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Benn Steil: The Fed Could be Tightening More Than it Realizes

Ten years ago, before the collapse of Lehman Brothers rocked global financial markets, the Fed’s balance sheet stood at $925 billion—mostly U.S. Treasuries. After fifty-nine months of asset purchases to push down longer-term interest rates, it had ballooned to a peak of $4.5 trillion, including nearly $1.8 trillion in mortgage securities, in October 2014.

In October of this year, the Fed at last began a slow slimming-down of the balance sheet, allowing $10 billion in maturing securities to roll off without reinvesting the proceeds. All else being equal, this represents a tightening of monetary policy, as it tends to push up longer-term (10-year) market interest rates.

In Fed chair Janet Yellen’s words, the central bank “does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual prospective economic conditions.” She has therefore stressed that the Fed sees its balance-sheet reduction as a primarily technical exercise separate from the pursuit of its monetary policy goals—in particular, pushing inflation back up to 2%. The Fed’s main tool for tightening monetary policy in a recovering economy would, therefore, she explained, be raising short-term market interest rates by paying banks greater interest on reserves (IOR). Since December 2015, the Fed has raised the rate on IOR by 100 basis points (1%), which has pushed up its short-term benchmark rate—the effective federal funds rate—in tandem.

But is Yellen right that the Fed’s gradual approach to balance-sheet reduction makes it relatively unimportant in its impact on monetary conditions? Our analysis suggests that it will be, in fact, considerably more important than the market, or the Fed itself, realizes. Here is why.

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

How Uncle Sam Inflates Away Your Life

How Uncle Sam Inflates Away Your Life

“Inflation is always and everywhere a monetary phenomenon,” once remarked economist and Nobel Prize recipient Milton Friedman.  He likely meant that inflation is the more rapid increase in the supply of money relative to the output of goods and services which money is traded for.

As more and more money is issued relative to the output of goods and services in an economy, the money’s watered down and loses value.  By this account, price inflation is not in itself rising prices.  Rather, it’s the loss of purchasing power resulting from an inflating money supply.

Indeed, Friedman offered a shrewd insight.  However, he also accompanied it with an opportunist mindset.  Friedman saw promise in the phenomenon of monetary inflation.  Moreover, he saw it as a means to improve human productivity and economic growth.

You see, a stable money supply was not good enough for Friedman.  He advocated for moderate levels of monetary growth, and inflation, to perpetually stimulate the economy.  By hardwiring consumers with the expectation of higher prices, policy makers could compel a relentless consumer demand.

This desire to harness and control the inflation phenomenon has infected practically every government economist’s brain since the early 1970s.  Over the decades they’ve somehow come to a consensus that 2 percent price inflation is the idyllic rate for provoking economic nirvana.  The Fed even tinkers with its federal funds rate for the purpose of targeting this magic 2 percent rate of price inflation.

Shadow Stats

On Wednesday the Bureau of Labor Statistics (BLS) published its October Consumer Price Index (CPI) report.  According to the government number crunchers, consumer prices are increasing at an annual rate of 2 percent.  Of course, anyone who lives and works in the real world knows prices are rising much faster.

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

Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP

Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP

In a moment of rare insight, two weeks ago in response to a question “Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?”, we said that this was simply a “prelude to central bank funded universal income”, or in other words, Fed-funded and guaranteed cash for everyone.


Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?

prelude to central bank funded universal income


On Thursday afternoon, in a stark warning of what’s to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of “solutions”, as simply cutting interest rates won’t well, cut it anymore, and in addition to more QE and forward guidance – both of which were used widely in the last recession – the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.

The bolded is a tacit admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force, the US central bank will have to take drastic steps to preserve social order and cohesion.

According to Williams’, Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams’ implicit admission that as a result of 9 years of Fed attempts to stimulate the economy – yet merely ending up with the biggest asset bubble in history – the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.

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

Central Bank Group Think: Convince the Public More Inflation is Coming 

Chicago Fed chief Charles Evans is worried about the lack of inflation primarily because he is clueless about where to find it. As further proof of his economic illiteracy, Evans says “Low inflation expectations keep inflation down”.

