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Time to learn about money
Time to learn about money
An unexpected destruction of fiat currency has been advanced by the monetary and fiscal response to the coronavirus. Financial markets have yet to discount the possibility of such an outcome, but in the coming months they are likely to awaken to this danger.
The question arises as to what will replace fiat currencies. In the past the answer has always been gold but today there are cryptocurrencies as well, whose enthusiasts are more aware than most of fiat money’s failings.
This article describes the basics about money, what it is and the role it plays in order to understand what will be required by the eventual replacement for fiat. It concludes that gold will return as the world’s medium of exchange, and secure cryptocurrencies, unable to provide the scalability and stability of value required of a medium of exchange will be priced in gold after the demise of fiat. But then the rationale for them will be gone, and with it their function as a store of value.
The destruction of fiat money
These are strange times. Circumstances are forcing governments to destroy their money by debasing it to pay for their obligations, real and imagined. If central bankers had a grasp of what money really is, they wouldn’t have got into a position where they are forced to use their seigniorage to destroy it. They are so ignorant about catallactics, the fundamentals behind economics, that they cannot see they are destroying the means of exchange they have imposed upon their citizens with far worse consequences than the abandonment of the evils they are trying to defray.[i]
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The Outlines of a Better World Are Emerging
The Outlines of a Better World Are Emerging
Once the government’s ability to sustain its enforcement with money created out of thin air vanishes, the entire order vanishes along with it.
The era of waste, greed, fraud and living on borrowed money is dying, and those who’ve known no other way of living are mourning its passing. Its passing was inevitable, for any society that squanders its resources is unsustainable. Any society that makes private greed the primary motivator and priority is unsustainable. Any society that rewards fraud above all else is unsustainable. Any society which lives on money borrowed from the future and other forms of phantom capital is unsustainable.
We know this in our bones, but we fear the future because we know no other arrangement other than the unsustainable present. And so we hear the faint echo of the cries of alarm filling the streets of ancient Rome when the Bread and Circuses stopped: what do we do now?
When the free bread and entertainments disappeared, people found new arrangements. They left Rome.
The greatest private fortunes in history vanished as Rome unraveled. All the land, the palaces, the gold and all the other treasures were no protection against the collapse of the system that institutionalized corruption as the ultimate protector of concentrated wealth.
The most zealously guarded power of government is the creation of money, for without money the government cannot pay the soldiers, police, courts and administrators needed to enforce its rule. Western Rome created money by controlling silver mines; in the current era, governments create money (currency) out of thin air.
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U.S. Public Debt Increases More In April Than During Entire 2019
U.S. Public Debt Increases More In April Than During Entire 2019
The U.S. public debt increased at the fastest rate ever during April. Due to the negative economic impacts stemming from the global contagion, the U.S. Treasury increased the federal debt by a whopping $1.3 trillion in a single month.
The additional $1.3 trillion of U.S. public debt during April would purchase approximately one-third of all the physical gold investment bullion in the world, which currently stands at $4.1 trillion. In just one month (April), Uncle Sam’s printing press or digital monetary liquidity could purchase 750 million oz of gold. That 750 million oz of gold would be 67% of the total Central Bank Gold Reserves.
So, at some point, the Fed and central bank monetary insanity will come back to BITE THEM HARD… LOL.
According to the data from TreasuryDirect.gov, the U.S. public debt increased by $1,287 billion ($1.28 trillion) during April:
Now compare that to the average monthly U.S. public debt increase of $106 billion in 2019. Thus, the U.S. public debt increase in April was even higher than in Full-Year 2019:
While it took twelve months for the U.S. Treasury to add $1,207 billion in debt (2019), it only took one month to increase it to $1,287 billion (April). I don’t believe Americans understand how much damage is being done to the U.S. Government Balance Sheet. Unfortunately, it’s only going to get worse going forward.
It is impossible to forecast the collapse of the U.S. Bond Market or U.S. Dollar. However, the current monetary policy taking place suggests that it’s going to be SOONER rather than LATER.
And, it’s all due to the Collapse in U.S. oil demand. Keep an eye on the U.S. Oil Industry and oil price for clues how quickly the domestic economy and financial system will head into a depression.
Fed Drastically Slashed Helicopter Money for Wall Street. QE Down 86% From Peak Week in March
Fed Drastically Slashed Helicopter Money for Wall Street. QE Down 86% From Peak Week in March
Fed shed MBS. Loans to “SPVs” flat for fifth week. Repos in disuse. Fed still hasn’t bought junk bonds, stocks, or ETFs. But it sure sent Wall Street dreaming.
