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Everyone is convinced the dollar is going to inflate because more dollars are entering the system.

But are they really?

That is the question that sparked a succinct Twitter thread by Travis K (@ColoradoTravis) explaining why inflation is not what happens next (emphasis ours):

Let’s take a look at how dollars are born and how they die.

A dollar is ‘born’ when a loan is made against collateral on a bank’s balance sheet. Banks can issue multiples of dollars for every dollar of collateral they have.

It’s this multiplication effect that expands the amount of total dollars.

Generally, banks are limited in how much they can lend – let’s say it’s 10x their collateral. So for every dollar of collateral they have, they can lend 10 dollars.

By so lending, they ‘birth’ new dollars into the system.

As banks lend more, more dollars are created and the money supply increases. This multiplicative lending is the chief driver of total dollars in the system.

Banks lending a lot → more total dollars and inflation.

When do dollars die?

Dollars ‘die’ when debts are paid back. This reverses the multiplication effect of lending, leading to less total dollars in the system and a contraction of total dollars in circulation.

So what is the Fed ‘printer’ doing – creating dollars, right? Actually no, not really.

The printer only increases the collateral banks have to lend against. It does not directly ‘birth’ dollars, only *potential* dollars.

Banks are still the midwives, and the only ones who birth dollars into the system by lending.

The Fed can increase collateral by 1000x but unless the banks lend against that collateral, dollars will not enter circulation for you and I to interact with.

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

Blain’s Morning Porridge – 21st August 2020 – John Law’s MMT revisited

August 21, 2020

Blain’s Morning Porridge – 21st August 2020 – John Law’s MMT revisited

“Earlier today apparently a woman rang the BBC and said she had heard that there was a hurricane on the way. Well if you are watching, don’t worry, there isn’t.”

It’s blowing a full hooley out there this morning, which is very bad news for my olive trees as the storm is shaking the ripening fruit off. Shame. It’s the first time our little olive grove has produced what looked likely to become full-sized olives. I was going to add them to Dirty Martinis. Meanwhile, mink farms are being wiped out by coronavirus which is proving 100% fatal to the well-dressed ferrets. Interesting, but what does it mean…?

It’s Friday, which means I am allowed to go off on something of a tangent – so let’s not worry about how long this tech rally continues, the rising tensions in Europe, Apple spending $17bln on stock buybacks, China vs US, or the US election.

What’s got me worried this morning is the headline in the FT: UK Public Debt tops £2 trillion for first time on Covid Spending Boom.

Should we worry or should we not? (Clue: the first one…)

Let me ask the question: how long can governments continue to spend their way out of the Coronavirus crisis? The bills for long-term furlough programmes and sectoral bailouts and support, increased social services as unemployment rises, and the urgent need for health spending are going to come due at some point. Is it going to be a problem, and if yes, how big?

Government debt is rocketing higher – but does it matter? Conventional thinking, based on Reinhart and Rogoff, is when debt/GDP exceeds 77% there will a significant slowdown in growth.

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

Gold and Free Banking Versus Central Banks

August 16, 2020

GOLD AND FREE BANKING VERSUS CENTRAL BANKING

In spite of the officially declared “independence” of the Federal Reserve from the immediate political control of either Congress or the White House, America’s central bank is, nonetheless, a branch of the U.S. government that is responsible for setting monetary policy, overseeing a variety of banking regulations, and influencing market interest rates. As a result, politics is always present when it concerns the Federal Reserve, as witnessed in the nomination of Dr. Judy Shelton to serve on the central bank’s board of governors.

Dr. Shelton has become a lightning rod for angry opposition, not only due to Donald Trump, who as president of the United States nominated her to fill one of the seven slots on the Federal Reserve’s Board of Governors, but the fact that she has long been a public and vocal advocate for a return to some version of the gold standard as an “anchor” for limiting discretionary policies by the central bank.