The Federal Reserve should take a more aggressive stance toward boosting inflation and stop talking so much about using interest rates to ensure financial stability, Chicago Fed President Charles Evans said.

Evans expressed concerns Wednesday that the public was losing faith in policy makers’ commitment to bring inflation back up to their 2 percent target.

The central banker has consistently argued for a slower pace of interest-rate increases than many of his colleagues on the policy-setting Federal Open Market Committee.

“In order to dispel any impression that 2 percent is a ceiling, our communications should be much clearer about our willingness to deliver on a symmetric inflation outcome, acknowledging a greater chance of inflation at 2.5 percent in the future than what has been communicated in the past,” he said in remarks prepared for a speech in London.

Two Asinine Economic Theories

  1. There is a need for inflation
  2. The Fed can achieve it by talking about it

For proof of number 2, look at Japan.

In regards to point number 1, the BIS agrees that routine price deflation may be beneficial.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

“*Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive*,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

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

Is There a Way Out of the ECB’s Trap?

 

The ECB faces the Devil’s Alternative that Frederick Forsyth mentioned in one of his books. All options are potentially riskly. Mario Draghi knows that maintaining the so-called stimuli involves more risks than benefits, but also knows that eliminating them could make the eurozone deck of cards collapse.

Despite the massive injection of liquidity, he knows that he can not disguise political risks such as the secessionist coup in Catalonia. The Ibex reflects this, making it clear that the European Central Bank does not print prosperity, it only puts a floor to valuations.

The ECB wants a weak euro. But it is a game of juggling to pretend a weak euro and at the same time a strong economy. The European Union countries export mostly to themselves. Member countries sell more than two-thirds of their goods and services to other countries in the eurozone. Therefore, the more they export and their economies recover, the stronger the euro, and with it, the risk of losing competitiveness. The ECB has tried to break the euro strength with dovish messages, but it has not worked until political risk reappeared. With the German elections and the prospect of a weak coalition, the results of the Austrian elections and the situation in Spain, market operators have realized – at last – that the mirage of “this time is different “in the European Union was simply that, a mirage.

A weak euro has not helped the EU to export more abroad. Non-EU exports from the member countries have been stagnant since the monetary stimulus program was launched, even though the euro is much weaker than its basket of currencies compared to when the stimulus program began. The Central Bank Trap, which I explain in my new book.

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

Sweden: The World’s Biggest Housing Bubble Cracks

Sweden: The World’s Biggest Housing Bubble Cracks

Sweden’s property bubble is probably the world’s biggest, despite which it gets relatively little coverage in the mainstream financial media – although that might be about to change. Warnings about this bubble are not new. In March 2016, Moody’s issued a very explicit warning that Sweden’s negative interest rates were propagating an unsustainable housing bubble.

The central banks of Switzerland, Denmark and Sweden (all rated Aaa stable) have been among the first to push policy rates into negative territory. A year into this novel experience, Moody’s Investors Service concludes that, from among the three countries, Sweden is most at risk of an – ultimately unsustainable – asset bubble…

“The Riksbank has not been successful in engineering higher inflation, while Sweden’s GDP growth continues to be among the strongest in the advanced economies,” says Kathrin Muehlbronner, a Senior Vice President at Moody’s.

“At the same time, the unintended consequences of the ultra-loose monetary policy are becoming increasingly apparent – in the form of rapidly rising house prices and persistently strong growth in mortgage credit”, adds Ms Muehlbronner. In Moody’s view, these trends will likely continue as interest rates will remain low, raising the risk of a house price bubble, with potentially adverse effects on financial stability as and when house prices reverse trends.

In October 2016, the Riksbank’s Governor, Stefan Ingves, spoke in grave terms to the FT about the impact of negative rates on house prices.

But despite a lack of drama so far, Mr Ingves remains worried about a bad ending due to risks over financial stability.

He said: “It remains an issue because we are mismanaging our housing market. Our housing market isn’t under control, in my view.” The ratio of household debt to disposable income in Sweden is one of the highest in the world at more than 180 per cent and the Riksbank estimates it will continue to rise in the coming years.

