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India Central Bank Intervenes As Rupee Crashes To Record Low

Just weeks after Urjit Patel, Governor of the Reserve Bank of India, wrote an op-ed in the FT warning that should the US maintain its current pace of monetary policy tightening, it could have serious repercussions for the global economy, it is…

It was the first time this tightening cycle that a prominent foreign central banker has accused the Fed of stirring trouble for emerging markets, with its ongoing tightening, and specifically, the balance sheet reduction coupled with the Treasury debt issuance surge, to wit:

Global spillovers did not manifest themselves until October of last year. But they have been playing out vividly since the Fed started shrinking its balance sheet. This is because the Fed has not adjusted to, or even explicitly recognised, the previously unexpected rise in US government debt issuance. It must now do so.

Patel’s advice? Immediately taper the tapering, or rather, the Fed should “recalibrate its normalisation plan, adjusting for the impact of the deficit. A rough rule of thumb would be to reduce the pace of its balance-sheet contraction by enough to damp significantly, if not fully offset, the shortage of dollar liquidity caused by higher US government borrowing.”

Incidentally, the various pathways described by Patel were conveniently laid out by Deutsche Bank’s Aleksandar Kocic two weeks ago, and which we explained in “Why The Soaring Dollar Will Lead To An “Explosive” Market Repricing.”

 

And Patel’s warnings are coming true as The Fed’s actions are impacting India as much – if not more – than anywhere else.

The Indian rupee slumped to an all-time low as a resurgence in crude prices and the emerging-market selloff took a toll on the currency of the world’s third-biggest oil consumer.

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

Make Capital Cheap and Labor Costly, and Guess What Happens?

Make Capital Cheap and Labor Costly, and Guess What Happens?

Employment expands in the Protected cartel-dominated sectors, and declines in every sector exposed to globalization, domestic competition and cheap capital.

If you want to understand why the global economy is failing the many while enriching the few, start with the basics: capital, labor and resources. What happens when central banks drop interest rates to near-zero? Capital becomes dirt-cheap. It becomes ludicrously easy to borrow money to buy whatever cheap capital can buy: stock buybacks, robots, automation tools, interest-sensitive assets such as housing, competitors or potential competitors, high-yield emerging-market bonds, and so on.

What happens when cartels take control of core domestic industries such as banking, defense, higher education and healthcare? Costs soar because competition has been throttled via regulatory capture, and these domestic sectors are largely non-tradable, meaning they can’t be offshored and have little meaningful exposure to globalization.

Labor-intensive cartels such as these can pass on their rising costs for labor, resources and profiteering. Do you really think assistant deans could be pulling down $250,000 annual salaries in higher education if there was any global or domestic competition?

As for healthcare, I’ve often noted that healthcare/sickcare will bankrupt the nation all by itself. When a cartel such as healthcare / sickcare can force higher prices on employers and employees, the cost of labor throughout the economy rises.

Sickcare Will Bankrupt the Nation–And Soon (March 21, 2011)

Can Chronic Ill-Health Bring Down Great Nations? Yes It Can, Yes It Will (November 23, 2011)

You Want to Fix the Economy? Then First Fix Healthcare (September 29, 2016)

As I’ve indicated on the chart, labor-intensive cartels in non-tradable sectors–higher education, defense/national security, healthcare and banking– can pass on their rising labor costs to their captive customers.

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

How Long Can The Federal Reserve Stave Off the Inevitable?

How Long Can The Federal Reserve Stave Off the Inevitable?

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them. The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs.

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

Trade Tariffs Won’t Crash the World Economy, Monetary Policy Will

Trade Tariffs Won’t Crash the World Economy, Monetary Policy Will

puzzle-2500328_1920.jpg

As the Trump administration announces 25% tariffs on over $50bn of Chinese goods, and Europe and China prepare retaliation measures, The Economist concludes that “Rising tariffs are the worst of many threats to the world economy”, because, among other things, “Tariffs temporarily push up inflation, making it harder for central banks to cushion the blow.” This statement displays a deeply entrenched confusion—if not utter misunderstanding—of some basic economic concepts. Most important, many people fail to correctly distinguish between the causes and effects of price inflation and those of monetary inflation.

Monetary inflation is the increase in the quantity of money in an economy. This inflation causes the purchasing power of money to fall, which brings about price effects—a general rise in prices of goods and services—which we can refer to as price inflation. However, this general rise in prices following monetary inflation is disproportionate and staggered: prices will rise at different times and to different extents as money reaches a lower purchasing power.

