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“They just won’t let the scales balance… it is a rampant narcissistic megalomania that somehow some guy in a air-conditioned office can best repliacte the free market and centrally plan our affairs… Their starry-eyed pollyanna-ish do-goodery never seems to pan out.“

In the flux of never before seen economic uncertainty, Stefan Molyneux and Mike Maloney discuss the difference between currency and money, the historical role of gold as money, the dependence of the United States government on Wall Street for tax revenue, the role of the Federal Reserve in the creation of unstable economic bubbles, the possibility of deflation, $20,000 gold and how you can protect yourself in these uncertain economic times.

Who Owns the Federal Reserve Bank and Why is It Shrouded in Myths and Mysteries?

December 19, 2015

Who Owns the Federal Reserve Bank and Why is It Shrouded in Myths and Mysteries?

Federal Reserve

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

— Henry Ford

“Give me control of a Nation’s money supply, and I care not who makes its laws.”

— M. A. Rothschild

The Federal Reserve Bank (or simply the Fed), is shrouded in a number of myths and mysteries. These include its name, its ownership, its purported independence form external influences, and its presumed commitment to market stability, economic growth and public interest.

The first MAJOR MYTH, accepted by most people in and outside of the United States, is that the Fed is owned by the Federal government, as implied by its name: the Federal Reserve Bank. In reality, however, it is a private institution whose shareholders are commercial banks; it is the “bankers’ bank.” Like other corporations, it is guided by and committed to the interests of its shareholders—pro forma supervision of the Congress notwithstanding.

The choice of the word “Federal” in the name of the bank thus seems to be a deliberate misnomer—designed to create the impression that it is a public entity. Indeed, misrepresentation of its ownership is not merely by implication or impression created by its name. More importantly, it is also officially and explicitly stated on its Website: “The Federal Reserve System fulfills its public mission as an independent entity within government. It is not owned by anyone and is not a private, profit-making institution” [1].

To unmask this blatant misrepresentation, the late Congressman Louis McFadden, Chairman of the House Banking and Currency Committee in the 1930s, described the Fed in the following words:

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

The FOMC Decision, US Money Supply and the Economy

December 19, 2015

The FOMC Decision, US Money Supply and the Economy

Giving the Kremlinologists Something to Do

As is well known by now, on Wednesday the US central monetary planning bureau finally went through with its threat to hike the target range for overnight bank lending rates from nothing to almost nothing.

2-nauticalmodernboatinterior

Photo credit: Luca Brenta

The very next day, the effective federal funds rate had increased from 15 to 37 basis points – moreover, as illustrated by the trend in short term rates prior to the FOMC meeting, the markets had already fully anticipated the rate hike:

US 3-month t-bill discount rate and the one year t-note yield: between the October and December FOMC meetings, the markets fully discounted the impending rate hike. Once again we can see that there is actually a feedback loop between the Fed and the markets, and that it is not true that the Fed has absolutely no control over interest rates (even though the degree of its control is limited) – click to enlarge.

Of course, some markets still managed to act surprised (and/or confused), most prominently the US stock market, which is traditionally the very last market to get the memo, regardless of what is at issue. This is why asset bubbles so often end in crashes – market participants tend to very “suddenly” realize that something is amiss.

This time, the trusty WSJ FOMC statement tracker reveals that the planners have given us Kremlinologists something to do, by changing the statement’s content quite a bit. By contrast to the previous carbon copy approach, it tells a completely new story. Well, almost.

Between the October and the December meetings, the minds of the committee members have evidently experienced a great epiphany. Suddenly they have realized that the economy is indeed just awesome.

