Home » Posts tagged 'monetary policy'

Tag Archives: monetary policy

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase

Why Trade Wars Ignite and Why They’re Spreading

Why Trade Wars Ignite and Why They’re Spreading

The monetary distortions, imbalances and perverse incentives are finally bearing fruit: trade wars.
What ignites trade wars? The oft-cited sources include unfair trade practices and big trade deficits. But since these have been in place for decades, they don’t explain why trade wars are igniting now.
To truly understand why trade wars are igniting and spreading, we need to start with financial repression, a catch-all for all the monetary stimulus programs launched after the Global Financial Meltdown/Crisis of 2008/09.
These include zero interest rate policy (ZIRP), quantitative easing (QE), central bank purchases of government and corporate bonds and stocks and measures to backstop lenders and increase liquidity.
The policies of financial repression force risk-averse investors back into risk assets if they want any return on their capital, and brings consumption forward, that is, encourages consumers to borrow and buy now rather than delay purchases until they can be funded with savings.
As Gordon Long and I explain in the second part of our series on Trade Warsfinancial repression generates over-capacity and over-consumption: with credit almost free to corporations and financiers, new production facilities are brought online in the hopes of earning a profit as the global economy “recovers.”
Soon there is more productive capacity than there is demand for the good being produced: this is over-capacity, and it leads to over-production, which as a result of supply and demand, leads to a loss of pricing power: producers can’t raise prices due to global gluts, so they end up dumping their over-production wherever they can.
If the producers are state-owned enterprises subsidized by governments and central banks, these producers can sell at a loss because their only function is to sustain employment; profitability is a bonus.

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

Dissecting the Madness of Economic Reason

David Harvey’s latest book provides a riveting reading of Marx’s Capital and a trenchant critique of a political and economic system spiralling out of control.

A decade after the financial crisis of 2008, global capitalism remains in dire straits. Despite central banks providing a steady diet of low interest rates and pumping over $12 trillion of new money into the world economy through quantitative easing, growth remains anaemic, even as debt levels in many countries are back on the rise and inequality rapidly spirals out of control. Secular stagnation now goes hand in hand with the emergence of new speculative bubbles in stocks and housing, raising fears that fresh financial turmoil and further debt crises may only be a matter of time.

With mainstream economics clearly incapable of providing a satisfactory account of capitalism’s inherent tendency towards crisis formation, the past decade has seen a resurgence of interest in the work of Karl Marx, undoubtedly the most astute observer of the system’s internal contradictions. Perhaps no other living scholar has played a more important role in this renaissance of Marxist theorizing than David Harvey, the geographer whose many books and celebrated online course on Capital weaned a new generation of students and activists on an innovative reading of Marx’s critique of political economy.

In his new book, Marx, Capital, and the Madness of Economic Reason, Harvey provides a concise introduction to Marx’s theoretical framework and a compelling argument for its increasing relevance to the “insane and deeply troubling world in which we live.” Fleshing out a number of ideas first presented as part of a lecture series at the City University of New York, where he is Distinguished Professor of Anthropology and Geography, the book is characteristic of the “late Harvey”: incisive in its analysis, sweeping in its scope, accessible in its style and laced with profound insights on the madness of the economic system under which we live.

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

The Next Crisis Will Be The Last

The Next Crisis Will Be The Last

It is an interesting thing.

Throughout the last four decades there is a direct link between the actions of the Federal Reserve and the eventual economic and market outcomes due to changes in monetary policy. In every case, that outcome has been negative.

The general consensus continues to be the markets have entered into a “permanently high plateau,” or an era in which asset price corrections have been effectively eliminated through fiscal and monetary policy. The lack of understanding of economic and market cycles was on full display Monday as Peter Navarro told investors to just “buy the dip.”

“I’m thinking the smart money is certainly going to buy on the dips here because the economy is as strong as an ox.”

I urge you not to fall prey to the “This Time Is Different” thought process.

Despite the consensus belief that global growth is gathering steam, there is mounting evidence of financial strain rising throughout the financial ecosystem, which as I addressed previously, is a direct result of the Fed’s monetary policy actions. Economic growth remains weak, wages are not growing, and job growth remains below the rate of working age population growth.

While the talking points of the economy being as “strong as an ox” is certainly “media friendly,” The yield curve, as shown below, is telling a different story. While the spread between 2-year and 10-year Treasury rates has not fallen into negative territory as of yet, they are certainly headed in that direction.

This is an important distinction. The mistake that most analysts make in an attempt to support a current view is to look at a specific data point. However, when analyzing data, it is not necessarily the current data point that is important, but the trend of the data that tells the story.