But monetary inflation also has non-price effects. One of these is the transfer of wealth between the last receivers of the new money toward the first receivers.

Another—and even more important—is the distortion of the pattern of investment and production, as the new money being created through credit expansion reaches stock markets and businesses—thus artificially reducing the interest rate. This latter effect explains the occurrence of production booms misaligned with consumer preferences, and the later, inevitable economic bust or crash. These price and non-price effects of monetary inflation are general and underline every possible economic activity.

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

Living Dangerously

Regular readers of Goldmoney’s Insights should be aware by now that the cycle of business activity is fuelled by monetary policy, and that the periodic booms and slumps experienced since monetary policy has been used in an attempt to manage economic outcomes are the result of monetary policy itself. The link between interest rate suppression in the early stages of the credit cycle, the creation of malinvestments and the subsequent debt dénouement was summed up in Hayek’s illustration of a triangle, which I covered in an earlier article.[i]

Since Hayek’s time, monetary policy, particularly in America, has evolved away from targeting production and discouraging savings by suppressing interest rates, towards encouraging consumption through expanding consumer finance. American consumers are living beyond their means and have commonly depleted all their liquid savings. But given the variations in the cost of consumer finance (between 0% car loans and 20% credit card and overdraft rates), consumers are generally insensitive to changes in interest rates.

Therefore, despite the rise of consumer finance, we can still regard Hayek’s triangle as illustrating the driving force behind the credit cycle, and the unsustainable excesses of unprofitable debt created by suppressing interest rates as the reason monetary policy always leads to an economic crisis. The chart below shows we could be living dangerously close to another tipping point, whereby the rises in the Fed Funds Rate (FFR) might be about to trigger a new credit and economic crisis.

 

living danger 1

Previous peaks in the FFR coincided with the onset of economic downturns, because they exposed unsustainable business models. On the basis of simple extrapolation, the area between the two dotted lines, which roughly join these peaks, is where the current FFR cycle can be expected to peak. It is currently standing at about 2% after yesterday’s increase, and the Fed expects the FFR to average 3.1% in 2019.

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

America’s Greatest Crisis Upon Us…Debt to GDP Makes It Clear

America’s Greatest Crisis Upon Us…Debt to GDP Makes It Clear

America in the midst of its greatest crisis in its 242 years of existence.  I say this based upon the US federal debt to GDP (gross domestic product) ratio.  In the history of the US, at the onset of every war or crisis, a period of federal deficit spending ensued (red bars in graph below) to overcome the challenge but at the “challenges” end, a period of federal austerity ensued.  Until now.  No doubt the current financial crisis ended by 2013 (based on employment, asset values, etc.) but federal spending continues to significantly outpace tax revenues…resulting in a continually rising debt to GDP ratio.  We are well past the point where we have typically began repairing the nation’s balance sheet and maintaining the credibility of the currency.  However, all indications from the CBO and current administration make it clear that debt to GDP will continue to rise.  If the American economy were as strong as claimed, this is the time that federal deficit spending would cease alongside the Fed’s interest rate hikes.  Instead, surging deficit spending is taking place alongside interest rate hikes, another first for America.
The chart below takes America from 1790 to present.  From 1776 to 2001, every period of deficit spending was followed by a period of “austerity” where-upon federal spending was constrained and economic activity flourished, repairing the damage done to the debt to GDP ratio and the credibility of the US currency.  But since 2001, according to debt to GDP, the US has been in the longest ongoing crisis in the nations history.

But what is this crisis?  The chart points out the debt to GDP surges in order to resolve the Revolutionary war, the Civil War, WWI, and WWII. But the debt to GDP surges since 1980 seem less clear cut.  But simply put, America (and the world) grew up and matured, but the central banks and federal government could not accept this change.

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

Weekly Commentary: The Great Fallacy

Weekly Commentary: The Great Fallacy

A big week in the world of monetary management: The Federal Reserve raised rates 25 bps, the ECB announced plans to wind down its historic QE program, and the Bank of Japan clung to its “powerful monetary easing” inflationist scheme. A tense People’s Bank of China left rate policy unchanged, too weary to follow the Fed’s path.
The renminbi declined a notable 0.5% versus the dollar this week. More dramatic, the euro was hammered 1.9% on Draghi’s game plan. Also on Thursday’s dollar strength – and even more dramatic – the Argentine peso sank another 6.2% (down 34% y-t-d). The session saw the Brazilian real drop 2.2%, the Hungarian forint 2.6%, the Czech koruna 2.2%, the Polish zloty 2.0%, the Bulgarian lev 1.9%, the Romanian leu 1.9% and the Turkish lira 1.7%.