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

Peter Schiff: “Mission Accomplished”

December 18, 2015

Peter Schiff: “Mission Accomplished”

Mission Accomplished

On May 1, 2003 on the flight deck of the USS Abraham Lincoln then President George W. Bush, after becoming the first U.S. president to land on an aircraft carrier in a fixed wing aircraft (in a dashing olive drab flight suit), declared underneath an enormous “Mission Accomplished” banner that “major combat operations” in Iraq had been concluded, that regime change had been effected, and that America had prevailed in its mission to transform the Middle East. 13 years later, after years of additional combat operations in Iraq, and a Middle East that is spiraling out of control and increasingly disdainful of America’s influence, we look back at the “Mission Accomplished” event as the epitome of false confidence and premature celebration.

The image of W on the flight deck comes to mind in much of the reaction to this week’s decision by the Federal Reserve to raise interest rates for the first time in nearly a decade. While many in the media and on Wall Street talked of a “concluded experiment” and the “dawning of a new era,” few realize that we are just as firmly caught in the thickets of failed policy as were Bush, Cheney, and Rumsfeld in the misunderstood quagmire of 2003 Iraq.

In its initial story of the day’s events, The Washington Post (12/16/15) declared that by raising the Fed Funds rate to one quarter of a percent The Fed is “ending an era of easy money that helped save the nation from another Great Depression.” Putting aside the fact that 25 basis points is still 175 points below the near 2.0% rate of core inflation that the government has reported over the past 12 months (and should therefore be considered undeniably easy), the more important question to ask is into what environment the Fed is apparently turning this page.

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

Canadian dollar tumbles to close below 72 cents US

December 18, 2015

Canadian dollar tumbles to close below 72 cents US

Oil slips below $35 US amid continuing strength of U.S. dollar

Some analysts say the loonie could eventually fall to 70 cents US as the currency is pressured by low commodity prices, and the diverging interest rate policies of Canada and the United States.

Some analysts say the loonie could eventually fall to 70 cents US as the currency is pressured by low commodity prices, and the diverging interest rate policies of Canada and the United States. (Mark Blinch/Reuters)

UPDATED

Loonie has lost 17% of its value in 2015, the second-worst year it’s ever had

The Canadian dollar continued its slide today, closing below the 72-cent US mark for the first time since the spring of 2004.

The loonie ended the trading day at 71.68 cents US, down more than four-fifths of a cent from its close Wednesday. At one point during the day, it was down more than a full cent.

Put another way, it now costs almost $1.40 Cdn at official exchange rates to buy a single U.S. dollar. Tack on service fees charged by banks and anyone buying American currency at their local financial institution will end up paying $1.43 or so.

The loonie is on track to post its second-worst year ever, down 17 per cent since Jan. 1, and there’s still a week to go, Bank of Montreal economist Doug Porter noted Thursday. “The only bigger annual decline was in the extreme conditions of 2008, when the Canadian dollar fell 18.6 per cent — a threshold I thought would never even be approached again,” Porter said.

Several factors

The dollar’s drop has been fuelled by several factors, including the continuing slide in oil prices, and the diverging monetary policies of Canada and the United States.

The U.S. Federal Reserve on Wednesday began raising its key lending rate for the first time in nearly 10 years, while the Bank of Canada has indicated it’s in no hurry to follow suit. Some analysts say the Bank of Canada may have to lower rates to jump start the economy.

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

Our “Star Wars” Economy: The Fed-Farce Awakens

December 18, 2015

Our “Star Wars” Economy: The Fed-Farce Awakens

The Fed’s hubris has led it to the Dark Side.

It’s not just a movie, it’s real life: the Fed-Farce awakens. Now that the Federal Reserve has finally voted to “restore order to the galaxy” with a tiny .25% rate increase, the true measure of our travesty of a mockery of a sham economy–in a phrase, The Fed-Farce–has been revealed.

Here’s a snapshot of the Fed meeting, “restoring order to the galaxy” in a show of unanimous galactic-scale hubris:

If we had to list the fatal wounds inflicted on the economy by the Fed-Farce’s financial repression, we might start with: the Fed’s flood of cheap credit has not boosted productivity, it’s only boosted speculation. Why is this fatal?

