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The “Liquidity Glut” Springs Eternal: Global Central Bank Easing Quadruples In 2015
The “Liquidity Glut” Springs Eternal: Global Central Bank Easing Quadruples In 2015
Thanks to global disinflationary pressures driven by the savings glut, an oil glut, and universally high (peak) debt levels (crushing the transmission mechanisms of textbook economists), central planners have gone full ease-tard in 2015. From a ‘balanced’ 10 easing, 9 tightening bias (~1:1) in December, Morgan Stanley illustrates in the following chart there are now 16 central banks easing and only 4 with a tightening bias (4:1) as it appears the one-trick pony brigade are trying moar of what didn’t work the first, second, and last times in an effort to prove this time is different…
Source: Morgan Stanley
With so many central planners piling up in the lower left corner… and global growth expectations crashing… when oh when does the world wake up to smoke and mirrors they have been witnessing and, as Marc Faber recently warned, lose faith in central bank omnipotence?
Fears over deflation thwarted Bank of England vote to raise interest rate
Falling oil prices driving inflation down to 0.5% in January, forced Martin Weale and Ian McCafferty to back down
Fears that Britain could sink into a damaging “deflationary spiral” have stayed the hands of Bank of England policymakers who had pushed for an early interest rate rise, monetary policy committee member Martin Weale has revealed.
Weale was one of two MPC members who had consistently voted for higher borrowing costs from August last year, as the economy recovered. But after falling oil prices drove inflation down to 0.5% in January, Weale and his fellow anti-inflation “hawk”, Ian McCafferty, backed down and agreed that rates should remain at their record low of 0.5%.
In an article for the Observer, Weale, an independent member of the MPC, which meets each month to set interest rates for borrowers across the UK, explains publicly for the first time what made him change his mind.
Falling oil prices have so far been a boon for consumers, Weale says. But if everyone starts to assume that prices will continue declining, deflation can take hold.
“If very low expectations of inflation were to become entrenched there would be a risk that the economy would sink into a deflationary spiral. Wages and prices could fall, people might put off spending if they thought things would be cheaper in the future, and they would find that, even though interest rates were very low, their mortgages became a burden which was difficult to manage,” he writes.
…click on the above link to read the rest of the article…
Debt As Wealth; The Caution of Unfit Past Experience
Debt As Wealth; The Caution of Unfit Past Experience
With the G-20 recoiling itself back into the same kinds of mistakes made in the 1960’s, leading directly to the Great Inflation, we will have to take into account the other end of that, namely other forms of “stimulus.” With the global economy sinking, and worries about it beginning to resound beyond just inconvenient bears, there is growing official consensus on central banks taking a clearer approach but also that governments need to face up to “austerity.”
Paul Krugman has been leading the critique against what he sees is a disastrous and ignorant deformation against debt. In times like these, which he “predicted” based on too little government spending, Krugman derides fiscal sense as “cold-hearted.”
This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about — and the people who talk the most understand the least…
People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!
The above quoted passage was taken from a column he wrote back on New Year’s Day 2012. While it has aged three years, given the global slowdown that was about to take place and the ineffectiveness of monetarism alone to dispel it, his words are being taken increasingly as both prescient and prescriptive. However, the logic behind his anti-austerity agenda is more of a sleight of hand than actual argument.
…click on the above link to read the rest of the article…
A New Red Flag for Our Rosy Economic Scenario
A New Red Flag for Our Rosy Economic Scenario
Wholesale inventories balloon to Lehman-Moment levels.
A lot of economists, particularly those quoted in the media, claim that rising inventories are a sign of confidence, that merchants believe that the future is rosy, that sales will be good. There is some truth to that. Merchants stock up for expected good times. But when these hopes of good times turn into sales that are less than rosy, these inventories begin to pile up, and the ratio of inventories to sales suddenly takes a nasty turn.
Inventories tie up precious working capital, so companies manage them aggressively. But in the US, wholesale inventories have been ballooning since summer. And they now have become a red flag for the economy.
Part of the problem: hopes meet crummy sales. December sales by merchant wholesalers (except manufacturers), adjusted seasonally but not for price changes, fell 0.4% from November to $449.8 billion, the Census Bureau reported today. Year-over-year, they rose a mere 1.4%!