The FOMC, raising rates and adjusting “dot plots” higher, was viewed more on the hawkish side. The ECB, while announcing plans to conclude asset purchases by the end of the year, was compelled to add dovish guidance on rate policy (“…expects the key ECB interest rate to remain at present levels at least through the summer of 2019…”). Blindsided, the market dumped the euro. The Fed and ECB now operate on disparate playbooks, each focused on respective domestic issues. Anyone these days focused on faltering emerging market Bubbles, global contagion and the rising risk of market illiquidity?

June 13 – Financial Times (Sam Fleming): “Jay Powell put his personal stamp on the Federal Reserve on Wednesday, as the new chairman vowed to speak in plain English and hold more regular press conferences as he fosters ‘a public conversation’ about what the US central bank is up to. The Fed’s statement after the Federal Open Market Committee meeting, which detailed its decision to raise rates 0.25% and set a course for two more increases this year, also bore his imprint, as Mr Powell stripped away some of the economic verbiage that cluttered its communications in recent years. Mr Powell’s break from the approach of his predecessor… was more a stylistic one than a radical change of monetary policy strategy.”
…click on the above link to read the rest of the article…

NY Fed President Dudley Complains Unemployment is Too Low, Rate Hikes Needed

NY Fed President William Dudley is worried about the low unemployment rate. He thinks the Fed needs to be above neutral.

New York Fed President William Dudley will retire Monday. Current San Francisco Fed chief John Williams will take over.

“The federal funds rate will probably have to climb a little bit above neutral, because the unemployment rate is already — from most people’s vantage points — below a sustainable level of unemployment consistent with stable inflation,” Dudley told reporters Friday. “So, I think the move will be eventually to a slightly tight monetary policy.”

“I’m sort of expecting that the peak in the federal funds rate in this cycle will be lower than in past cycles, but I have quite a bit of uncertainty about that,” Dudley said during a conference call.

The unemployment rate is too low now, so we need to hike.

Last year he said consumers should “unlock” housing equity to boost the economy.

“The previous behavior of using housing debt to finance other kinds of consumption seems to have completely disappeared,” and people are leaving the wealth generated by rising home prices “locked up” in their homes.

“A return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to economic growth.”

Dudley is a real gem. He will be missed for the comedy he provides.

Living Dangerously

Living Dangerously

Regular readers of Goldmoney’s Insights should be aware by now that the cycle of business activity is fuelled by monetary policy, and that the periodic booms and slumps experienced since monetary policy has been used in an attempt to manage economic outcomes are the result of monetary policy itself. The link between interest rate suppression in the early stages of the credit cycle, the creation of malinvestments and the subsequent debt dénouement was summed up in Hayek’s illustration of a triangle, which I covered in an earlier article.[i]

Since Hayek’s time, monetary policy, particularly in America, has evolved away from targeting production and discouraging savings by suppressing interest rates, towards encouraging consumption through expanding consumer finance. American consumers are living beyond their means and have commonly depleted all their liquid savings. But given the variations in the cost of consumer finance (between 0% car loans and 20% credit card and overdraft rates), consumers are generally insensitive to changes in interest rates.

Therefore, despite the rise of consumer finance, we can still regard Hayek’s triangle as illustrating the driving force behind the credit cycle, and the unsustainable excesses of unprofitable debt created by suppressing interest rates as the reason monetary policy always leads to an economic crisis. The chart below shows we could be living dangerously close to another tipping point, whereby the rises in the Fed Funds Rate (FFR) might be about to trigger a new credit and economic crisis.

living danger 1

Previous peaks in the FFR coincided with the onset of economic downturns, because they exposed unsustainable business models. On the basis of simple extrapolation, the area between the two dotted lines, which roughly join these peaks, is where the current FFR cycle can be expected to peak. It is currently standing at about 2% after yesterday’s increase, and the Fed expects the FFR to average 3.1% in 2019.

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

Blain: Will The Fed Hike Unleash The “Swing” Moment When Suddenly Balance Is Lost?

Fed, Stratospheric dangers, US corporate leverage and the greater competition to manage funds.