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

Close to the Edge

“Look at it this way. In 100 years, who’s gonna care ?”

  • Nancy, waitress, in ‘The Terminator’ (screenplay by James Cameron and Gale Ann Hurd).

Imagine that a cyborg from 10 years into the future paid you a visit back in 2007. Here is what is going to happen, he says, in a thick Austrian accent, his body looking like a condom stuffed with walnuts. After deregulation and a gaudy credit boom, Wall Street will face an extinction level event. So will the City of London. As a result, interest rates will be driven down to zero and kept there for a decade as a “temporary” emergency measure. The UK will vote to leave the European Union. Donald Trump will be elected US President. On the basis of these facts alone, what do you think would happen to global stock markets ? Would they be higher, or lower – and perhaps much lower ?

Since we know the answer, it’s hardly a fair question, and there can in any case be no counter-factual. But this thought experiment does reveal the vulnerability of ‘global macro’ investing in a world in which central banks are almost exclusively calling the shots. Which might explain why an increasing number of ‘global macro’ managers are quietly folding up their tents.

The first requirement to harvest superior long-term returns from the markets is to have some kind of edge. If you do not know what your edge is, you do not have one. It is difficult to see how many (or any) ‘global macro’ managers can possess any form of edge when the financial markets are largely at the mercy of the arbitrary behaviour of monetary central planners, either adding or withdrawing liquidity as they see fit. Which is just one of the reasons why we don’t invest in ‘global macro’ funds.

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

What Hayek Tells Us About the Link Between Ultra-Loose Monetary Policy and Political Instability

The European Central Bank will increase the overall volume of its bond purchase program to 2.550.000.000.000 euros by September 2018. The main refinancing rate will remain at zero. Mario Draghi has stressed that this policy shall continue until inflation picks up sustainably (which is unlikely to happen in the foreseeable future). The works of Friedrich August von Hayek (1931, 1944, 1976) help to explain why the tremendous monetary expansion is increasingly causing growing economic and political instability in Europe.

Hayek’s (1931) Production and Prices explains boom and bust with central bank mistakes. During the upswing, the central bank keeps the interest rate too low. Investment projects with comparatively low marginal efficiency are launched, financed by credit creation of the banking sector. Share prices hike, because profit opportunities of enterprises and banks increase, while deposit rates are low. Wages do not rise as long as idle capacities in the labor market exist. As soon as wages start to rise, enterprises lift prices and inflation picks up. When the central bank increases the interest rate to contain inflation, investment projects with low marginal efficiency have to be dismantled. The boom turns into bust. The central bank aggravates the recession by keeping the interest rate too high.

To understand the economic development of the industrialized countries since the mid 1980s Hayek (1931) is important, but two modifications have to be made (Schnabl 2016). In line with Hayek, central banks around the globe have tended to keep interest rates too low during upswings, thereby causing exuberant booms. In contrast to Hayek’s theory, they cut interest rates fast during crisis to avoid painful recessions. In addition, increasingly expansionary monetary policies became visible in rising asset rather than goods prices (see Figure). Therefore, interest rates could converge towards zero and central bank balance sheet could be inflated without inflation targeting central banks being forced to tighten monetary policy.

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

Ron Paul: We Are Reaching A Point Of No Return

Ron Paul: We Are Reaching A Point Of No Return

When the system will break no matter what the Fed tries

Ron Paul Book: The Revolution At Ten Years

Dr. Ron Paul has long been a leading voice for limited constitutional government, low taxes, free markets, sound money, civil liberty, and non-interventionist foreign policies.

Dr. Paul served as the US Representative for Texas’s 27th Congressional District from 1976 to 1985. He then represented the 14th district from 1977 to 2013. He ran for the office of US President, three times, most recently in the 2012 Republican primaries. Dr. Paul also had a long career as an OBGYN over which he delivered more than 4,000 babies.

The recent author of the book, The Revolution At Ten Years, Dr. Paul looks ahead at the future of the movement he helped launch — tackling central planning, the military empire, cultural Marxism, the surveillance state, the deep state, and the real threats from these institutions to our civil liberties.