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

BofA’s Striking Admission: Markets Will Soon Begin To Panic About Debt Sustainability

In the latest BofA survey of European fixed income investors (both IG and high yiled), the bank’s credit analyst Barnaby Martin writes that “after fretting about inflation at the start of the year, April’s credit survey shows that the biggest concern has reverted back to “Quantitative Failure”, driven by the recent data slowdown.”

Indeed, as the chart below shows, whereas the evolution of “biggest risks” for Euro investors indicated that strong growth at the start of the year provoked worries over rising inflation, “the recent data moderation has meant that these concerns have quickly given way to worries about a lack of inflation – and thus “Quantitative Failure”.”  And yes, it took just three months for the market to make a 180 and worry not about inflation, but deflation, and a Fed that may be pursuing too many rate hikes into 2018. As Martin notes, “the speed at which inflation concerns have flipped highlights the slim margin of error for a “goldilocks” economic backdrop in ’18.”

In retrospect, however, the sudden reversal is probably not that much of a surprise: as we showed this morning, according to the Citi G-10 Eco Surprise index, after hitting the highest level since the financial crisis, economic surprises promptly tumbled into the red just three months later, confirming how tenuous and fleeting the so-called “global coordinated economic recovery” had been all along.

And yet this sudden reversal puts the Fed and central banks in a major quandary. Recall that in a world with over $200 trillion in debt, amounting to well over 300% of Global GDP, the only saving grace is for the debt to get inflated as the alternative is default, either sovereign or private.

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

The Risk of the Fed’s Continuous Rate Hikes

The Risk of the Fed’s Continuous Rate Hikes

jerome powell raises rates

This past week, the Fed raised interest rates by 0.25%. The effective Fed fund rate is now 1.63% – the highest since the big market crash of 2008.

However, it could get as high as 3.375% by 2020. The decade 2020 – 2029 could see a high-tech version of the early-1980’s when home loans fetched interest rates up to 18%.

It was only a couple years ago when raising rates seemed like a “boy who cried wolf” idea. Now we’re seeing one rate hike after the other, with two more expected for 2018.

Does the Fed have something up their sleeve, or are they hanging on to false hope?

The Fed is Either in Denial or Misleading Us About the Economy

While the Fed’s decision to raise rates was predictable, the rest of their announcement wasn’t.

In the recent FOMC report the Fed paints a rosy picture about the state of our economic situation. They stated the outlook has “strengthened in recent months.”

Then they claimed a better unemployment rate at 4.1%. And it is, if you’re only reporting the statistics that make things look good.

We know that rate is misleading for one simple fact…

Anyone who is not looking for work is not considered part of the calculation.

As more and more people leave the workforce altogether, and give up looking for work, they get culled from the calculation reported in the media which skews the statistic.

The truth is, the unemployment rate is much higher than the media reports. It’s actually closer to 8.2% as of February 2018.

So is the Fed in denial about the state of our economy? Is it telling white lies? Or a combination of both?

 

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

Mises the Man and His Monetary Policy Ideas Based on His “Lost Papers”

One day in 1927 Austrian economist, Ludwig von Mises, stood at the window of his office at the Vienna Chamber of Commerce, and looked out over the Ringstrasse (the main grand boulevard that encircles the center of Vienna). He said to his young friend and former student, Fritz Machlup, “Maybe grass will grow there, because our civilization will end.” He also wondered what would become of many of the Austrian School economists in Austria. He suggested to Machlup that, clearly, they would have to immigrate, perhaps, to Argentina, where they might find work in a Buenos Aires nightclub. Friedrich A. Hayek could be employed as the headwaiter, Mises said, while Machlup, no doubt, would be the nightclub’s resident gigolo. But what about Mises? He would have to look for work as the doorman, for what else, Mises asked, would he be qualified to do?

It is worth recalling that in the mid-1920s, Mises had warned of the rise of “national socialism” in Germany, with many Germans, he said, “setting their hopes on the coming of the ‘strong man’ – the tyrant who will think for them and care for them.” He also predicted that if a national socialist regime did come to power in Germany and was determined to reassert German dominance over Europe, it would likely have only one important ally with whom to initially conspire in this new struggle – Soviet Russia. Thus, years before Adolph Hitler came to power, Mises anticipated the Nazi-Soviet Pact to divide up Eastern Europe that set in motion the start of the Second World War in 1939.

Ten years after Mises’s playful 1927 prediction to Fritz Machlup, reality was not that far from what he said. By 1938, many of the Austrian economists had, indeed, emigrated and left their native country.

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

Monetary Policy is a Complete Failure? Will Shutting Down the Fed Solve All the Problems?