“Of all extinct life-forms, dinosaurs are the most popular. Why that should be is not clear… ”

All eyes on the Fed today. They will hike by 25bp to 2% – the 6th hike in 7 quarters. Slow and gradual. This is something of a one-off in terms of the economic environment – unconventional being the word. Easy financial conditions in terms of growth, inflation, jobs and the ongoing fiscal spending and tax boosts. Plus, we’ve got the positive sentiment effects of strong equity and real estate markets – when folk feel rich they feel positive! Plus plus, with the rest of the world still on negative or zero interest rates, then money continues to pour into Treasuries making the ballooning deficit a SEPT (Someone Else’s Problem Tomorrow). Asset prices are inflated, but still weakness in consumer prices and wages. This remains an “interesting” space in terms of the potential policy pitfalls, and the “swing” moment – when suddenly balance is lost and the centre cannot hold…

Perhaps the writing is already on the wall? I was slightly concerned to read the National Federation of Independent Business (the US SME organisation) believes: “Main Street optimism is on a “stratospheric trajectory” thanks to recent tax cuts and regulatory changes”. Stratospheric is often confused with ballistic. Stratospheric could mean its’ going into orbit, or simply that a ballistic launch will reach the stratosphere. Sadly, ballistic means the kind of trajectory Kim Jong Un claims to no longer be interest in…`

(Last time someone was talking “stratospheric” it was in relation to Bitcoin, and that’s not ending well. Final comment on ballistic trajectories….I note a headline about Telsa slashing salaried staff.. )

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

The Eurozone’s Coming Debt Crisis

The Eurozone’s Coming Debt Crisis

The European Central bank has signaled the end of its asset purchase program and a possible rate hike before 2019. After more than 2 trillion euro of purchases and zero interest rate policy, it is overdue.

The massive quantitative easing program has generated very significant imbalances and the risks outweigh the questionable benefits.

The balance sheet of the ECB is now more than 40% of the Eurozone GDP.

The governments of the Eurozone, however, have not prepared themselves at all for the end of stimuli.

Rather the contrary.

The Eurozone states often claim that deficits have been reduced and risks contained. However, closer scrutiny shows that the bulk of deficit reductions came from lower cost of debt. Eurozone government spending has barely fallen, despite lower unemployment and rising tax revenues. Structural deficits remain stubborn, and in some cases, unchanged from 2013 levels.

The 19 eurozone countries have collectively saved 1.15 trillion euros in interest payments since 2008 due to ECB rate cuts and monetary policy interventions, according to Handelsblatt. A reduction in costs against the losses of pensioners and savers.

However, that illusion of savings and budget stability can rapidly disappear as most Eurozone countries face massive maturities in the 2018-2020 period and wasted precious years of quantitative easing without implementing strong structural reforms. Tax wedge rose for families and SMEs, while current spending by governments barely fell, competitiveness remained poor and a massive one trillion euro in non-performing loans raised doubts about the health of the European financial system.

 

The main eurozone economies face more than 2.1 trillion euro in maturities between 2018 and 2021. This, added to lower tax revenues due to the slowdown and rising spending from populist demands creates an enormous risk of a large debt crisis that no central bank will be able to contain. Absent of structural reforms, the eurozone faces a Japan-style stagnation or a debt crisis.

 

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

Supply v Demand-Side Economic & What is Never Discussed

COMMENT: Usury, first the Fed starves we savers for return for 18 years with their zero percent interest rates and gave us two giant stock market crashes in that intervening period.
The lack of return caused us to cannibalize our savings and trillions of savings lost thru the stock market crashes and ditto home equity. Then property taxes explode.
Now even the cost of funds is still at historic lows credit card rates move from 8/9% to 12% in a matter of months.

What are Grandma and Grandpa to do? Knowing what the Feds original charter was is not an answer because they have become the master manipulator for the wealth transfer from the people to their greedy cohorts.

Have followed your public work since well before your legal problems and greatly appreciate your cycle work but the wealth transfer must stop and some jail sentences applied and claw back enacted.

Or is the wealth transfer already accomplished and the taxpayer/consumer left holding the bag?
Martin, thank you for your efforts.

LL

REPLY: I fully agree. This is the battle between Demand v Supply-side Economics. This age of “New Economics” that was ushered in by Marx and Keynes, justified that government had the power to manipulate society to achieve their goals. The idea of raising and lowering interest rates to influence demand has utterly failed. The 800-pound gorilla in the room is the $200 trillion+ of sovereign debt around the world. Demand-Side Economics cannot possibly work when the biggest debtor is government and the raising of interest rates only increases their deficits that come back as tax increases reducing the net wealth of the people and lowering economic growth.