The good part: sales of durable goods jumped 7.3% from a year ago, with a number of big gainers, including electrical equipment up 13.4% and metals up 14.3%. But non-durable goods sales dropped 3.5% from a year ago. Wholesales of petroleum products, including gasoline, plunged 13.7% for the month and 29.4% from a year ago.
…click on the above link to read the rest of the article…
“We Just Need To Print More Money” Bank Of Japan’s New Board Member Clarifies Endgame
“We Just Need To Print More Money” Bank Of Japan’s New Board Member Clarifies Endgame
The Abe administration nominated a major proponent of reflationary (inflationary) monetary policy to the central bank’s board, buttressing Governor Haruhiko Kuroda’s efforts to save the nation from the dread of deflation. As Bloomberg reports, economist Yutaka Harada, who will replace Ryuzo Miyao, has said Japan can beat deflation by printing money in a 2013 book “Reflationary Policy Revives Japan’s Economy.” So far that is not working so try harder… “The nomination is a good news for Kuroda… he will keep a majority on the board and win what he wants.” Why such good news? As deputy director at the finance ministry’s Policy Research Institute, Harada exclaimed, “we just need to print money.”
As Bloomberg reports, “Harada has been a well-known monetarist and a strong supporter on quantitative easing,” Masaaki Kanno, an economist at JPMorgan Chase & Co., wrote in a note…
In an interview with Bloomberg News in 2002, Harada said the central bank held the key to ending deflation, which began to grip the economy in the late 1990s as Japan stumbled into a recession amid a banking crisis.“We just need to print money,” said Harada, who was a deputy director at the finance ministry’s Policy Research Institute at the time.
“If the BOJ buys all of the bonds from Japan’s debt market, that will create inflation without a doubt. That’s it,” Harada said. “Deflation will be over if the BOJ buys them under the condition that it would continue the purchases until 2 or 3 percent of inflation is achieved.”
In 2012 paper published before Abe took office pledging to shake Japan out deflation with Abenomics, Harada said the “absence of any real monetary policy” had contributed to Japan’s two decades of stagnation.
* * *
So far that’s not working out so great…
…click on the above link to read the rest of the article…
The Beauty of Deflation
The Beauty of Deflation
Deflation Paranoia
The euro zone’s consumer price inflation rate declined below 1% in early 2014, getting closer to zero during 2014, nowhere near the ambitious 2% benchmark set by central banks. A further small downward adjustment in the inflation rate has put it into negative territory, so harmonized euro area consumer prices are now declining. Western monetary authorities and economists appear genuinely fearful of deflation. Headlines in leading papers reflect this fear very strongly, describing deflation as “the world’s biggest economic problem”, or a “nightmare that stalks Europe” that could lead to its “demise and collapse”.
The real question is though, why do our governments fear deflation? Why do they perceive it as a chronic disease that could infect the economy and why do they go to such great lengths to avoid this “taboo” event? The mainstream argument is that we should avoid deflation because it causes a drop in overall demand and hence lowers economic growth (Germany and other European countries have experienced a slowdown recently which has resulted in a downgrade of 2014 and 2015 growth expectations). Also, deflation implies lower corporate earnings and asset prices, particularly real estate prices.
The euro area’s harmonized index of consumer prices has recently dipped slightly into negative territory, which is excellent news for European consumers – click to enlarge.
But the greatest concern to governments is not deflation itself; the real concern is the impact of deflation on the already over-indebted governments of Europe. Seven euro zone countries are projected to have public debt to GDP ratios of over 100% next year! The worry is quite legitimate from the perspective of indebted governments. With deflation, the burden of debt increases, making defaults more likely. So what are policymakers doing to tackle this problem?
…click on the above link to read the rest of the article…
Oil-led deflation can be good, bad or ugly
Not all deflation is the same. In this case, cheaper oil wears the white hat — for now
When you fill up your car with cheap gas, there’s a group of economists who just hate it. That’s because in many parts of the world the biggest worry for economic stability is the plague of falling prices.