I recently did an interview and was asked about the Federal Reserve. There is so much absolute nonsense sophistry that circulates where people think that ending the central bank will somehow cure everything. I really just laid it out plain and simple. The Fed’s balance sheet is a tiny fraction of the economy or the real money supply. Everyone blames the Fed for everything and they NEVER bother to look at (1) the fiscal policy of Congress, and (2) the banking system as a whole.

Even if you want to scream from the top of every hill that $4 trillion worth of Fed’s Quantitative Easing was pure evil and should have created hyperinflation (which it did not), the deficits created by Obama topped $1 trillion per year and those never die whereas the Fed’s QE evaporates as they do let the debt they bought mature and expire without rebuying it again, whereas Draghi and the ECB have conceded they will reinvest their holdings. Look at 2009-2012. Obama created $5.4 trillion that will never expire but will be rolled until there are no more buyers.

So let’s do the math. The entire Federal Reserve QE program was equal to 1/5th of the national debt. The ECB bought 40% of all public debt and the Bank of Japan bought 75% of new debt coming to the market. Yet all we get is dollar bashing and people actually have called the yen the safe-haven play. I really do not know if I am arguing is drunks, people with dementia, or just con-artists. All these people pushing the end of central banks because they are clueless about how the real world functions.

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

 

Who Needs Wall Street When You Can Have A Monetary Unicorn?

Who Needs Wall Street When You Can Have A Monetary Unicorn?

The single most important price in all of capitalism is the interest rate—-and at all points on the maturity curve. And the single most important truth about honest interest rates is that they must be discovered by markets, not imposed by the state.

We got to ruminating about those core propositions when we read that San Francisco Fed head, John Williams, may be headed toward the true #2 job at the Fed. That is, President of the New York Fed—-the joint that actually runs the casinos domiciled in the canyons of Wall Street.

We did not burst out laughing exactly, but nearly so. After all, why do you even need Wall Street if you are going to have John Williams running the joint?

Recall that Dr. Williams claims to see a financial apparition that no one has ever touched, measured, photographed, X-rayed or otherwise proven the existence of. We are referring, of course, to the “Neutral Rate of Interest”.

By contrast, Dr. Williams is certain that he has spotted it, measured it and completely understood it. Indeed, he is so certain that in recent times it has been extraordinarily low, that he wants to run the entire $19.7 trillion US economy on the basis of it.

That is, peg actual interest rates in the money market based on a theoretical rate that might as well be the equivalent of a Monetary Unicorn. That’s because no one on the bond and bill trading desks of Wall Street has ever seen it, or ever will.

Not only that, but Dr. Williams now suggests that we actually need even more inflation than the sacred 2.00% target to cure whatever ails the US economy, and that his Monetary Unicorn told him so. Thus, as per the AM’s Wall Street Journal:

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

The Fed is Raising Rates Because of the Pension Crisis

QUESTION: The Fed says it will raise rates two or three times more this year. My question is this: If the stock market is crashing, why are they still raising rates?

HW

ANSWER: The Fed is raising rates because they must be NORMALIZED given the pension crisis. They are trying to get then back up and if they could, they would jack them up to 8%. If you can imagine, a pension fund under normal conditions needs 8% annual. Even CalPERS came in at 7% and they were insolvent. Rates are rising because of the pension crisis, not because the economy is really heating up or the stock market is booming. The technical resistance stands at the Downtrend Line at the 3% level. Rates will double to reach that area faster than people suspect.

We have a Directional Change due in May and look at the August/September period where we also have a Panic Cycle. Things are not going to be as smooth-sailing as many believe. We have a very RARE Double Monthly Bullish Reversal at 2.25%. A monthly closing above that level and 5% will be seen in a matter of months.

Consequences of Replacing the Gold Standard with the PhD Standard

In 2011, Jim Grant chastised the Fed about replacing the Gold Standard with the PhD Standard. Our “reward” is coming up.

Here is the pertinent video clip of James Grant.

“The 2007-2009 real estate debacle is the monetary equivalent of a chain reaction on a foggy California freeway. The trouble with our monetary mandarins is they [the Fed] believe impossible things. They have persuaded themselves that the central bank can pick the interest rate that will cause the GDP to grow, payrolls to expand, and prices to levitate by just two percent a year, as they measure it. It is impossible as experience and common sense attest. Yet, they hold it to be true. … William F. Buckley famously and persuasively said that he would rather be governed by the first 400 names in the Boston phone directory than by the faculty of Harvard. Unaccountably, this Congress has entrusted the value of the dollar that we own, that we transact to an independent committee dominated by monetary scholars. In one short generation we have moved to the PhD standard from the gold standard.