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

ECB & Bonds – People Believe What They Want to Believe

QUESTION: the ECB is arguing that given the low free float of EU bonds (especially German), bonds not owned by the ECB or other central banks, the impact of an end to APP purchases will be nowhere comparable to the tapering sell-off in the US in 2013. Bank research teams are hanging on to this idea to make positive forecasts in the EUR exchange rate versus the USD. They say an end-date for the APP programme may not result in a higher risk/term premium in the European government bond market.
Could you comment on this, please? Many thanks for all your work,
GM

ANSWER: The ECB knows it has to stop the QE program. They also know that Yellen was correct in lecturing them that interest rates had to be “normalized” so they know there is a real meltdown coming. That is inevitable. Pension funds cannot buy 10-year bonds at 1.5% or even 3% locking in losses for 10 years. I really fail to see that claiming there is such a small float, because the ECB has been the 800-pound gorilla buying everything, that interest rates will not rise. That is just complete fallacy. There is a small float because they have DESTROYED the bond market in Europe.

Draghi has proved something incredibly important – Demand-Side Economics has been a complete and utter failure. After 10 years of manipulating interest rates, that they want to put private bankers in prison for under the Libor Scandal, the ECB has failed completely. In just 7 days, the German bunds dropped from 16415 to 15939 – that was 5.9%. The 2013 decline in US 30-year Treasuries back in 2013 was 16%. So what the Bunds did in 7 days in their decline based upon events in Italy reflect that the ECB is trying to paint a picture that yes – rates will rise and bonds will decline.

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

Nomi Prins: Central Bank-Inspired “Major Credit Squeeze” Will Trigger Next Crisis

For all the talk about tapering (in both the US and Europe), the Federal Reserve has actually done remarkably little to reduce its balance sheet. And in an interview with Macrovoices Erik Townsend, former Wall Street executive Nomi Prins expands upon some of the same themes she covered in her latest book, “Collu$ion: How Central Bankers Rigged the World”.

Nomi

As Prins reminds us early on, the Fed and other central banks have expanded their balance sheets by more than $20 trillion, and despite all the chatter about withdrawing stimulus and letting its balance sheet roll off, the Fed’s balance sheet has only shrunk from $4.5 trillion to $4.3 trillion.

Central bankers, Prins argues, like to pat themselves on the back for avoiding what many feared would be runaway inflation resulting from low interest rates and quantitative easing. But of course, they did create inflation, just not the kind that could be reflected by CPI:

But the reason the markets went up and didn’t see through that is not because they believed this wasn’t an act of desperation (I think), but because there was just free money being handed out. It’s sort of like if you’re a drug addict, and you know at some point you’ll be clearheaded if you just get off the drugs and get your act together and move forwards, that’s one way to do it.

Or if someone is supplying you with lots of drugs then it just works and everything else, well then you’ll take them. And this is what happened. The Fed was that sort of supplier of last resort and a lender of last resort of capital for the market.

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

Higher Oil Prices Might Not Destroy Demand Growth

Higher Oil Prices Might Not Destroy Demand Growth

Gas station

The recent jump in oil prices to $80 per barrel raised a lot of questions about whether or not the heady demand growth projections for this year would hold up. In fact, signs of strain quickly popped up in disparate parts of the world. But as governments move to protect their citizens from high fuel prices (and to protect their political positions), demand might not be as price sensitive as analysts tend to think.

The history of oil price cycles show demand is highly sensitive to sharp increases in prices – demand took a hit in 1973, the early 1980s, the extraordinary 2005-2008 price increase, and the 2011-2014 period, when prices routinely topped $100 per barrel.

That record provides some guidance about what we should expect. Brent hit $80 per barrel for the first time in more than three years in May, a price level that would start to test the durability of demand growth. The run up in prices coincided with some early signs that consumers were losing their patience.

For example, U.S. President Donald Trump complained to OPEC in April about “artificially” high prices, and reportedly sent a request to the Saudis for higher output recently. Crippling protestsin Brazil brought the economy to a standstill and led to the ouster of the CEO of Petrobras. The International Energy Agency revised down its forecast for demand growth this year by 100,000 bpd, citing high prices.

Just as prices started to become painful, the OPEC+ coalition felt compelled to change course, and are on the verge of increasing output. Even with the recent price correction, demand threats still loom. The U.S. Federal Reserve continues to hike interest rates, which is strengthening the U.S. dollar and making dollar-denominated debt more painful to service. That is putting a strain on emerging market demand. The currencies of Argentina and Turkey have been slammed in the past few months.

…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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