Most academic and policy-oriented economists apparently are both flabbergasted and fearful that if she were to serve on the Fed board, she might actually attempt to limit the virtually unrestrained latitude the central bank currently has to seemingly create money and bank credit in practically any quantity, and, in the process, influence the level of interest rates at which banks make money available for borrowing purposes.

What is clearly horrifying to so many in the wide mainstream of the economics profession is the notion of a check on the powers and prerogatives of what amounts to America’s system of monetary central planning. But that is the very point of a commodity-based monetary system such as a gold standard, to limit abuse of the monetary printing press.

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

An unexpected systemic crisis is for sure

August 16, 2020

An unexpected systemic crisis is for sure

Downturns in bank credit expansion always lead to systemic problems. We are on the edge of such a downturn, which thanks to everyone’s focus on the coronavirus, is unexpected.

We can now identify 23 March as the date when markets stopped worrying about deflation and realised that monetary inflation is the certain outlook. That day, the Fed promised unlimited monetary stimulus for both consumers and businesses, and the dollar began to fall.

The commercial banks everywhere are massively leveraged and their exposure to bad debts and a cyclical banking crisis is now certain to wipe many of them out. In this article we look at the global systemically important banks — the G-SIBs — as proxy for all commercial banks and identify the ones most at risk on a market-based analysis.

Introduction

In these bizarre markets, the elephant in the room is systemic risk — visible to all but simply ignored. This is partly due to everyone in government and central banks, as well as their epigones in the investment industry and mainstream media, believing our economic problems are only a matter of Covid-19. In other words, when the pandemic is over normality will return. But Covid-19 has acted like a conjurer’s distraction: it has deflected us from the consequences of Trump’s trade wars with China and the liquidity strains that surfaced in New York last September when the repo rate soared to 10%.

The liquidity strains and the severe downturn in the stock markets that followed earlier this year before mid-March have been buried for the moment in a tsunami of central bank money. Liquidity problems following last September’s repo crisis and the S&P 500 index collapsing by one third between 19 February and 23 March were a clear signal that the multiyear cycle of bank credit expansion had already peaked. Ever since the last credit crisis in 2008, the banks had recovered their lending confidence and expanded bank credit, a classic expansionary phase.

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

The Wonders of Free Money in Two Pictures

August 15, 2020

The Wonders of Free Money in Two Pictures

Lesson of the Day

If you give away enough free money, spending recovers.

Census Report on Advance Retail Sales

The Census report on Advance Retail Sales provides half of our “Lesson of the Day“.

Adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, July sales were $536.0 billion, an increase of 1.2 percent from the previous month, and 2.7 percent above July 2019.Total sales for the May 2020 through July 2020 period were down 0.2 percent from the same period a year ago.

The May 2020 to June 2020 percent change was revised from up 7.5 percent to up 8.4 percent. Retail trade sales were up 0.8 percent from June 2020, and 5.8 percent above last year.

Nonstore retailers were up 24.7 percent from July 2019, while food and beverage stores were up 11.1 percent from last year.

Retail spending rose for the third straight month despite a rise in coronavirus infections with reopenings stalled.

Spike in Government Spending

The chart from Pew shows stimulus and deficits exceed that in the Great Recession.

Since March, government stimulus authorizations (not all spent yet) total at least $3 trillion. Another $2 trillion is on the deck when Democrats and Republicans agree to another package.

That is the second half of the Free Money Wonder.

The federal government has run deficits nearly every year since the Great Depression and consistently since fiscal 2002. Through the first 10 months of fiscal 2020, the government took in $2.82 trillion in revenue and spent $5.63 trillion, for a year-to-date deficit of just over $2.8 trillion, according to the Treasury Department’s Bureau of the Fiscal Service. Through the first 10 months of fiscal 2019, by comparison, the deficit stood at $866.8 billion.

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

Here’s Why the “Impossible” Economic Collapse Is Unavoidable

August 15, 2020

Here’s Why the “Impossible” Economic Collapse Is Unavoidable

This is why denormalization is an extinction event for much of our high-cost, high-complexity, heavily regulated economy.