Grant is correct. The result has been a series of economic bubbles with increasing amplitudes over time.

The Alps Precious Metals Group commented on Grant in its latest monthly letter.

We’re Smarter Now

​>Jim Grant is spot-on in his description of what has transpired: “We have replaced the Gold Standard with the PhD Standard”.

Consistent with our post-Modern zeitgeist, we have traded the wisdom of old for the cockiness of what I call the “We’re much smarter now” syndrome. Hence the propensity of Western governments over the last 50 years to deplete their supplies of the “barbarous relic” as Gold’s time “has passed”.

Tulips, South Sea and Florida Real Estate ventures, Roaring ‘20’s stocks bought at 10x leverage as a norm, as well as innumerable investment ideas since 1971 when Nixon closed the Gold window are all examples of investments based solely on confidence, the ebb and flow of which resulted in volatile “risk on and off” episodes.

The last material loss of confidence in the system was in 2008/early 2009; which resulted in a series of experiments whose 9-year anniversary is upon us.

What happens when Common Knowledge changes and moves over to something else that “everyone knows that everyone knows”? Not unlike the ferocious tornados which rip across the American continent when winter turns to spring, the change may be rapid and violent.

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

 

 

The euro area’s deepening political divide

The euro area’s deepening political divide

Two European elections – in Germany on 24 September 2017 and Italy on 4 March 2018 – warn that the peoples of Europe are drifting apart. Much of the recent deepening of these divisions can be traced to Europe’s single currency, the euro. This column argues that the political divide in Europe may now be hard to roll back absent a shift in focus to national priorities that pay urgent attention to the needs of those being left behind.

The University of Cambridge economist Nicholas Kaldor was first to warn that the euro would divide Europe (reprinted in Kaldor 1978). His critique came in March 1971 as a response to the Werner Commission Report, which presented the original blueprint of what would eventually be the euro area’s architecture (Werner 1970). Kaldor wrote that a single monetary policy (and the accompanying one-size-fits-all fiscal policy framework), when applied to diverse European countries, would cause their economies to diverge from one another. The logic was simple: a monetary policy that is too tight for one country can be too loose for another. The economic divergence, Kaldor said, would cause a political rift. Such warnings continued. The University of Chicago economist and Nobel laureate Milton Friedman (1997) predicted that the euro’s flawed economics would “exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues”.

European leaders dismissed such naysayers. They insisted that the single currency would bring Europeans closer into a political union (Sutherland 1997).

A permissive consensus?

The discourse on the possibility of political union in Europe was conducted mainly within a group of so-called elites. These elites – political leaders and bureaucrats – had little basis to presume that national interests could be reconciled to unify Europe. But they made the further assumption that they had a “permissive consensus” from the public to make far-reaching decisions on European matters (Mair 2013). As I argue in a forthcoming book (Mody 2018), the permissive consensus began to break down about the time the single European currency became a political reality. Following the signing of the Maastricht Treaty in February 1992, the Danish public rejected the single currency in a referendum held in June 1992. And in September 1992, the French public came within a whisker of rejecting the single currency.

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

 

The Central Bank Bubble: It Will Be Ugly

The Central Bank Bubble: It Will Be Ugly

The global economy has been living through a period of central bank insanity, thanks to a little-understood expansion strategy known as quantitative easing, which has destroyed main-street and benefitted wall street.

Central Banks over the last decade simply created credit out of thin air. Snap a finger, and credit magically appears. Only central banks can perform this type of credit magic. It’s called printing money and they have gone on the record saying they are magic people. 

Increasing the money supply lowers interest rates, which makes it easier for banks to offer loans. Easy loans allow businesses to expand and provides consumers with more credit to buy goods and increase their debt. As a country’s debt increases, its currency eventually debases, and the world is currently at historic global debt levels. 

Simply put, the world’s central banks are playing a game of monopoly.

With securities being bought by a currency that is backed by debt rather than actual value, we have recently seen $9.7 trillion in bonds with a negative yield. At maturity, the bond holders will actually lose money, thanks to the global central banks’ strategies. The Federal Reserve has already hinted that negative interest rates will be coming in the next recession.

These massive bond purchases have kept volatility relatively stable, but that can change quickly. High inflation is becoming a real possibility. China, which is planning to dethrone the dollar by backing the Yuan with gold, may survive the coming central banking bubble. Many other countries will be left scrambling. Some central banks are attempting to turn the current expansion policies around. Both the Federal Reserve, the Bank of Canada, and the Bank of England have plans to hike interest rates. The European Central Bank is planning to reduce its purchases of bonds. Is this too little, too late?

