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The Inflation Illusion

We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates.

We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of interest we have to subtract inflation from the nominal rate, so to speak remove the illusion of inflation.

1-real FF rate The “real” federal funds rate (effective FF rate minus CPI-U y/y rate of change)

Real interest rates have been negative fairly often, including for most of the period since 2009. The main problem consists of choosing the appropriate measure of inflation.

Since the calculation of price inflation is highly subjective and easy to manipulate, one possibility is to adjust nominal prices to gold to calculate real interest rates. In the chart below you can see nominal U.S. 10-year Treasury rates versus gold-adjusted rates since 1962.

Nominal vs. gold-adjusted treasury yields (actually, the calculation of “price inflation” or a “general level of prices” is not merely subjective – it is literally impossible) – click to enlarge.

Ben Bernanke says in his article:

“The fundamental economic constraint on how negative interest rates can go is that, beyond a certain point, people will just choose to hold currency, which pays zero interest. (It’s not convenient or safe for most people to hold large amounts of currency, but at a sufficiently negative interest rate, banks or other institutions could profit from holding cash, for a fee, on behalf of customers).

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

Affairs of State

April 25, 2016

Affairs of State

Insulting Mr. Erdoğan Can Be Dangerous

Most of our readers are probably aware by now that the German government finds itself in a rather awkward situation over its relations with Turkey’s government again – with which the EU has just struck a widely criticized and very expensive deal to help it stem the flood of refugees.

One thing is absolutely certain about Turkey’s president Recep Tayyip Erdoğan: He has no sense of humor whatsoever. As of early March 2016, 1,845 lawsuits were pending in Turkey for “insulting the president”. To see how extremely ridiculous most of these cases are, consider the one involving the pictures below:

golloerd22a Bilgin Çiftçi was fired from his job at Turkey’s public health service last October and detained after comparing Erdoğan to Gollum. He could face up to two years in prison. His lawyer Hicran Danisman said she was forced to argue in court that “Gollum is not a bad character” because she “got nowhere with a defense case based on freedom of expression”. The trial has now been adjourned to give the court time to “consult with a group of experts on whether Gollum is a good or a bad character”.

Two prominent Turkish journalists are even facing possible life sentences over what appear to be trumped-up treason charges after they reported on Turkey’s shady dealings with ISIS. A great many other journalists have lost their jobs and/ or are at risk of getting jail sentences. Not surprisingly, Turkey currently finds itself on place 149 of 180 on the global press freedom list. In short, it is quite dangerous to criticize or make fun of Mr. Erdoğan. This is a great pity, considering what an extremely inviting target he is.

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

Russian Aggression Unmasked (Sort Of)

April 24, 2016

Russian Aggression Unmasked (Sort Of)

Provocative Fighter Jocks

Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time:

“A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action “provocative and unprofessional.”

The jet was one of two Russian aircraft in the vicinity — the other flew at a higher altitude. The close-flying jet came within a few thousand feet of the USS Donald Cook, a guided missile destroyer which was conducting a “routine mission” at the time. The U.S. ship tried to contact the plane’s cockpit, but received no response. The Russian plane, which the U.S. says was unarmed, made at least 12 passes. This continued for about 90 minutes. The event ended without incident.”

An unarmed plane making passes! Very provocative. Let’s briefly look at a map of the Black Sea:

The Black Sea, with the USS Donald Cook in it – click to enlarge.

Recently the same thing happened again, this time in the Baltic Sea. The Guardian reports:

“The US navy released photos and videos showing Russian SU-24 fighter jets flying low over the sea and “buzzing” the USS Donald Cook – a destroyer of the Arleigh Burke class – which carries guided missiles and which had just made a call at the Polish port of Gdynia.

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

Cultural Marxism and the Birth of Modern Thought-Crime

April 18, 2016

Cultural Marxism and the Birth of Modern Thought-Crime

What the Establishment Wants, the Establishment Gets

If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around?

In other words, does human consciousness create what we perceive as our reality and physical existence or vice versa; does the pre-existing material world determine our sentience and shape our cognition? In essence, what really lies beneath the surface of this question is the following: is man born as a conscious being with free will and self-determination or not?

thought police You may think citizen, but it will be best if you confine yourself to approved collectivist thought. In case you find yourself unable to do so, you may need to be reeducated. Illustration by LibertyManiacs.com

Do not be alarmed; this is not an article on political philosophy. But it is a fundamental existential issue that I found underpins many of the doubts I have regarding the functioning of our society and our political culture. While I freely admit that I am no philosopher or expert in the field, I will try to explain in this article why the answer we choose to this crucial question, which most people never even consider, has an amazing impact on the way we think, the way we live and act and the way society behaves as a whole.

We need to understand why Western society and its cultural identity have so vastly degenerated and especially why family values have deteriorated so dramatically.

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

Why All Central Planning Is Doomed to Fail

April 15, 2016

Why All Central Planning Is Doomed to Fail

Positivist Delusions

[ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives]

We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works.

Simpletons A bunch of famous people with a simpleton view of how the world works…who not only seriously think the economy can and should be “planned”, but arrogantly believe they are the ones who should do it. It’s a bit like the crazy guy who doesn’t know he’s crazy.

They believe they can manipulate the future and make it better. Not just for themselves… but also for everyone else. Where did such a silly idea come from?

After the Renaissance, Aristotelian logic came to dominate Western thought. It was essentially a forerunner of positivism – which is supposedly based on objective conditions and scientific reasoning.

“Give me the facts,” says the positivist, confidently.

“Let me apply my rational brain to them. I will come up with a solution!”

Beyond the Herald’s Cry

This is fine, if you are building the Eiffel Tower or organizing the next church supper. But positivism falls apart when it is applied to schemes that go beyond the reach of the “herald’s cry.”

That’s what Aristotle said: Only a small community would work. Because only in a small community would all the people share more or less the same information and interests.

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

State of Fear – Corruption in High Places

April 13, 2016

State of Fear – Corruption in High Places

Mr. X and his Mysterious Benefactors

As the Australian Broadcasting Corporation (ABC) reports, a money-laundering alarm was triggered at AmBank in Malaysia, a bank part-owned by one of Australia’s “big four” banks, ANZ. What had triggered the alarm? Money had poured into the personal account of one of the bank’s customers, a certain Mr. X, in truly staggering amounts.

najib A recent photograph of Mr. X. Photo credit; Peter Foley / Bloomberg via Getty Images

Hundreds of millions of dollars were paid into the account of Mr. X by a Saudi prince described as “mysterious”, and two British Virgin Island companies characterized as “shadowy”.

Overall, more than $1.05 billion landed in Mr. X’s private account in a little over two years. This was bound to raise eyebrows, considering Mr. X’s official salary only amounts to approx. $100,000 per year. Not a bad salary to be sure, but even if he were to save half of it every year, it would take him 210,000 years to save up $1.05 billion, not just two.

Then the head of a government-owned Malaysian company put millions of ringgit into Mr. X’s credit card accounts, which had been a tad overdrawn (by slightly over $ 1m.), due to Mr. X’s wife splurging a bit on jewelry in 2014.

ringgit A nice little pile of ringgit suddenly found its way into Mr. X’s credit card accounts, taking care of a slight overdraft.

Apparently Mr. X was not shy about spending some of his new-found wealth either. Apart from his wife’s predilection for expensive jewelry and other luxury items, he himself occasionally displayed a yen for fancy cars and reportedly also favored swanky accommodation. Friends and partners of Mr. X also enjoyed a windfall.

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

A Fatal Flaw in the System

April 11, 2016

A Fatal Flaw in the System

The Hard Rocks of Real Life

BALTIMORE – The Dow dropped 174 points on Thursday, the biggest fall in six weeks. Not the end of the world. Maybe not even the end of this year’s bounce-back bull run. As you’ll recall, stocks sold off at the beginning of the year, too. Then, investors were buoyed up after central banks got to work – jimmying the credit market on their behalf.

5o1rhrdw59wk Photo credit: Andrei Shumskiy

The Fed swore off any further “normalization” until later in the year. Central banks in Europe, Japan, and China all took bolder and more reckless action… with the Bank of Japan following some European banks by going into “full retard” mode with negative interest rates.

DJIA, 10-minute candles; the red rectangle bounds Thursday’s market action. A rebound attempt on Friday failed to go very far – click to enlarge.

Now, according to the narrative popular in the financial press, investors are beginning to worry that central banks are not very effective after all. As to that last point, they’re right; central banks can only do so much. They made the situation what it is. Now, they can only make it worse. How? By adding more of what made it bad in the first place. All they can do is add more debt to a world already drowning in it.

If anyone knows of a different way this story might unfold, we’d like to hear it. But for all the puzzling and preposterous guesswork and wondering, it is still the same tale: Debt builds up; debtors can’t pay; they go broke. It happens all the time.

In a healthy economy – with real money and honest banking – people make mistakes. They go broke. The bankruptcies are absorbed and disposed of in good order. Assets go on the block. Hungry investors and entrepreneurs snap them up… and put them to good use.

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

The Precious Metals Conspiracy

April 11, 2016

The Precious Metals Conspiracy

Tricky and Dangerous Assumptions

For at least a few weeks now, we have noticed a growing drumbeat from a growing corps of analysts. Gold is going to thousands of dollars. And silver is going to outperform. Reasons given are myriad. Goldman Sachs apparently said to short gold, so if one assumes that the bank always advises clients to take the other side of its trades — a tricky and dangerous assumption at best — then one should buy gold.

Goild conspiracy A metallic conspirator and his flying factotum… Image via sceptic.com

Then there’s the change in ETFs, for example the Sprott Physical Silver Fund has had inflows and Sprott bought more silver. And there’s currency wars, money printing, negative interest rates, etc. Most of these stories are based in fact (well except the belief that Goldman’s research is always wrong).

However, they have little to do with the price of gold. The money supply has grown steadily since 2011 while the prices of gold and silver have not. Hell, the money supply has been growing since forever. And the price of gold has gone up as well as down.

Something tells us that this effort to draw in buyers is concerted. Certainly there has been an 8.4% increase in silver held in trust for SLV. This is the result of relentless buying of SLV shares. When buyers push up the price of SLV relative to the price of silver, that creates an arbitrage opportunity for Authorized Participants.

They buy silver metal, create SLV shares, and sell the newly issued shares. They can do that as much as they want while there’s a profit to do so. But of course this pushes down the price of SLV until it is very close to the price of silver. SLV is somewhere between metal and futures. It can be a speculative play on price, but it’s bought with less leverage and it can also be a long-term holding for many people.

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

Gold – The Best Defense Strategy

April 10, 2016

Gold – The Best Defense Strategy

The War on Cash is on!

If you are used to making visits to your bank to make your credit card payments, you may find this no longer an option in the future. Some banks are no longer accepting (or limiting their acceptance) of cash deposits. The war on cash forges on. Paper money, which is indeed more or less worthless, is slowly being taken out of circulation and being replaced by digital currency.

Burning_Money

Photo credit: Stephen Krow

This shift presents of course the same fundamental problem as paper money itself: “digital money” is also not backed by gold or other precious metals or any asset representing real value. The whole concept of digitizing our transactions is being marketed as a convenience, a hassle-free payment method and a transparent, easy new way to smoothly run our lives and businesses, without the burden of carrying cash around.

However, the realistic flip side of this joyful argument is more ominous than we might at first realize: Now, account monitoring or freezing, and confiscations will be easier than ever. And of course, by eliminating cash, central banks are getting rid of the last existing barrier to negative interest rates.

The Global Economy is Stuck… Gold is on a Roll

In the first quarter of 2016, the gold price rallied by 14.3%, and in February alone, it jumped 9.6% – this was the highest single-month increase in four years. 2016 has so far not shown any positive changes on the economic front. Growth remains rather slow, much slower than projected by government authorities and the various mainstream market experts and gurus. So what has driven the demand for the precious metal? It goes back to the basics: Risk!

Gold, June 2016 futures, daily – click to enlarge.

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

Going Into Debt to Invest Into Debt…

April 7, 2016

Going Into Debt to Invest Into Debt…

Bankers Hate It When You Hold Cash

In an extraordinary turn of events, last week we were contacted by our local bankers. Since we were turned down for a mortgage in 1982 (our business finances were thought to be “too shaky”), we have had little truck with them. We pay cash. They mind their own business.

cash-reserves1 Too many Benjamins! Photo credit: Andrew Magill / Flickr

But for the first time we can recall, not just one but three suits came to visit. Personable and intelligent, they were worried when they saw how much cash we were keeping on hand. No kidding. They came to visit to propose ways we could “put it to use.”

“You really should take some of that cash and invest it in municipal bonds” was the motion on the table.

“What if the municipalities can’t pay?” we asked.

“Don’t worry about that. Historically, the odds of default are extremely remote,” one of them answered.

“But what if interest rates turn up? Wouldn’t the default rate go up?”

“Well, maybe. But we keep the maturities short and invest only in the most creditworthy municipalities. The risk is very low.”

“Oh… but what if we just need some cash.”

“No problem. We’ll give you a line of credit.”

“Let me get this straight. You’re proposing to put me into debt so that I can keep my money invested in somebody else’s debt?”

“Uh… well… yes… and we’ll charge you less interest than you will earn from the municipal bonds.”

“Wait. You can earn a fee for putting my money in bonds… and earn another fee for lending me money… and I still end up ahead?”

“Yes. We just try to find ways to help clients with their financial needs.”

“Oh.”

peopleofpuertoricopublicimprovbondvig If unlucky, you’ll end up with one of these… Image via scripophily.net

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

Rotten to the Core

April 6, 2016

Rotten to the Core

Poison Money

BALTIMORE – We live in a world of sin and sorrow, infected by a fraudulent democracy, Facebook, and a corrupt money system. Wheezing, weak, and weary from the exertion of trying to appear “normal,” the economy staggers on.

David-Simonds-zombie-high-011 Staggering on…. Image credit: David Sidmond

Last week, we gained some insight into the ailment. Something in the diagnosis has puzzled us for years: How is it possible for the most advanced economy in the history of the world to make such a mess of its most basic bodily functions – getting and spending?

By our calculations – backed by studies, hunches, and deep research – the typical American man (it is less true for women) earns less in real, disposable income per hour today than he did 30 years ago.

He goes to buy a car or a house, and he finds he must work longer to pay the bill than he would have in the last years of the Reagan administration. How is that possible? What kind of economic quackery do you need to stop capitalism from increasing the value of workers’ time?

What kind of policies and circumstances are required to stiffen its joints… clog up its innards… and rot its brain? Globalization? Financialization? Bad trade deals? Too much red tape? Too many cronies? Too many zombies?

nonsequitor_cartoon_comic_first-economist We can identify at least one source of the quackery…

All of those things played a role. But our answer is simpler: poison money. The bigger the dose… the sicker it got. When you say you “have some money,” you usually believe that there is, somewhere, an electronic database in which it is recorded that you are the owner of some amount of currency.

You have $100,000 in your account, right? Does it mean that there is a little cubbyhole somewhere, with your name on it, in which you will find a stack of 1,000 Ben Franklins? Nope. Not even close. No cubbyhole. No stack of money. No nothing.

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

The Path to the Final Crisis

April 1, 2016

The Path to the Final Crisis

Reader Questions on Negative Interest Rates

Our reader L from Mumbai has mailed us a number of questions about the negative interest rate regime and its possible consequences. Since these questions are probably of general interest, we have decided to reply to them in this post.

The NIRP club – negative central bank deposit rates – click to enlarge.

Before we get to the questions, a few general remarks: negative interest rates could not exist in an unhampered free market. They are an entirely artificial result of central bank intervention. The so-called natural interest rate is actually a non-monetary phenomenon – it simply reflects time preferences. Time preferences are an inviolable category of human action and are always positive.

Market interest rates consist of the natural interest rate plus two additional components: a price (or inflation) premium that reflects the expected decline in money’s purchasing power, and a risk premium or entrepreneurial profit premium that reflects the perceptions of lenders of a borrower’s creditworthiness and generates an entrepreneurial profit for those engaged in lending.

One often reads that interest is the “price” of money, but that is actually not quite correct. It is really a price ratio, the difference between the valuation of present against that of future goods. An apple one can obtain today will always be worth more than a similar apple one can obtain at some point in the future. If time preferences were to decline to zero, people would stop consuming altogether. All efforts would be directed toward providing for the future, but they would never see that future, because they would starve to death before it arrives.

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

The Other Problem with Debt No One is Talking About

April 1, 2016

The Other Problem with Debt No One is Talking About

Faux Growth Recovery

Nearly 7 years have elapsed since the official end of the Great Recession. By now it’s painfully obvious the rising tide of economic recovery has failed to lift all boats. In fact, many boats bottomed out on the rocks in early 2009 and have been taking on water ever since.

Last week, for instance, it was reported that U.S. credit card debt topped $917 billion in the fourth quarter of 2015. That’s up $71 billion from the year before. Shouldn’t the economic recovery allow consumers to pay down their debts?

Annual increase in credit card debt load….via cardhub (more data here) – click to enlarge.

Indeed, it should, if only the economic recovery was the result of real, economic growth. To the contrary, the recovery has been faux growth driven by cheap Fed credit and financial engineering. Mutual increases in prosperity haven’t occurred.

In particular, those outside the financial services business, and other bubble industries, like government lobbyists, have largely missed out on any increase in income or living standard. Good paying professional jobs that vaporized during the downturn have been replaced with low paying service jobs. Consumers have used credit card debt to pick up the slack.

Unfortunately, this short term solution sets up consumers for pain in the future. At some point, as debt increases faster than incomes, the ability to pay down the principal becomes near impossible. Even making the minimum payment becomes more and more difficult as new debt is added to the burden each month.

Playing with Fire

“We’re playing with fire now,” said Odysseas Papadimitriou, chief executive of credit statistics and analysis site CardHub. “Either an unexpected economic downtown or the continuation of current spending and payment trends could be enough to unleash an avalanche of defaults.”

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

The Pitfalls of Currency Manipulation – A History of Interventionist Failure

March 30, 2016

The Pitfalls of Currency Manipulation – A History of Interventionist Failure

The G-20 and Policy Coordination

Readers may recall that the last G20 pow-wow (see “The Gasbag Gabfest” for details) featured an uncharacteristic lack of grandiose announcements, a fact we welcomed with great relief. The previously announced “900 plans” which were supposedly going to create “economic growth” by government decree seemed to have disappeared into the memory hole. These busybodies deciding to do nothing, is obviously the best thing that can possibly happen.
Yuan, weekly – since the sharp move in USDCNY in August, market participants have begun to worry about the yuan and China’s shrinking foreign exchange reserves – click to enlarge.

There have been rumors though that they did at least strike some sort of sub rosa agreement with respect to the future course of yuan manipulation. In other words, some kind of policy coordination between China and other major currency issuers has quite possibly been agreed upon, even if only tacitly. Officially, China merely used the occasion to “reassure trading partners on foreign exchange”:

“Chinese policymakers on Thursday ruled out an imminent devaluation of the yuan as they seek to reassure trading partners ahead of the G20 summit that they can manage market stability while driving structural reforms.”

When global stock markets swooned in late August 2015 and again in January 2016, the decline in the yuan’s exchange rate was widely blamed as the cause. Considering various central bank policy decisions announced since the G20 meeting, it does appear as though a coordinated move aimed at halting the yuan’s slide and support wobbly risk asset prices has been underway.

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

Who’s Anti-American?

March 25, 2016

Who’s Anti-American?

Maryland!
The Old Line bugle, fife, and drum,
Maryland!
She is not dead, nor deaf, nor dumb.
Huzza! She spurns the Northern scum!
She breathes! She burns! She’ll come! She’ll come!
Maryland! My Maryland!

– Maryland’s State Song

Sam J’accuse… Illustration by James Montgomery Flagg

Guilty as Charged

BALTIMORE – Yesterday, one dear reader wrote in to say we were “cynical” and “anti-American.”

Today, we rise to defend our reputation… such as it is. Cynical? Nah… We’d need a big dose of positive thinking and earnest optimism to be cynical. According to the Oxford English Dictionary, people who are cynical are “suspicious,” “doubting,” and “skeptical.”

We’re way beyond that. We’re pretty sure that the system is rigged… and rotten. Elections are exercises in solemn deceit. And the Fed’s management of the economy is a mixture of delusion and self-serving scam. We don’t have much doubt about it. That’s just the way it is.

As for “anti-American,” our accuser needs to clarify the allegation. Is he talking about the Deep State? The empire? Or is he talking about the 50 sovereign states… and the Old Republic? Or the language? The culture? Reality TV… the Kardashians… NASCAR racing… Old Faithful and the mighty Mississip’?

No one can be anti-America; America is too many things to too many people. But if he’s talking about the federales who control half our national output… tie us in knots with Obamacare, National Labor Relations Board rules, and all their other dopey programs… and stomp around the world trying to justify their trillion-dollars-a-year security budget…

…if he’s talking about Hillary, Bernie, The Donald, the Bushes, et al… and all the 535 members of the U.S. Congress… and the 2,783,000 zombies on the U.S. payroll…

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

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