A collapse of major chunks of the economy is widely viewed as “impossible” because the federal government can borrow and spend unlimited amounts of money because the Federal Reserve can create unlimited amounts of money: the government borrows $1 trillion by selling $1 trillion in Treasury bonds, the Fed prints $1 trillion dollars to buy the bonds. Rinse and repeat to near-infinity.

With this cheery wind at their backs, conventional pundits are predicting super-rebounds in auto sales and other consumption as consumers weary of Covid-19 and anxious to blow their recent savings borrow and spend like no tomorrow.

As for the 30+ million unemployed–they don’t matter. Conventional analysts write them off because they weren’t big drivers of “growth” anyways–they didn’t have big, secure salaries and ample wealth/credit lines.

What this happy confidence in near-infinite money-printing and V-shaped spending orgies overlooks is what I’ve termed denormalization, an implosion of the Old Normal so complete that the expected minor adjustment to a New Normal is no longer possible.

The “New Normal” Is De-Normalization

We’re already in a post-normal world because the expansion of globalization and financialization needed to fuel the Old Normal has reversed into contraction. This reversal is an extinction event for all sectors and institutions with high fixed costs: air travel, resort tourism, healthcare, higher education, local government services, etc. because their fixed cost structures are so high they are no longer financially viable if they’re operating at less than full capacity.

Only getting back to 70% of previous capacity, revenues, tax receipts, etc. dooms them to collapse.

And there’s no way to cut their fixed costs without fatally disrupting all the sectors that are dependent on them.

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

Market Update: Overstimulated!

August 15, 2020

Market Update: Overstimulated!

Today’s twin orgy of monetary & fiscal stimulus makes a market reckoning inevitable

The melt-up discussed last week remains in full force, with the S&P 500 hitting a new intraday all-time high on Wednesday.

Just to make sure we’re all clear on this: stocks are back to their highest prices BEFORE the coronavirus pandemic exploded. Before Q2 GDP plummeted -33% in the US. Before 50+ million Americans lost their jobs.

Thanks to the $trillions shoved into the system by both central banks and national legislatures since April, “investors” now believe the markets are a 1-way ride to forever-increasing wealth.

As the chart below from the National Association of Active Investment Managers shows, financial advisory firms that manage client capital are more fully-invested in the markets than at any other time in the past several years:

NAAIM chart

So everyone in “all-in” on the belief that the markets are both fully backstopped and rising higher from here.

How realistic is this belief?

Michael Pento, this week’s Market Update video expert guest, thinks it’s willful delusion. History is crystal clear that disconnects like we have today between (over-inflated) asset prices and the underlying (contracting) economic reality always result in crisis — either a deflationary repricing, or a destruction of the purchasing power of the currency.

Michael shares the 20 financial and economic metrics on the dashboard of indicators he tracks to determine where we are in this story, and which outcome is looking most likely to happen when. This week’s interview is worth listening to for that list alone.

Not one to mince words, Pento believes this is the most treacherous time ever for investors — which means those blindly long the current melt-up will get slaughtered if indeed the risks he predicts play out. As always, we recommend working in partnership with an independent financial advisor who appreciates these risks, prioritizes preservation of your investment capital, and can help you chart the turbulent waters ahead when the reckoning arrives:

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

Buyer Beware–Gold ETFs Like GLD Own No Gold

August 15, 2020

BUYER BEWARE – GOLD ETFs LIKE GLD OWN NO GOLD

Two major asset classes are major beneficiaries of the unlimited money printing and credit creation that is now taking place globally. One of them will end in tears and the other one has just started a major secular bull market.

As the world economy and financial system is disintegrating, investors are under the illusion that all is well with many stock markets still not far from their all time bubble highs.

THE DISCONNECT BETWEEN STOCK AND THE REAL ECONOMY CONTINUES

Many companies and services are haemorrhaging cash and are not going to recover for years and some never. As very few people are travelling, many airlines, cruise lines, hotels and restaurants for example will not survive. This is a global industry that employs 330 million people and represents 10% of global GDP. International tourism could fall as much as 60-80% in 2020 according to some estimates. The car industry is 3% of global GDP and is expected to drop 25% in 2020.

Real and hidden unemployment is a major problem and if furlough or social benefits are stopped many people will not survive. As many can’t pay their rents they will also become homeless.

Currently 31 million Americans are on some kind of unemployment benefits. That is 20% of all workers.

But if we include workers who are not receiving any benefits the total unemployment is 30% according to Shadow Government Statistics. This is worse than in the 1930s depression.

DREAMLAND STOCK INVESTORS IGNORE DEFICITS

Stocks market investors still live in dreamland and translate all the bad news to good news as the continuous flood of printed money and credit inject liquidity. This has always worked before so why won’t it this time? No one knows what the US deficit will be at the end of calendar 2020 but it could easily be $10 trillion as the debt grows to over $30t and on to $40 trillion within a year or two.

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

What You Will Find When You Follow the Money

August 14, 2020

What You Will Find When You Follow the Money

It has been a rough go for California Governor Gavin Newsom. Late last week it was revealed that the state Department of Public Health had tickled the poodle on its COVID-19 record keeping. Somehow the bureaucrats in Sacramento undercounted new coronavirus cases by as many as 300,000.

Perhaps this oversight prompted Newsom to imbibe in a little meditation and reflection. At his Wednesday coronavirus news conference, shortly after quoting Voltaire, Newsom offered the following epiphany:

“Businesses can’t thrive in a world that’s failing.”

Often the simplest insights into reality are the most essential. We’ll give Newsom that. Yet, this is hardly an insight. Rather, it’s readily obvious…even to a numskull.

The world that’s failing, where businesses can’t thrive, is a direct consequence of government lockdown orders. And Newsom, more than any other public official, has his fingerprints all over the offense. If you recall, California, under Newsom’s command, was the first state to order lockdowns. It’s a shame he didn’t pause for meditation before committing the state to ruin.

The dynamics of what would follow Newsom’s lockdown orders were predictable. When government decrees froze the economy, bills were still due. Yet many people’s incomes, in the form of paychecks, disappeared.

For businesses, outstanding accounts payable were still due. Though accounts receivable quickly became overdue. In short, the flow of cash, as delivered by an open economy of give and take, broke down.

Certainly, Newsom thought he was doing the right thing. He had to keep everyone in the Golden State safe by locking them down. Many governors followed Newsom’s lead, having the same disastrous results.

But that was just the beginning. Soon the uplifters in Washington swung into action…

Printing Press Money

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

The Dollar’s Ongoing Fall From Grace Will Soon Catapult Precious Metals to Even Greater Heights

August 10, 2020

The Dollar’s Ongoing Fall From Grace Will Soon Catapult Precious Metals to Even Greater Heights

I have been telling readers to put savings into gold and silver for well over 14 years now, and in that time, precious metals have had spectacular rallies as well as intense corrections. Weak hands have been selling and strong hands have been buying and holding for some time now. We have done this with the expectation of something far more than just a parabolic event; some of us have been predicting an economic crisis the likes of which have not been seen in almost a century.

Specifically, in 2018, I warned that there was a dramatic shift in Federal Reserve policy that would puncture the massive debt bubble they had been building since 2008. The crash of the “Everything Bubble” would inevitably lead to a spike in metals prices.

In an article published in January 2018, I warned that the Fed would increase the speed of its balance sheet cuts and interest rate hikes and that this would trigger an initial implosion in the U.S debt bubble and the dollar, along with flirtations with a stock market plunge. By the end of 2018, we saw exactly that.

By mid-2019, the Fed had reversed its fiscal tightening policies, but of course, it was too late; Pandora’s box had already been opened and economic instability was increasing. I continue to believe that this action on the part of the Fed was absolutely deliberate and that they knew they were initiating the beginnings of a crisis. The minutes of the October 2012 Federal Open Market Committee even reveal that Jerome Powell openly discussed what would happen, years before he became the Fed Chair.