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

 

Can Money Pumping Stimulate Economic Growth?

According to most economic experts when an economy falls into a recession the central bank can pull it out of the slump by means of money pumping. This way of thinking implies that money pumping can somehow grow the economy.  Indeed US historical evidence supposedly does show that easy money policy seems to work. For instance on average between 1970 and 2018.2 it took about 11 months before increases in money supply caused increases in the growth rate of industrial production (see chart).

The question is how is this possible? After all if money printing can grow the economy then why not to print plenty of it and make massive economic growth? By doing that, central banks could have created an everlasting prosperity for every individual on the planet.

For most commentators the arrival of a recession is due to unexpected events such as shocks that push the economy away from a trajectory of stable economic growth. Shocks weaken the economy i.e. cause lower economic growth so it is held.

We suggest that as a rule a recession emerges in response to a decline in the growth rate of money supply. Usually this takes place in response to a tighter stance of the central bank.

As a result various activities that sprang up on the back of the previous strong money growth rate (usually this emerges because of loose central bank monetary policy) come under pressure.

These activities cannot support themselves – they survive because of the support that the increase in money supply provides. The increase in money diverts to them real wealth from wealth generating activities. Consequently, this weakens these activities i.e. wealth-generating activities.

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

DiMartino Booth: It Won’t Take Much More For The Fed To Break The Markets

Via Financial Sense,

The following is a summary of our recent FS Insider podcast, “Danielle DiMartino Booth: Problems at the Fed, More Volatility for the Markets.”

Danielle DiMartino Booth, founder of Money Strong and author of Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America, warns that the US is more highly levered today than it was in 2008 and it won’t be long before rate hikes start to impact the economy.

Though our own Fed funds risk neutral index (see below) shows Fed monetary policy as still relatively loose and not yet a threat, a combination of slowing economic growth and further rate hikes will eventually usher us into the next downturn.

Here’s what Danielle told Financial Sense Newshour…

FISCAL, MONETARY POLICY IN CONFLICT

We just had a huge fiscal stimulus with the recent tax cut, but monetary policy is going in the opposite direction.

Eventually, she warned, we’re going to have one of those moments where the Fed overshoots and they’ve moved too far, too fast.

Though Danielle admits we don’t quite know when that point is yet, Fed monetary policy should now be seen as a headwind with the “final hike that breaks the market” much lower than in the past.

Source: Bloomberg, Financial Sense Wealth Management

DEBT A LARGE CONCERN GOING FORWARD

We’re on track for a trillion dollar deficit in 2019, at the same time China and others are buying fewer Treasuries.

It will be interesting to see if we hit 3 percent on the 10-year, as it might serve as a mental catalyst for markets, she said.

Danielle sees defaults heading higher, and thinks it’s not going to take too much more in rate hikes before it impacts the economy.

WE NEED A RETURN TO NORMAL MARKETS

We essentially have a lost decade behind us, Danielle said, and if the Fed pushes the economy into recession, expect more QE and debt.

Quantitative easing is problematic because it’s habit forming, she stated. She’s hoping the new Fed chair, Jerome Powell, will stop the next round of QE in its tracks and allow the market to go back to being a price discovery mechanism.

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

Trump and the Federal Reserve

Trump and the Federal Reserve

Many of us would rather not think about the possibility of President Trump getting reelected, but there is little doubt that he is thinking about it.

If Trump is serious about winning reelection, he may want to reconsider the sort of people he is appointing to the Federal Reserve. Virtually all political experts agree that a central factor in a president’s reelection prospects is the state of the economy in the year he or she is running. But Trump is appointing people who are likely to support rapid increases in interest rates, which very well could slow economic growth.

Unfortunately, most Americans don’t pay much attention to the Fed. People usually perceive its decisions about interest rates and inflation as affecting only Wall Street and big investor types. But the Fed has an enormous impact on the lives of ordinary workers. When it chooses to raise interest rates, as it has been doing for the last 15 months, it is making a conscious decision to slow the economy.

Higher interest rates discourage people from buying new cars and homes. Fewer home owners refinance mortgages. Businesses and state and local governments are less likely to borrow to invest in new factories, equipment and infrastructure. When growth slows, the economy has fewer jobs. The unemployment rate could stop falling and even rise. People with jobs also are worse off because they have less bargaining power in a weaker labor market. Their wages rise less rapidly and may not keep up with inflation.

The Fed and its leadership should matter to all of us, in other words.

Until the beginning of February, the central bank was led by Janet L. Yellen. Over the previous 15 months, Yellen, an Obama appointee, went along with four interest rate hikes, but she was much more cautious about rate increases than many other economists.

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

 

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase