is well capitalized and has strong profitability, but that there are rising vulnerabilities in the housing sector…  Directors agreed that monetary policy should stay accommodative and be gradually tightened as signs of durable growth and
inflation pressures emerge.

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

The Federal Reserve Is A Saboteur – And The “Experts” Are Oblivious

The Federal Reserve Is A Saboteur – And The “Experts” Are Oblivious

I have written on the subject of the Federal Reserve’s deliberate sabotage of the U.S. economy many times in the past. In fact, I even once referred to the Fed as an “economic suicide bomber.” I still believe the label fits perfectly, and the Fed’s recent actions I think directly confirm my accusations.

Back in 2015, when I predicted that the central bankers would shift gears dramatically into a program of consistent interest rate hikes and that they would begin cutting off stimulus to the U.S. financial sector and more specifically stock markets, almost no one wanted to hear it. The crowd-think at that time was that the Fed would inevitably move to negative interest rates, and that raising rates was simply “impossible.”

Many analysts, even in the liberty movement, quickly adopted this theory without question. Why? Because of a core assumption that is simply false; the assumption that the Federal Reserve’s goal is to maintain the U.S. economy at all costs or at least maintain the illusion that the economy is stable. They assume that the U.S. economy is indispensable to the globalists and that the U.S. dollar is an unassailable tool in their arsenal. Therefore, the Fed would never deliberately undermine the American fiscal structure because without it “they lose their golden goose.”

This is, of course, foolish nonsense.

Since its initial inception from 1913-1916, the Federal Reserve has been responsible for the loss of 98% of the dollar’s buying power. Idiot analysts in the mainstream argue that this statistic is not as bad as it seems because “people have been collecting interest” on their cash while the dollar’s value has been dropping, and this somehow negates or outweighs any losses in purchasing power. These guys are so dumb they don’t even realize the underlying black hole in their own argument.

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

Falling Interest Rates Have Postponed “Peak Oil”

Falling Interest Rates Have Postponed “Peak Oil”

Another group of people who don’t understand the power of interest rates is the group of people who put together the Peak Oil story. In my opinion, the story of finite resources, including oil, is true. But the way the problem manifests itself is quite different from what Peak Oilers have imagined because the economy is far more complex than the Hubbert Model assumes. One big piece that has been left out of the Hubbert Model is the impact of changing interest rates. When interest rates fall, this tends to allow oil prices to rise, and thus allows increased production. This postpones the Peak Oil crisis, but makes the ultimate crisis worse.

The new crisis can be expected to be “Peak Economy” instead of Peak Oil. Peak Economy is likely to have a far different shape than Peak Oil–a much sharper downturn. It is likely to affect many aspects of the economy at once. The financial system will be especially affected. We will have gluts of all energy products, because no energy product will be affordable to consumers at a price that is profitable to producers. Grid electricity is likely to fail at essentially the same time as other parts of the system.

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The Inconvenient Truth of Consumer Debt

The Inconvenient Truth of Consumer Debt

It’s acceptable to build infinitely high levels of household debt — as long as rates never rise.
Ready for a rainy day?Photographer: Anoek De Groot/AFP/Getty Images

Oh, but for the days the hawks had a hero in Sydney. Against the backdrop of a de facto currency war, the Reserve Bank of Australia stood as a steady pillar of strength. The RBA held the line on interest rates, maintaining a floor of 2.5 percent, even as its global central bank peers drove rates to the zero bound and beyond into negative territory.

The abrupt end to the commodities supercycle drove the RBA to join the global currency war. The mining-dependent nation’s economy was so debilitated that policy makers felt they had no choice but to ease financial conditions. In February 2015, after an 18-month honeymoon, the RBA reduced its official rate to 2.25 percent, marking the start of a cycle that ended last August with the fourth cut to a record low of 1.5 percent.