As a multi-term member of Congress, Dr. Paul knows the players and policies responsible for the growing unfairness and inequality now rampant in society. He does not expect the offenders will reform willingly. Instead, he predicts the system will collapse under its own unsustainability — offering a rare and valuable chance then for more sound and fair solutions to prevail:

Wealth doesn’t come from the creation of money, especially a fiat system. With too much fiat money and all this credit, eventually the economy becomes exhausted and engulfed with debt and mal-investments. The treatment for this is a correction; you have to allow the debt to be liquidated. You have to get rid of the mal-investment and you have and to allow real economic growth to start all over again. But that wasn’t permitted in ’08 and ’09, which is why there’s been stagnation.

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

Bank Of England Hikes Rates By 25bps In 7-2 Vote; First Increase In A Decade; Pound Plunges

Bank Of England Hikes Rates By 25bps In 7-2 Vote; First Increase In A Decade; Pound Plunges

Over ten years since the last rate hike by the Bank of England in July 2007 (when incidentally, cable was trading above $2.00), and following years of market expectations of an imminent rate hike that failed to materialize…

…. moments ago the BOE – which had telegraphed the move extensively in recent months despite some dovish misgivings – finally pulled the trigger, and raised rates by 25bps to 0.5% in order to curb the effect of high inflation brought about by the post-Brexit plunge in the pound, squeezing local households and pressuring the UK economy. However, while cable initially spiked higher on the news, it subsequently slumped on the news that the vote was not a unanimous 9-0 decision as some had expected, as would telegraph a normal rate hike cycle, and instead had a decidedly dovish tilt with a far more contested 7-2 vote, with Cunliffe and Ramsden dissenting based on insufficient evidence that domestic costs, particularly wage growth, would pick up in line with central projections.

Here is the BOE assessment:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.  At its meeting ending on 1 November 2017, the MPC voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%.  The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion.  The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

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

Deutsche Asks A Stunning Question: “Is This The Beginning Of The End Of Fiat Money?”

Deutsche Asks A Stunning Question: “Is This The Beginning Of The End Of Fiat Money?”

One month ago, Deutsche Bank’s unorthodox credit analyst, Jim Reid published a phenomenal report, one which just a few years ago would have been anathema, as it dealt with two formerly taboo topics: is a financial crisis coming (yes), and what are the catalysts that have led the world to its current pre-crisis state, to which Reid had three simple answers: central banks, financial bubbles and record amounts of debt. 

Just as striking was Reid’s nuanced observation that it was the modern fiat system itself that has encouraged and perpetuated the current boom-bust cycle, and was itself in jeopardy when the next crash hits:

We think the final break with precious metal currency systems from the early 1970s (after centuries of adhering to such regimes) and to a fiat currency world has encouraged budget deficits, rising debts, huge credit creation, ultra loose monetary policy, global build-up of imbalances, financial deregulation and more unstable markets.

The various breaks with gold based currencies over the last century or so has correlated well with our financial shocks/crises indicator. It shows that you are more likely to see crises/shocks when we break from hard currency systems. Some of the devaluation to Gold has been mindboggling over the last 100 years.

The implications of this allegation were tremendous, especially coming from a reputable professional who works in a company which only exists thanks to the current fiat regime: after all, much has been said about Deutsche Bank’s tens of trillions  in gross liabilities, mostly in the form of various rate derivatives, backed by hundreds of billions in deposits and, implicitly, the backstop of the German government as Deutsche Bank discovered the hard way one year ago.

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

Low Interest Rates Subsidize Wealthy Households

When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.

Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”

While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.

Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts. The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.

snarr1.png

Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.

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Stagnation Is Not Just the New Normal–It’s Official Policy

Stagnation Is Not Just the New Normal–It’s Official Policy

Japan is a global leader is how to gracefully manage stagnation.

Although our leadership is too polite to say it out loud, they’ve embraced stagnation as the new quasi-official policy. The reason is tragi-comically obvious: any real reform would threaten the income streams gushing into untouchably powerful self-serving elites and fiefdoms.

In our pay-to-play centralized form of governance, any reform that threatens the skims, privileges and perquisites of existing elites and fiefdoms is immediately squashed, co-opted or watered down.