It’s called deflation. Many economists consider it to be a dangerous disease that has spread from Japan to the heart of Europe where this week even mighty Germany has succumbed. Now central bankers are worried it could sweep the world.
Although oil prices have crossed back above $50 US, last year’s crash from over $100 is just now feeding into inflation calculations. Yesterday, central bankers in Australia and India joined thelong list trying to boost their economies and stave off deflation.
Inflation makes money worth less. Deflation has the opposite effect.
During times of, say, 10 per cent inflation, if you carry a $100 bill around in your wallet for a year, at the end of the year it will buy 10 per cent less. But during 10 per cent deflation, keeping the same $100 will buy you 10 per cent more. That sounds good.
But the reason deflation frightens economists is that falling prices go hand in hand with economic stagnation. As with many economic phenomena, it is not absolutely clear whether deflation is the cause of recession, or whether it’s the other way round.
…click on the above link to read the rest of the article…
Oil and Real Estate Bubbles in Canada: What Goes up Won’t so Smoothly Come Down
Oil and Real Estate Bubbles in Canada: What Goes up Won’t so Smoothly Come Down
Five years ago, I noted how unsustainable Canadian economic growth is fuelled by debt, which is leveraged to increase the prices–and ‘profitability’–of assets like oil holdings and real estate. It might as well be called “phantom growth,” because it’s bound to disappear in due course. When prices are high, the debt-based Ponzi scheme functions; when prices sustain lows, the scheme unravels. With Canada’s oil and real estate sectors both apparently slowing down, will it lead to a ‘Minsky moment?’
Economist Hyman Minsky studied financial instability as a result of debt accumulation, and his work was largely ignored by mainstream economists. He noted that debt-heavy capitalist economies exhibit inflations and deflations that tend to spin out of control–inflation feeds inflation and deflation feeds deflation. The ‘Minsky moment’ is the moment where our financial system begins to experience deflationary stress due to price shifts. Historically, government interventions to contain debt spirals were not terribly competent, and–other factors notwithstanding–the sheer volume of debt that has been leveraged makes the global economy poised for contraction. Canada’s recent dependence upon asset inflation makes it particularly vulnerable.
Where has all the Money Come From?
Debt has been leveraged in several investment streams, including derivatives, securities, and ordinary debt. After 2008, international quantitative easing–essentially the creation of money from nothing–has partly facilitated further investment in unconventional and costly oil production methods. As long as international prices and investment levels remain high, it is feasible for unconventional oil to achieve a return on the huge amounts of money and energy required to get it out of the ground. But the longer oil prices remain low, the longer investors will be exposed to defaults.
Investors include ordinary folks by virtue of our holdings in pension funds and RRSPs. Laricina Energyhas defaulted on financing extended by Canada’s largest pension fund, the public Canadian Pension Plan Investment Board. We can likely expect defaults to international investors as well, which should create upward pressure on interest rates as investors try to cover exposure to losses.
…click on the above link to read the rest of the article…
Fear And Dread Of Deflation—-The Keynesian Big Lie At Work
Fear And Dread Of Deflation—-The Keynesian Big Lie At Work
The fear of deflation has become the cornerstone of Keynesian economic thought. A lack of inflation has been used to explain periods of economic weakness from the Great Depression of the 1930’s, to the Great Recession 2008-2009. And now, that philosophy has been adopted as gospel by those that control the Federal Reserve and virtually every central bank on the planet. In reality deflation is cathartic, and a necessary condition to heal the economy. If deflation were allowed to naturally run its course, as it did in the brief Depression of 1920-21, depressions would be sharp but fairly short in duration. And the economy would find itself on firm footing fairly quickly. However, Keynesians view deflation as the source of a destructive cycle in which; asset prices plunge, companies cut jobs, spending plummets, and a permanent recession sets in. Therefore, the prevailing current view maintains that deflation is something that needs immediate intervention of massive monetary stimulus–you can say they have become deflation phobic. This is why I find it fascinating that Keynesians, who proliferate in central banks and in the financial media, are relentlessly cheerleading the recent spate of deflationary data. And, just to be clear, deflation has not been limited to the New England Patriots’ footballs–it is everywhere you look.