Productivity is the engine of wealth creation. Speculation is the engine of wealth inequality and devastating boom/bust cycles. This is self-evident, but unfortunately the Dark Side can also conjure mind-tricks in the weak-minded (for example, Congress, the mainstream media, etc.): the Fed has successfully conned the weak-minded into believing that speculative frenzies of mal-investment and Fed-fueled asset bubbles are the sources of healthy growth.

A funny thing happens when you give unlimited borrowing power at near-zero interest rates to financiers and corporations: they use the free money not to hire more people (that would be incredibly dumb–employees cost money!) but to buy up shares in their own companies and snap up income-producing assets such as rental apartment complexes.

$1 trillion in stock buybacks creates zero jobs. Borrowing $1 trillion to buy back shares (and thus boost the personal wealth of managers and owners) does not create a single job. Repurchasing the company’s stock reduces the number of shares outstanding, which increases your earnings per share without increasing sales or net profits.

In other words, stock buybacks are just another Dark Side mind-trick.

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

Sell The Bonds, Sell The Stocks, Sell The House —–Dread The Fed!

December 18, 2015

Sell The Bonds, Sell The Stocks, Sell The House —–Dread The Fed!

There is going to be carnage in the casino, and the proof lies in the transcript of Janet Yellen’s press conference. She did not say one word about the real world; it was all about the hypothecated world embedded in the Fed’s tinker toy model of the US economy.

Yes, tinker toys are what kids used to play with back in the 1950s and 1960s, and that’s when Janet acquired her school-girl model of the nation’s economy.

But since that model is so frightfully primitive, mechanical, incomplete, stylized and obsolete, it tells almost nothing of relevance about where the markets and economy now stand; or what forces are driving them; or where they are headed in the period just ahead.

In fact, Yellen’s tinker toy model is so deficient as to confirm that she and her posse are essentially flying blind. That alone should give investors pause—-especially because Yellen confessed explicitly that “monetary policy is an exercise in forecasting”.

Accordingly, her answers were riddled with ritualistic reminders about all the dashboards, incoming data and economic system telemetry that the Fed is vigilantly monitoring. But all that minding of everybody else’s business is not a virtue—-its proof that Yellen is the ultimate Keynesian catechumen.

This stupendously naïve old school marm still believes the received Keynesian scriptures as penned by the 1960s-era apostles James(Tobin), John (Galbraith), Paul (Samuelson) and Walter (Heller).

But c’mon.Those ancient texts have no relevance to the debt-saturated, state-dominated, hideously over-capacitated global economy of 2015. They just convey a stupid little paint-by-the-numbers simulacrum of what a purportedly closed domestic economy looked like even back then.

That is, before Richard Nixon had finally destroyed Bretton Woods and turned over the Fed’s printing presses to power aggrandizing PhDs; and before Mr. Deng had thrown out Mao’s little red book in favor of a central bank based credit Ponzi.

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

Doomsayers are wrong (so far) as U.S. Fed raises rates: Don Pittis

December 17, 2015

Doomsayers are wrong (so far) as U.S. Fed raises rates: Don Pittis

Breaking the ice on frozen rates has calmed markets, not roiled them

U.S. Federal Reserve chair Janet Yellen oozed confidence as she announced a hike in interest rates yesterday. Markets responded in kind.

U.S. Federal Reserve chair Janet Yellen oozed confidence as she announced a hike in interest rates yesterday. Markets responded in kind. (Reuters)

“Remember, we have very low rates and we’ve made a very small move.”

With those words, U.S. Federal Reserve chair Janet Yellen meant to reassure ordinary Americans that yesterday’s quarter-point hike in interest rates, labelled “historic” after seven years near zero, was really nothing much to worry about.

With everyone from Harvard’s Larry Summers, to IMF boss Christine Lagarde to the Financial Times warning of the economic risk of raising rates, it appears that, so far at least, Yellen’s reassuring words were effective far beyond Main Street, extending to financial markets around the world.

If there are economists who think interest rates should stay at zero forever, I’ve never met them. So the issue was not whether rates should rise, but when.