So the power structure of the status quo has embraced stagnation as a comfortable (except to those on the margins) and controllable descent that avoids the unpleasantness and uncertainty of crisis. We all know that humans quickly habituate to gradual changes in circumstances, and that if the changes are gradual enough, we have difficulty even noticing the erosion.

So wages/salaries stagnate, inflation eats away at the purchasing power of our net income, junk fees, tolls and taxes notch higher by increments too modest to trigger protest, fundamental civil liberties are chipped away one small piece at a time, healthcare costs rise every year like clockwork, and the gap between the bottom 95% and the top 5% widens, as does the gap between the top .1% and the bottom 99.9%, productivity stagnates, the growth rate of new businesses stagnates, but it’s all so gradual that we no longer notice except to sigh in resignation.

Japan is a global leader is how to gracefully manage stagnation. Here’s how Japan is managing to maintain a comfortable secular stagnation:

Japan’s central bank creates a ton of new currency every year, which it uses to buy Japan’s government debt/bonds. This keeps interest rates near-zero, so the cost of government borrowing is kept minimal.

 

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

The Courage to Normalize Monetary Policy

The Courage to Normalize Monetary Policy

A decade after the onset of the global financial crisis, it seems more than appropriate for central bankers to move the levers of policy off their emergency settings. A world in recovery – no matter how anemic it may be – does not require a crisis-like approach to monetary policy.

NEW HAVEN – Three cheers for central banks! That may sound strange coming from someone who has long been critical of the world’s monetary authorities. But I applaud the US Federal Reserve’s long-overdue commitment to the normalization of its policy rate and balance sheet. I say the same for the Bank of England, and for the European Central Bank’s grudging nod in the same direction. The risk, however, is that these moves may be too little too late.

Central banks’ unconventional monetary policies – namely, zero interest rates and massive asset purchases – were put in place in the depths of the 2008-2009 financial crisis. It was an emergency operation, to say the least. With their traditional policy tools all but exhausted, the authorities had to be exceptionally creative in confronting the collapse in financial markets and a looming implosion of the real economy. Central banks, it seemed, had no choice but to opt for the massive liquidity injections known as “quantitative easing.”

This strategy did arrest the free-fall in markets. But it did little to spur meaningful economic recovery. The G7 economies (the United States, Japan, Canada, Germany, the United Kingdom, France, and Italy) have collectively grown at just a 1.8% average annual rate over the 2010-2017 post-crisis period. That is far short of the 3.2% average rebound recorded over comparable eight-year intervals during the two recoveries of the 1980s and the 1990s.

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

ECB Negative Rate Experiment May Lead to the Worst Financial Crisis in Modern History

QUESTION: Mr. Armstrong; Your proposition that the quantity of money theory is dead seems to be a true earth shattering proposition. It certainly disproves the Austrian School and the events post 2008 support your statement.

The European Central Bank is supposed to traditionally pursue the goal of monetary stability. The Germans have followed the Austrian School of Economics religiously. However, the ECB has used monetary policy instruments attempting to create an annual depreciation of the euro of just under 2 per cent without success. Since the outbreak of the financial crisis in 2008, the function and importance of the ECB has changed fundamentally and drastically.

In order to avert a core meltdown of the global financial system, the ECB went beyond the American Federal Reserve and other major central banks, launching an extremely expansive monetary policy lowering the key interest rates to negative territory. This has never been done in history and the ECB experiment has created tremendous problems moving forward. Moving the deposit rate for commercial banks parking money at the central bank to the negative range of minus 0.4 per cent combined with began buying up large amounts of government bonds and later corporate bonds of the worst quality, has completely failed to stimulate the economy.

My question is this. Have the measures taken by the ECB resulted not averting a crisis, but transforming it into a far greater risk and simply extended the entire deflationary process?

Thank you

GK

ANSWER: Absolutely. This entire policy has failed to create inflation and has proven that inflation is not driven purely by the quantity of money. Confidence is the critical factor. The rich can move their capital to foreign lands. However, the average person cannot move their labor or money offshore.

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

 

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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