However, it is the height of hypocrisy that Keynesians use the specter of deflation to frighten us into believing we need to endlessly dilute the value of our currencies and take the rate on our savings to zero percent. But then, at the same time, take every data point that points to falling prices as another reason to be bullish on markets and the economy. Their mantras are: Lower commodity prices–a boost to the consumer, plunging interest rates–an increase in mortgage refinancing, I actually heard a commentator suggest crumbling copper prices were a boon to minting pennies–he obviously didn’t realize pennies have been minted mostly with zinc since 1983.
…click on the above link to read the rest of the article…
All eyes on Fed, Greece after ECB fires bazooka
All eyes on Fed, Greece after ECB fires bazooka
PARIS (Reuters) – After the surprises from central banks which rocked markets at the start of the year, the U.S. Federal Reserve will be watched as closely as ever this week to see that it doesn’t stray from its own policy path.
The atmosphere will already be tense as the fallout from Sunday’s snap election in Greece settles and concern has grown in some quarters that central banks, which played such a big part in guiding economies through the financial crisis, are becoming less predictable.
The shock of the Swiss National Bank abandoning its cornerstone currency cap had yet to fully subside when the European Central Bank said it would flood markets with over a trillion euros, more than expected, to prevent the euro zone from sliding into deflation.
Canada also cut its rate out of the blue and Denmark did so twice to navigate a world of tumbling oil prices and weak growth.
Now, after Europe mostly dominated the start of the year, attention will turn to the Fed’s rate-setting meeting on Tuesday and Wednesday for any sign that its resolve to start raising interest rates mid-way through the year could be softening.
Expectations are for the U.S. central bank to stick to its guns despite the turmoil elsewhere, with top Fed officials citing in the past weeks strong U.S. economic momentum and falling unemployment.
But questions have been raised due to weak wage growth and five-year low oil prices that have dragged U.S. consumer prices down to their biggest drop in six years in December and heightened deflation fears in Europe.
…click on the above link to read the rest of the article…
How China Deals With Deflation: A 60% Pay Raise For 39 Million Public Workers
How China Deals With Deflation: A 60% Pay Raise For 39 Million Public Workers
While the rest of the developed world, flooded with re-exported deflation as a result of now ubiquitous money printing, scrambles to print even more money in hopes of stimulating the economy when all it is doing is accelerating a closed deflationary loop (at least until the infamous monetary helicopter drop), China – which still has the most centrally-planned economy in the world even if the US is rapidly catching up – has a more novel way of dealing with the threat of deflation: a massive wage hike across the board for all public workers. Two days ago, at a press conference, the Chinese vice minister of human resources and social security Hu Xiaoyi said that China’s 39 million civil servants and public workers will get a pay raise of at least 60% of their base salaries as part of pension plan overhaul.
The hope is that just like in the US where the Federal government would love to be able to do just that and more, surging wages would stimulate the Chinese economy which over the past year has had to content with the double whammy of surging bad loans and the collapse of shadow banking, as well as the burst housing market.
The pay raise “will make sure that the overall incomes for most of these workers will not decrease after the reform, and some of them could actually earn a bit more,” Ziaoyi said, even if he did not provide details of the plan, which will cover civil servants and public workers, such as teachers and doctors.
According to Caixin, top civil servants, including President Xi Jinping and Premier Li Keqiang, will see their monthly base salaries rise to 11,385 yuan from 7,020 yuan (to $1,833 from $1,130), starting in October. Of course, both are billionaires with hidden money around the world, but the raise is all about optics and boosting confidence. The base salaries of the lowest civil servants would more than double to 1,320 yuan. It is unclear if the plans Caixin saw are final.
…click on the above link to read the rest of the article…
Low inflation should not be feared, says George Osborne
Low inflation should not be feared, says George Osborne
The sharp fall in the UK inflation rate should not be feared, Chancellor George Osborne will say in a speech later.
“We should not confuse this welcome news with the threat of damaging deflation that we see in the eurozone,” he will say in a speech.
The speech comes a day after official figures showed the UK inflation rate had fallen to 0.5% in December – its lowest rate since May 2000.
Economists have warned the fall means an outright drop in prices is possible.