With almost two years in the job as head of the world’s most powerful central bank, Yellen was able to present a calm and rational case for why the Fed did have to move now.

Calming effect

As some predicted earlier this year, the announcement of a rise in rates was far more soothing than the speculation and doomsaying that came before.

Challenged at yesterday’s news conference by a reporter who quipped central banks often kill off periods of economic growth by raising rates, Yellen had a confident response. She said the reason that sometimes happened was that central banks moved too late, allowing inflation to get out of control.

“At that point they’ve had to [raise interest rates] very abruptly and very substantially,” said Yellen. “And it has caused a downturn, and the downturn has served to lower inflation.”

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

On US Interest Rates

December 17, 2015

On US Interest Rates

The first US interest rate increase since June 2006 is a pivotal moment for the global economy, launching what Mohamed El-Erian, Chief Economic Adviser at Allianz, calls the “great policy divergence,” with repercussions in every region and financial market. The impact will be particularly powerful in emerging countries, where currencies are vulnerable to a rising dollar and tightening liquidity conditions in the US. Project Syndicate’s commentators – some of the world’s preeminent economists and policymakers – have examined the issue from four broad angles.

What is the immediate and longer-term outlook for US monetary policy?

The Fed’s leaders have repeatedly said that they plan to raise interest rates much more slowly than in previous periods of monetary tightening. Such assurances from central bankers cannot always be trusted, but Fed Chair Janet Yellen’s promises to move more gradually than in the past are credible, because the Fed is genuinely determined to push inflation higher and to ensure that it never again falls much below 2%.

Nobel laureate Joseph Stiglitz provides further grounds for discounting the likelihood of faster tightening. Instead of trying to control inflation, according to Stiglitz, the Fed’s main concern now is to reduce unemployment and counteract inequality. To do this, the Fed must continue to stimulate the US economy with easy money. Even the quarter-point rate hike that the Fed’s just announced is, in Stiglitz’s view, dangerous and premature.

Moreover, while the Fed’s official responsibility is to manage the US economy, its leadership fully understands the international impact of Fed decisions. Thus, Harvard’s Carmen Reinhart, an authority on global debt crises, believes the Fed will “favor gradualism” to avoid wreaking havoc in emerging economies that are overloaded with dollar debts. In a related argument, Barry Eichengreen, the Berkeley economic historian, suggests that US monetary policy is now effectively “Made in China,” because China’s efforts to stabilize the renminbi have already tightened US monetary conditions by the equivalent of the quarter-point rate hike expected on December 16.

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

Money Velocity Is Crashing–Here’s Why

December 17, 2015

Money Velocity Is Crashing–Here’s Why

The inescapable conclusion is that Fed policies have effectively crashed the velocity of money.

That the velocity of money has been crashing while the money supply has been exploding doesn’t seem to bother the mainstream pundits. There is always a fancy-footwork explanation of why whatever is crashing no longer matters.

Take a look at these two charts and tell me money velocity doesn’t matter.First, here’s money supply: notice how money supply leaped from 2001 to 2008 as the Federal Reserve pumped liquidity and credit into the economy, and then how it exploded higher as the Fed went all in after the Global Financial Meltdown.

Now look at a brief history of the velocity of money. There are various measures of money supply and various interpretations of velocity, but let’s set those quibbles aside and compare money velocity in the “golden era” of the 1950s/1960s and the stagflationary 1970s to the present era from 2008 to 2015–the era of “growth”:

Notice how the velocity of money remained in a mild uptrend during both good times and not so good times. The inflationary peak of 1979-1982 (Treasury yields were 16% and mortgages were 18%) generated a spike, but velocity soon returned to its uptrending channel.

The speculative excesses of the dot-com era pushed velocity to unprecedented heights. Given the extremes in velocity, it is unsurprising that it quickly fell in the dot-com bust.

The Federal Reserve launched an unprecedented expansion of money, credit and liquidity that again pushed velocity up in the speculative frenzy of the housing bubble. But note that despite the vast expansion of money supply, the peak in the velocity of money was considerably lower than the dot-com peak.

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

Why the Fed Is WRONG About Interest Rates

December 17, 2015

Why the Fed Is WRONG About Interest Rates

Richard Werner – an economics professor and the creator of quantitative easing – says that it’s a myth that interest rates drive the level of economic activity. The data shows that the opposite is true: rates lagthe economy.

Economics prof Steve Keen – who called the Great Recession before it happened – points out today in Forbes that the Fed’s rate dashboard is missing crucial instrumentation:

The Fed will probably hike rates 2 to 4 more times—maybe even get the rate back to 1 per cent—and then suddenly find that the economy “unexpectedly” takes a turn for the worse, and be forced to start cutting rates again.

This is because there are at least two more numbers that need to be factored in to get an adequate handle on the economy: 142 and 6—the level and the rate of change of private debt. Several other numbers matter too—the current account and the government deficit for starters—but private debt is the most significant omitted variable in The Fed’s toy model of the economy. These two numbers (shown in Figure 2) explain why the US economy is growing now, and also why it won’t keep growing for long—especially if The Fed embarks on a period of rate hiking.

Figure 2: The two key numbers The Fed is ignoring

[T]he dilemma this poses for The Fed—a dilemma about which it is blissfully unaware—is that a sustained growth rate of credit faster than GDP is needed to generate the magic numbers on which it is placing its current wager in favor of higher interest rates.

The Fed, along with all mainstream economists, dismisses this argument on the basis that the level of private debt doesn’t matter to the macroeconomy: for every debtor who can spend less because of higher rates, there is a saver who can spend more, so the two effects cancel out.

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

A Free Market in Interest Rates

December 17, 2015

A Free Market in Interest Rates

The Corn Control Agency

Unless you’re living under a rock, you know that we have an administered interest rate. This means that the bureaucrats at the Federal Reserve decide what’s good for the little people. Then they impose it on us.

In trying to return to freedom, many people wonder why couldn’t we let the market set the interest rate. After all, we don’t have a Corn Control Agency or a Lumber Board (pun intended). So why do we have a Federal Open Market Committee? It’s a very good question.

Federal_Open_Market_Committee_Meeting Where the central planers meet. It’s all very Sovietesque, except the furniture isn’t as run-down as it used to be at GOSPLAN
Photo credit: Nils Tycho

Someone asked it at the recent Cato Monetary Conference. George Selgin answered: no matter if the Fed stands pat or does something, it’s still setting rates. This is a profound truth, which brings us to a fatal flaw in the dollar.

In our irredeemable currency, interest cannot be set by the market. There’s literally no mechanism for it. To understand why, let’s start by looking at the gold standard.

Under gold, the saver always has a choice. If he likes the rate of interest, he can deposit his gold coin. If not, he can withdraw it. By withdrawing, he forces the bank to sell an asset.

That in turn ticks down the price of the bond, which is the same as ticking up the rate of interest. His preference has real teeth, and that’s an essential corrective mechanism.

Unfortunately, the government removed gold from the monetary system. Now you can own it, but your choices have no effect on interest. If you buy gold, then you get out of the banking system.

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

U.S. interest rate hike will be tough medicine for indebted Canada

December 16, 2015

U.S. interest rate hike will be tough medicine for indebted Canada

America has had its housing market ‘correction,’ ours is yet to come

Federal Reserve Chair Janet Yellen at the Economics Club of Washington earlier this month. She is widely expected to raise the Feds main interest rate today, for the first time in nine years.

Federal Reserve Chair Janet Yellen at the Economics Club of Washington earlier this month. She is widely expected to raise the Feds main interest rate today, for the first time in nine years. (Susan Walsh/Associated Press)

Let’s look at the unfortunate facts for a moment.

The U.S. Federal Reserve appears ready to raise interest rates slightly today, because it believes an American recovery is well underway. The U.S. economy is now at what economists would call full employment — about five per cent.

Good for them. An American recovery cannot be anything but good for Canada.

And yet.

The Canadian economy is weak enough that Bank of Canada governor Stephen Poloz is now actually talking about the possibility of going the other way, all the way to negative rates, which means you’d be better off stuffing cash into a mattress.

That would penalize savers and push people to take risks in search of return. (It also means an even lower Canadian dollar; what a difference a few years make.)

The unemployment rate here is now 7.1 per cent.

Americans, having been terrified out of their wastrel-grasshopper lifestyle back in 2008, when it looked as though their financial world was coming to an end, have been trimming back debt and actually saving.

As a result, American household finances haven’t been in this good shape for many years.

But Canadians, addicted to the cocaine of nearly free money, keep setting records for household debt. The average Canadian household now owes $1.64 for every dollar of income.

Canadian debt, to put it plainly, is increasing a lot faster than Canadian incomes.

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

Grant Williams: The End Of The Road

December 16, 2015

Grant Williams: The End Of The Road

The Fed is finally boxed in

Grant Williams returns this week to set the context for this week’s FOMC meeting, where the Federal Reserve is widely expected to hike interest rates for the first time in nearly a decade. To say he is very skeptical of the Fed’s ability to continue to control market forces much longer is a gross understatement:

None of this has been tried before and, to me, that just demonstrates the dangers. Once you get into a situation like the central banks did in ’08 with this panicking — everyone calls it the Hotel California — you can’t get out. And, so incrementally, they have to keep doing something. Instead of stepping back and letting free markets and business cycles and forces of nature have their way and flush out all of the impurities in the system, this is what happens. And, yet, this time, for whatever reason, I think since post-Volker, Greenspan has basically started this ball rolling with this knee-jerk reaction to slash interest rates. And, you can kind of understand it, because everyone was still traumatized by the high inflation of the ‘70s. But, they started and they started down that road.

And, if you look at a chart of interest rates in the U.S., you can see. It’s just, from 1980—I’ve marked two points on all my charts for presentations. One is the end of the gold standard, August 15, ’71, when Nixon closed the gold window. And, the next is peak interest rates in 1980. And, if you look at those two charts and you see what’s happened with interest rates since, they’ve been on a course to hit zero ever since.

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

There’s No Upside Left

December 16, 2015

There’s No Upside Left

The upside is ephemeral, illusory or wishful thinking; the downside is real and lasting.

There’s no upside left–not just in the real economy, but in jobs, politics or policy tweaks. Yes, there will be huge relief rallies in the stock market–relief that the Fed is still omnipotent, that the Fed didn’t destroy the world by withdrawing liquidity, etc., etc., etc.–but in terms of sales and profits, there’s no upside left: an increasingly nervous upper middle class is reining in profligate spending, while everyone below the top 10% is running out of credit cards, student loans, etc. to tap.

Whatever surplus the real economy generated has been skimmed by financiers, lenders and the central state. Stock buybacks have boosted the wealth of corporate managers and institutional owners while creating zero jobs; lenders have feasted on high-interest credit cards, federally backed student loans and subprime auto loans that are immediately spun off to credulous suckers (Widows and Orphans Fund of Norway, et al.) as high-yield securitized debt.

Anyone working for Corporate America or government has little upside but plenty of downside: bonuses are being slashed, divisions closed, sold off or privatized in the case of government, all to cut costs.

State and local pension funds, bloated by seven years of speculative frenzy, are about to start bleeding from every orifice as reality and risk intrude on the central banks’ fantasy of never-ending asset bubbles.

Whatever pension and bennies you were promised–start practicing your fractions, because only a fraction of the bloated promises made by politicos desperate to get re-elected can be paid in the real world.

Doing a great job will either get you fired or overworked: no upside there. If you have the courage (or foolish devotion to truth) to be honest, then you’ll be fired as a disruptive “non-team-player” who stepped on too many toes in the pursuit of excellence.

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

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