Total assets on the Fed’s balance sheet rose by only $83 billion during the week ending April 29, to $6.656 trillion. That $83 billion was the smallest weekly increase since this show started on March 15, and down by 86% from peak-bailout in the week ended March 25. This chart shows the weekly increases of total assets on Fed’s balance sheet:
The Fed is thereby following its playbook laid out over the past two years in various Fed-head talks that it would front-load the bailout-QE during the next crisis, and that, after the initial blast, it would then cut back these asset purchases when no longer needed, rather than let them drag out for years.
On January 1, the balance sheet stopped expanding as the Fed’s repo market bailout had ended. However, in late February, all heck was breaking loose, and the Fed first increased its repo offerings and then on March 15, started massively throwing freshly created money at the markets, peaking with $586 billion in the single week ended March 25.
But since then, the Fed has slashed its weekly increases in assets, which shows up in the flattening curve of the Fed’s total assets in 2020:
The Fed cut its purchases of Treasury securities. The balance of its mortgage-backed securities (MBS) actually fell. Repurchase agreements (repos) have fallen into disuse. Lending to Special Purpose Vehicles (SPVs) has not gone anywhere in five weeks. And foreign central bank liquidity swaps, after spiking in the first two weeks, only rose modestly, with most of the increase coming from the Bank of Japan, which is by far the largest user of those swaps.
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Inflation or Deflation? Collapse in Demand Trumps Supply Shocks
Inflation or Deflation? Collapse in Demand Trumps Supply Shocks
The inflationists are coming out of the woodwork, but they are wrong.
Get Ready for the Return of Inflation, says Tim Congdon, in a Wall Street Journal op-ed.
The economists Milton Friedman and Anna Jacobson Schwartz demonstrated in “A Monetary History of the United States” that a collapse in the quantity of money was the main cause of the Great Depression. Hoping to avoid a repeat, the Federal Reserve in recent weeks has poured money into the economy at the fastest rate in the past 200 years. Unfortunately, this overreaction could turn out just as poorly; history suggests the U.S. will soon see an inflation boom.
Friedman and Schwartz used a broad definition of the quantity of money that included all bank deposits, and found that U.S. money stock shrank by 38% between October 1929 and April 1933. Some prominent economists—including Princeton’s Paul Krugman and Columbia’s Joseph Stiglitz—claim that money growth no longer matters much, but they’re wrong. After all, the 2007-09 recession showed that the ever-changing fortunes of the banking system have a significant effect on demand, output and employment. From 2010-18, growth rates of the quantity of money and nominal gross domestic product were virtually identical at 4% a year.Policy makers have repeatedly called the battle against the novel coronavirus a war. As in wartime, federal expenditures are rising sharply while tax revenues are being hit by the lockdown. Both World War I and World War II—and, indeed, the Vietnam War—were followed by nasty bouts of inflation. If that happens again, policy makers today being cheered for their swift, decisive action will instead have to answer for their grave lack of foresight.
Inflation View is Wrong
The inflation view espoused above is widely held. Some even call for hyperinflation.
However, the collapse in demand, dwarfs supply shocks and monetary printing.
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Capitalism on Life Support… Time for a Cure
Capitalism on Life Support… Time for a Cure
The Covid-19 pandemic is unleashing obscene bailouts of Western industries and companies, as well as lifelines for billionaire business magnates.
It is grotesque that millions of workers are being laid off by corporations which are in turn receiving taxpayer funds. Many of these corporations have stashed trillions of dollars away in tax havens and have contributed zero to the public treasury. Yet they are being bailed out due to shutdowns in the economy over the Covid-19 crisis.
Why aren’t the banks and corporations being forced by governments to pay for their workers on sick leave or in lockdown? It’s because the governments are bought and paid-for servants of the top one per cent. Some political leaders are the embodiment of the one per cent, like Donald Trump and senior members of the U.S. Congress.
The biggest orgy of funny money is seen in the U.S. where the Trump administration and Congress have approved the printing of trillions of dollars to prop up corporations and banks. Meanwhile crumbs are being thrown at millions of workers and their families.
In just five weeks, unemployment has hit a staggering 26.4 million people in the U.S. – and that’s the official figure. The real level is doubtless much higher. It is reported that the job losses have wiped out all the employment gains made over the past decade since the last financial crisis in 2008. As with the present crisis, the U.S. government arranged trillion-dollar bailouts for banks and industries back in 2008-2009. It didn’t last long until the next binge.