But in extracts from the speech released by the Treasury, Mr Osborne tries to distance the UK from the scenario playing out in the eurozone, where deflation has become a problem for policymakers.
He says the sharp drop in the Consumer Prices Index is “almost entirely driven by external factors such as the oil price”, which has more than halved since June, and is “much more welcome than in the eurozone”, where inflation has fallen to -0.2%.
‘Self-reinforcing spiral’
Mr Osborne will say that the UK could experience “a few months of very low or even negative inflation” without any significant risk to the economy.
…click on the above link to read the rest of the article…
Deflation and the eurozone: why falling prices aren’t always good news
Deflation and the eurozone: why falling prices aren’t always good news
As oil prices continue to fall, a strange phenomenon is making its presence felt across Europe: deflation. Familiar in Japan since the 1990s, consistently falling prices for the goods we buy are almost unheard of in Europe, not seen since the grim years of the 1930s. But according to figures released in December, prices inside the eurozone are now falling by 0.2% a year.
You might think this is good news. After all, as wages and salaries stagnate, declining prices means an increase in people’s real purchasing power. Each euro in your pocket stretches, on average, just a little bit further than before. And in the short term, the decline in the price of oil alone has fed into some improvements in real living standards – or, at the very least, set a floor to their decline.
If the price falls were confined to just falling costs of energy and transport, this positive argument could hold. In the mid-1980s, a sharp fall in the price of oil led to briefly falling prices in Germany and other European countries without further consequences.
The reality of falling prices
But should declining prices spread and persist, there are two serious causes for concern. First – if you know that the price of anything you buy will be less in the future, why not wait until the future to buy it? A general expectation that prices will fall rather than rise creates a major disincentive to buy. Demand falls, less is sold, the recession worsens.
…click on the above link to read the rest of the article…
The Achilles Heel of the Global Status Quo: Deflation
The Achilles Heel of the Global Status Quo: Deflation
Rather than being the Monster Under the Bed in central bank nightmares, deflation is the natural result of a competitive economy experiencing productivity gains.
That the global Status Quo is terrified of deflation is the background of every policy decision and official PR sound-bite. The reason behind this unremitting terror:deflation is the Achilles Heel of the global Status Quo. My colleague Gordon T. Long explains why in the latest of our video/slide programs.
Though central banks are constantly claiming their policies are intended to spark “growth,” their over-riding motivation is sustaining the colossal mountain of debt that is the foundation of the Status Quo’s wealth and power. If interest rates rise, the debt can no longer be serviced without ballooning deficits (i.e. more borrowing just to pay the rising interest) or the extreme pain of budget cuts–cuts that will necessarily come of discretionary government spending or entitlements.
If liquidity (easy, abundant credit) dries up, the portion of the debt mountain that must be rolled over into new loans cannot be refinanced, and the loans and bonds that have come due/reached maturity will default, toppling the system’s teetering financial dominoes.
If asset purchases (i.e. quantitative easing) by central banks taper to zero, risky assets will go bidless and/or yields will rise as investors demand higher risk premiums.
…click on the above link to read the rest of the article…
Fed looks past a world in turmoil, confident in U.S. recovery
Fed looks past a world in turmoil, confident in U.S. recovery
(Reuters) – U.S. central bankers have looked beyond a global deflation threat, fear of energy-sector bond defaults, and a surge of oil patch layoffs to reach what appears to be a firm conclusion: the U.S. recovery is here to stay.
New trade data released on Wednesday and signs of ever-stronger consumer spending confirmed the United States remains the bright spot in a global economy plagued by uncertainty.
The trade deficit shrank in November to less than $40 billion, providing a boost to growth as Americans spent less on imported oil.
Meanwhile, the first corporate reports from the Christmas season showed at least some of that money trickling into stores as J.C. Penney Co Inc. (JCP.N) said same-store sales rose 3.7 percent in November and December, pushing the company’s stock up nearly 20 percent.
At its December policy-setting meeting, according to minutes released on Wednesday, the Federal Reserve took close stock of plunging world oil prices and turmoil in Europe and decided that those negative trends would not undo that underlying strength.
…click on the above link to read the rest of the article…