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

The Dollar Is Dying

August 10, 2020

The Dollar Is Dying

Insulting the Captive Audience

This week, while perusing the Federal Reserve’s balance sheet figures, we came across a rather curious note. We don’t know how long the Fed’s had this note posted to its website. But we can’t recall ever seeing it. The note reads as follows:

“The Federal Reserve’s balance sheet has expanded and contracted over time. During the 2007-08 financial crisis and subsequent recession, total assets increased significantly from $870 billion in August 2007 to $4.5 trillion in early 2015. Then, reflecting the FOMC’s balance sheet normalization program that took place between October 2017 and August 2019, total assets declined to under $3.8 trillion. Beginning in September 2019, total assets started to increase.”

Directly below this note is the following chart:

Total assets of the Federal Reserve since 2008 – never-ending expansion (shaded areas indicate recessions) [PT]

Does this look like a balance sheet that expands and contracts over time?

Quite frankly, the Fed’s balance sheet chart, and the extreme dollar debasement that it illustrates, is a disgrace. The fact that the Fed had to add this flagrantly false note as preface to its disgraceful chart is an insult.

This is a direct offense to anyone who has built a modest savings account by exchanging their time for dollars. The time and effort put to obtaining these dollars is being stolen by the insidious process of central bank engineered money supply inflation. Year in and year out, these earned dollars will be worth less and less.

Moreover, normalization is a Fed lie. It never happened. Yes, $700 billion was contracted from the Fed’s Balance sheet between October 2017 and August 2019. But that was in the wake of a $3.5 trillion expansion. And it was quickly followed by another $3 trillion balance sheet expansion this spring.

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

It’s Time To Position For The Endgame

August 9, 2020

It’s Time To Position For The Endgame

Are you, like us, sensing that things are poised to fall apart?

Do you sense an approaching endgame?

Like there’s another heavy shoe to drop? Perhaps an entire closet’s worth?

Certainly there’s entirely too much confusion surrounding SARS-CoV-2 and how to deal with it.

Should people wear masks? Will schools re-open? Should they? Why isn’t Covid-19 being treated consistently across medical centers? Are there things we could and should be doing to minimize the impacts before people catch it?

I believe there are good common-sense answers, even if complicated, to these and many other related questions But common sense is in short supply these days, especially amongst our “leaders” in the US (who actually act like bad managers).

Our clueless politicians busy themselves either pandering to or hiding from the media cameras when it comes to Covid-19 response. Meanwhile, Big Pharma is doing everything it can to direct the action in ways that funnel any profits into its pockets — public health be damned.

It’s a certified shit show. No question about it.

But It Gets Worse

Beyond the pandemic, the central banks are busy ignoring Plutarch as they embark on the grandest social experiment in all of human history by floating billionaires’ yachts ever higher as more and more average folks drown beneath the rising waterline.

Displaying either a level of tone-deafness exceeding that of Marie Antionette, or a level of psychopathy matching that of Ted Bundy, the US Federal Reserve is — RIGHT NOW — engaged in the largest transfer of wealth in all of US history.

Between March-April 2020, the Fed added a staggering $282 billion to the bottom-line wealth of US billionaires:

But that wasn’t enough.

So the Fed kept printing. And buying, buying, and buying more and more financial assets held – of course – mainly by the already-wealthy.

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

The Fed is Determined to Prove the QTM Right

August 4, 2020

The Fed is Determined to Prove the QTM Right

Milton Friedman famously said, “Inflation was always and everywhere a monetary phenomenon.” But Friedman didn’t live through the QE years here in the U.S. and blatantly ignored the twenty plus years of Japanese deflation despite QE and insane levels of money printing during the latter years of his life.

Because Friedman, like a lot of modern economists, adhered strictly to the Quantity Theory of Money (QTM).