In truth is this is a familiar pattern over the past century where the economy is continually salvaged from ruin by the government at the expense of ordinary workers, small businesses and taxpayers. The recurring rescue is proof that the system of private capital and supposed free markets is a myth.
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Weekly Commentary: Fault Lines
Weekly Commentary: Fault Lines
Now on a weekly basis, we’re witnessing things that couldn’t happen – actually happen.
April 20 – Bloomberg (Catherine Ngai, Olivia Raimonde, and Alex Longley): “Of all the wild, unprecedented swings in financial markets since the coronavirus pandemic broke out, none has been more jaw-dropping than Monday’s collapse in a key segment of U.S. oil trading. The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory — minus $37.63 a barrel.”
For posterity, the latest numbers on U.S. monetary inflation: Federal Reserve Assets expanded $205 billion last week to a record $6.573 TN. Fed Assets surged $2.307 TN, or 56%, in just seven weeks. Asset were up $2.645 TN over the past 33 weeks. M2 “money” supply surged $125bn last week to a record $16.870 TN, with an unprecedented seven-week expansion of $1.362 TN. M2 inflated $2.329 TN, or 16.0%, over the past year. Institutional Money Fund Assets (not included in M2) jumped $123 billion last week. Over seven weeks, Institutional Money Funds were up $845 billion. Combined, M2 and Institutional Money Funds jumped a staggering $2.207 TN over seven weeks ($100bn less than the growth of Fed Assets).
It’s increasingly clear this pandemic is striking powerful blows at the most fragile Fault Lines – within communities, regions, societies, nations as well as for the world order. To see this disease clobber the most vulnerable ethnic groups and the downtrodden only compounds feelings of inequality, injustice and hopelessness. It is as well stunning to watch COVID-19 hasten the partisan brawl. A nation terribly divided is split only more deeply on the process of restarting the economy. To witness rival global superpowers plunge further into accusation and enmity. And to see the coronavirus viciously attack Europe’s fragile periphery, further splitting a hopelessly divided Europe and pressuring a critical global Fault Line.
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The destructive force of bank credit
The destructive force of bank credit
Commentators routinely confuse the deflationary effects of a contraction of bank credit with the inflationary effects of central bank policies designed to offset it. Central banks always ensure their stimulus is greater, so inflation, not deflation, is always the outcome.
In order to understand bank credit, we must enter the mind of a banker and understand how it is created, why it is expanded and why expansion is always followed by a sharp contraction.
But we have now moved on from a simplistic credit cycle model, given the global economy was already facing a tendency for bank credit to contract before the coronavirus drove supply chains into the greatest global payment crisis in history. The problem is now so large that to maintain both economic stability and price levels for financial assets the central banks, led by the Fed, will have to issue so much base currency that fiat currencies will become almost worthless.
In these conditions the banks that survive the next several months will then begin to expand bank credit anew to buy up physical assets instead of their normal financial fare, sealing the fate of fiat currencies with a final expansion of bank credit as the banks themselves dump worthless currencies for real assets.
Introduction
Never has it been more important to understand the psychology and motivation behind changes in the level of bank credit at a time when governments and central banks are relying on commercial banks to transmit Keynesian stimuli to distressed borrowers. And never has it been more important for analysts to differentiate between deflationary forces that come entirely from the contraction of bank credit and inflationary forces that arise from central banks’ monetary policy.
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#MacroView: Is The “Debt Chasm” Too Big For The Fed To Fill?
#MacroView: Is The “Debt Chasm” Too Big For The Fed To Fill?
Over the last month, the Federal Reserve, and the Government, have unleashed a torrent of liquidity into the U.S. markets to offset a credit crisis of historic proportions. Here is a list of programs already implemented which have already surpassed all programs during the “Financial Crisis.”
- March 6th – $8.3 billion “emergency spending” package.
- March 12th – Federal Reserve supplies $1.5 trillion in liquidity.
- March 13th – President Trump pledges to reprieve student loan interest payments
- March 13th – President Trump declares a “National Emergency” freeing up $50 billion in funds.
- March 15th – Federal Reserve cuts rates to zero and launches $700 billion in “Q.E.”
- March 17th – Fed launches the Primary Dealer Credit Facility to buy corporate bonds.
- March 18th – Fed creates the Money Market Mutual Fund Liquidity Facility
- March 18th – President Trump signs “coronavirus” relief plan to expand paid leave ($100 billion)
- March 20th – President Trump invokes the Defense Production Act.
- March 23rd – Fed pledges “Unlimited QE” of Treasury, Mortgage, and Corporate Bonds.
- March 23rd – Fed launches two Corporate Credit Facilities:
- A Primary Market Facility (Issuance of new 4-year bonds for businesses.)
- A Secondary Market Facility (Purchase of corporate bonds and corporate bond ETF’s)
- March 23rd – Fed launches the Term Asset-Backed Security Loan Facility (Small Business Loans)
- April 9th – Fed launches several new programs:
- The Paycheck Protection Program Loan Facility (Purchase of $350 billion in SBA Loans)
- A Main Street Business Lending Program ($600 billion in additional Small Business Loans)
- The Municipal Liquidity Facility (Purchase of $500 billion in Municipal Bonds.)
- Expands funding for PMCCF, SMCCF and TALF up to $850 billion.
Here is the Fed’s balance sheet through this past Wednesday (estimated at time of writing)
It is currently expected that over the course of the next several quarters, the Fed’s balance sheet will grow to $10 Trillion in total. Such would be a $6 Trillion expansion from the previous levels.
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Bankrupting America
Bankrupting America
Source: AP Photo/Alex Brandon
Two weeks ago, President Donald Trump signed the largest stimulus bill in U.S. history: more than $2 trillion.
For once, both Republicans and Democrats agreed. The Senate voted 96-0. The House didn’t even bother with a formal vote.
At the White House, a reporter asked the president, pointing out that the bill includes $25 million for the Kennedy Center, “Shouldn’t that money be going to masks?”
“The Kennedy Center has suffered greatly because nobody can go there,” Trump responded. “They do need some funding. And look — that was a Democrat request. That was not my request. But you got to give them something.”
“Something” they got. The bill includes $25 million for Congressional salaries, $50 million for an Institute of Museum and Library Services and lots of other wasteful things.
Only a few politicians were wary. Rep. Thomas Massie complained that he wasn’t even allowed to speak against the bill.
Rep. Alex Mooney asked: “How do you pay for it? Borrow it from China, borrow it from Russia? Are we going to print the money?”
Those are good questions.
Our national debt is already $24 trillion. Now it will jump, percentage-wise, to where Greece’s debt was shortly before unemployment there hit 27%.
Greece was bailed out by the European Union. But the United States can’t be bailed out by others.
How will we pay off our debt? That’s the topic of my new video.
There are really three options:
1. Raise taxes.
2. Print money.
3. Default.
Let’s consider each:
1. Raising taxes on rich people is popular. Even Michael Bloomberg wants “higher taxes on billionaires” like him.
But raising taxes on the rich often kills the wealth and jobs some rich people create. And it won’t solve our debt problem. Even if we took all the billionaires’ wealth — reducing their net worth to zero — it would cover only an eighth of our debt.
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Nobody Knows Anything
Nobody Knows Anything
The more I read and observe the clearer the message: Nobody knows anything. And by that I mean nobody truly knows how any of this will turn out and I think this point needs to be driven home more clearly.
Tons of projections of this, that and the other. Just stop. I happen to think there are times to simply step back and not make grand predictions. For us that’s ok because we focus primarily on market technicals and that’s an ever evolving picture that offers us pivot points to decide when and where to get engaged in.
But on the macro? Give me a break. Nobody knows anything. Everybody is just guessing.
Exhibit A: GDP forecast for Q2:
Ok great. How’s that helping anyone in trying to value companies, cash flow, revenues, earnings? It doesn’t. -9% is a completely different planet than -40% and so is everything in between.
How does one qualify central bank and stimulus intervention? It changes every single day. Today the Fed cranked out an international repo program. Global central banks unite I guess. Also today Donald Trump tweeted about a $2 trillion infrastructure program. Who knows if it will happen. The Fed already increased its balance sheet by $1.3 trillion since the same time last year and may well be heading toward $9 or $10 trillion balance sheet position within a year. Last week they added $600B, basically all of QE2 in a week.
These are insane numbers thrown around, all on top of the $2.2 trillion stimulus package just passed. What’s the deficit going to be? I guess it depends on whether GDP drops by 40% or 9%.
Give me a break. How do you make any forecasts that have a predictive meaning whatsoever in this environment? Other than a lucky guess, the answer is nobody. Why? Because nobody knows anything.
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Atlas Is Shrugging
Atlas Is Shrugging
“Government help to business is just as disastrous as government persecution… The only way a government can be of service to national prosperity is by keeping its hands off.”
– Ayn Rand
Congress has just approved an economically bloated $2.2 trillion spending relief bill, an amount more substantial than the GDP of all but a handful of countries. It is only the third massive relief bill, and we’ve been told several trillion dollars more would have to get spent. Then there are the trillions of dollars more of Federal Reserve Board liquidity injections.
We are starting to talk about real money here.
The politicians believe that sending $1,200 checks to people will “stimulate” the economy.
Among the many mistaken provisions of this new law is a welfare benefit to workers that pays them more money if they quit and become unemployed than if they stay on the job.
Here we go again.
A decade ago, during the height of the folly of the bank bailouts and trillions of dollars of spending for “shovel-ready projects” (that didn’t create jobs but plunged our nation into greater indebtedness), I noted in a Wall Street Journal article that with each successive bailout and multibillion-dollar economic stimulus scheme from Washington, the politicians were reenacting the very acts of economic stupidity that Ayn Rand parodied in her 1,000-page-plus 1957 novel “Atlas Shrugged.” In many surveys, “Atlas” rates as the second most influential book of all time behind the Bible.
For those of you who have not read it (first, shame on you!), the moral of the story is that politicians invariably respond to crises—that, in most cases, they created—by spewing out new, mindless government programs, laws and regulations.
These, in turn, generate more havoc and poverty, which inspires the politicians to spawn even more programs. At which point, the downward spiral repeats itself until there is a thorough societal collapse.
Isn’t this precisely what is happening now?
Covid-19 Helicopter Money: Go Big Now or Go Home
Covid-19 Helicopter Money: Go Big Now or Go Home
This is why it’s imperative to go big now, and make plans to sustain the most vulnerable households and small employers not for two weeks but for six months–or however long proves necessary.
That governments around the world will be forced to distribute “helicopter money” to keep their people fed and housed and their economies from imploding is already a given. Closing all non-essential businesses and gatherings will crimp the livelihood of millions of households and small businesses that lack the financial resources to survive weeks without any revenues.
The only question is whether governments which can borrow or print fresh currency will get ahead of the implosion or fall behind, creating a binary choice: go big now or go home.
Half-measures in helicopter money work about as well as half-measures in quarantine, i.e. they fail to achieve the intended objectives. Dribbling out modest low-interest loans is a half-measure, as is cutting payroll taxes. Neither measure will help employees or small businesses whose income has fallen below the minimum needed to pay essential bills: rent, food, utilities, etc.
Meanwhile, the ruling elites will be under increasing pressure to bail out greedy financial elites and gamblers–the same scoundrels and parasites they bailed out in 2008-09. But this is not just another speculative bubble-pop, this is a matter of life and death and solvency for the masses of at-risk households and small businesses. It is a different zeitgeist and a different crisis, and bailing out greedy parasites (banks, indebted corporations, speculators, financiers, etc.) will not go over big while households and small businesses are going bankrupt.
The Federal Reserve, was just handed a lesson in the ineffectiveness of the usual monetary “bazooka” in bailing out the predatory-parasitic class of overleveraged gamblers.
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Global Demographic Fact Vs. Central Bank Sorcery
Global Demographic Fact Vs. Central Bank Sorcery
Summary
- The annual growth of the working-age population is the organic baseline for growth in national, regional, and global consumption.
- However, since World War II, interest rate policy has moved inversely of annual working-age population growth, to incent ever more debt as working-age population growth has decelerated to nothing.
- Interestingly, total annual change in energy consumption has mirrored annual working-age population growth.except where synthetic growth has been temporarily substituted to maintain the appearance of growth (aka, China).
- Eventually, the inorganically rising consumption and asset prices will return to their organic baseline.and that will be a very rude new dawn for those who believed in infinite growth.
The 1st world economy lives within a fractional reserve banking system. In a fractional reserve system, one persons debt is the systems new money, as money is lent into existence. At a progressive rate since 1980, it has been the combination of decelerating working-age population growth, declining interest rates, and ramping utilization of privately loaned debt that has simultaneously been the basis for increasing consumption and the creation of new money. As borrowers undertook new loans prior to 2008, this borrowing was the primary means of monetary growth. However, the changing demography since 2008 has changed everything as population growth has shifted from young to old…and federal governments and central banks have taken over money creation via monetization resulting in asset inflation.
- New debt is primarily undertaken in the 1st world nations where income and savings are higher but also credit is readily available and standards for this credit vary widely, by asset type (zero for student loans, low for vehicles, moderate to high for homes…since ’07).
- It is primarily the working-age population that undertakes new debt while those in the post working age population tend to deleverage and pay down existing loans (this has the opposite monetary effect of destroying money).
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