The Bank of Canada has taken a similar journey in recent years. It embarked upon a mild tightening campaign in 2010 that raised the overnight loan rate from a record low of 0.25 percent to 1 percent in September 2010. The bank maintained that level until early 2015. Two weeks before the RBA’s first cut, the Bank of Canada lowered rates to 0.75 percent. The January move, which shocked the markets, was followed in July 2015 with an additional ease to 0.5 percent, where it remains today.

Bank of Canada Governor Stephen Poloz, who replaced Mark Carney after he departed to head the Bank of England, explained the moves as necessary to counter the downside risks to inflation emanating from the oil price shock to the country’s economy.

Two resource-rich economies reacting similarly to body blows is intuitive enough. They eased the pressure on their given economies.

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

Debt Has No Consequences? Color Me Skeptical

Debt Has No Consequences? Color Me Skeptical

The entire status quo is based on the delusion that rapidly rising debt will never generate any negative consequences.

Here’s a chart of America’s national debt, extended a mere dozen years into the future: the current $20 trillion in debt will double to $40 trillion, and that assumes 1) trillions of dollars in private and local government pensions don’t implode and have to be bailed out by the federal government, a bail-out that will have to be paid by borrowing more money, 2) a recession doesn’t slash federal tax revenues, 3) Universal Basic Income (UBI) doesn’t become policy, adding $1+ trillion in additional borrowing annually–and so on.

Color me skeptical that doubling the debt in 12 years won’t have any negative consequences. Let’s start by noting that federal debt is only the tip of America’s total debt load, which is rising fast in all sectors: federal, state/county/city, corporate and household.

Total government, corporate and household debt soared from $15.5 trillion in 2000 to $41.1 trillion in 2016. (see chart below, courtesy of 720Global). If we extend this expansion another 12 years, we will have a total debt load in the neighborhood of $100 trillion by 2030. And that’s if the “recovery” news is all good.

The consensus is that all this debt will have no negative consequences because 1) interest rates will remain near-zero forever and 2) it’s all “investment”, right? Actually, no; the vast majority of this debt is consumption, not investment, or even worse, it simply services existing debt or funds speculative gambling (stock buybacks, etc.)

Recall that every debt is somebody’s asset. Debt jubilees sound great to debtors, but not so appealing to insurance companies, pension funds, mutual funds, etc. that own the debt and rely on the income from that debt to pay pensioners their pensions, settle insurance claims, etc.

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

The Federal Reserve Is Destroying America

The Federal Reserve Is Destroying America

And wait until you hear what they’re getting away with now

Perhaps I should start with a disclaimer of sorts. Yes, I realize that the people working at the Federal Reserve, as well as the other central banks around the world, are just people.  Like the rest of us, they have egos, fears, worries, hopes, and dreams. I’m sure pretty much all of them go home each night believing they are basically good and caring individuals, doing important work.

But they’re destroying America.  They might have good intentions, but they are working with bad models. Ones that lead to truly horrible outcomes.

One of the chief failings of central banks is that they are slaves to an impossible idea; the notion that humans are free to pursue perpetual exponential economic growth on a finite planet.  To be more specific: central banks are actually in the business of promoting perpetual exponential growth of debt.

But since growth in credit drives growth in consumption, the two are concepts are so intimately linked as to be indistinguishable from each other.  They both rest upon an impossibility.  Central banks are in the business of sustaining the unsustainable which is, of course, an impossible job.

I can only guess at the amount of emotional energy required to maintain the integrity of the edifice of self-delusion necessary to go home from a central banking job feeling OK about oneself and one’s role in the world.  It must be immense.

I rather imagine it’s not unlike the key positions of leadership at Easter Island around the time the last trees were being felled and the last stone heads were being erected.  “This is what we do,” they probably said to each other and their followers.  “This is what we’ve always done.  Pay no attention to those few crackpot haters who warn that in pursuing our way of life we’re instead destroying it.”

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

Olduvai II: Exodus
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Olduvai III: Cataclysm
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