And as an Austrian economics kinda guy I somewhat agree with the QTM. I agree with Ludwig von Mises on this, as you would expect. So, how do we square the QTM with the evidence that QE in all of its guises has resulted in deflation, as expressed by the general price level, where ever it has been tried?

Martin Armstrong ask this question all the time and is openly hostile to the QTM. And his arguments have some merit, because, as he rightly points out the QTM only looks at the supply side of the money equation.

It cares not about the demand side. He’s right about that. What he’s wrong about is that the Austrians, like von Mises, haven’t considered this either.

Demand for money is just as important as the supply of it. And during a crisis, the demand side of the equation for any particular currency may, in fact, be more important.

This is what the Fed has struggled with for the past twelve years. The demand for the U.S. dollar has far outstripped the increase in supply, causing a far lower aggregate price rise than anticipated by the QTM.

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

Peter Schiff: The Dollar Crash Will Take Down the Entire US “House of Cards”

August 3, 2020

PETER SCHIFF: THE DOLLAR CRASH WILL TAKE DOWN THE ENTIRE US “HOUSE OF CARDS”

Peter Schiff says the new historic and record-breaking fall in gross domestic product numbers coupled with unemployment and the Federal Reserve’s excessive money creation will cause a dollar collapse. Once that happens, the entire house of cards that is the United States will fall.

Schiff says we should be prepared for the fall of the U.S. by the end of this year. According to a report by RT, Schiff, the ignorance of Americans is still present. People are not waking up, unfortunately. That ignorance is “likely to remain the case until the fall becomes a crash, which I don’t think will begin until the Dollar Index breaks 80,” wrote Schiff in a Tweet. ” At its current rate of decline that level could be breached before year-end, perhaps by election day.”

Remember, election time could be a gigantic planned disaster too, and Americans look like they’ll fall for that too.

Government Warning: “One Way Or Another, The Economy Is Going To Lockdown Again”

While the dollar continues to fall, gold, silver, and cryptocurrencies are all going up. This is a signal that people are leaving centralized systems for those that are decentralized and not controlled by the ruling class or elitists who think of us as their slaves. According to Schiff, gold will supplant the dollar because the euro and other currencies are not ready to take its place. They are also centralized and in the control of the same people who control the creation of U.S. dollars. “No other currency will take the dollar’s place, real money will take its place, particularly gold, because gold was there before the dollar,” he said, noting that the greenback “did a lousy job, and now gold is taking its spot back.”

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

The Last Gasps of “Late Degeneracy Capitalism”

July 19, 2020

The Last Gasps of “Late Degeneracy Capitalism”

It was a mid-afternoon in 2006 in Cannes, where I joined Dr. Kurt Richebächer at his apartment to collaborate on a book project that, unfortunately, failed to come together before his death a year later.

The old man grabbed his cane and moved to a comfy chair and clicked on a widescreen TV.

Bloomberg. In German.

It was bad news from what I remember. But as far as the economic commentariat was concerned, it was good news. It meant the Fed would simply pump more money into the market.

Traders loved the report; stock futures back in New York had already begun to rally.

Kurt, on the other hand, was flabbergasted. He started talking to me and to the television in German. Neither I nor the TV understood German…

Dr. Richebächer was kind of a crank. He was a special kind of crank, though.

He used to say something like: “the sins of the boom, will be laid bare in the bust.”

A Market Prophet

Kurt wrote a newsletter for more than 40 years. And back in the late 90s and early 2000s we published The Richebächer Letter.

Kurt accurately forecast the tech wreck. And for having done so, he became a semi-celebrity among the geeks — present company included — who like to read and think about an obscure outpost in the field of economics — the Austrian school.

Kurt never claimed to adhere to the Austrian school, but that hardly seemed to matter. His insights apply just as much today as they did 14 years ago — probably more.

It all started after World War II when Kurt had made a name for himself as the best-known financial journalist in Germany — a razor-sharp critic of what he saw as the stupid economic and fiscal policies of the post-war German government.

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

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