Home » Posts tagged 'credit bubble' (Page 2)
Tag Archives: credit bubble
From ZIRP to NIRP
From ZIRP to NIRP
The sudden end of the Fed’s ambition to raise interest rates above the zero bound, coupled with the FOMC’s minutes, which expressed concerns about emerging market economies, has got financial scribblers writing about negative interest rate policies (NIRP).
Coincidentally, Andrew Haldane, the chief economist at the Bank of England, published a much commented-on speech giving us a window into the minds of central bankers, with zero interest rate policies (ZIRP) having failed in their objectives.
Of course, Haldane does not openly admit to ZIRP failing, but the fact that we are where we are is hardly an advertisement for successful monetary policies. The bare statistical recovery in the UK, Germany and possibly the US is slender evidence of some result, but whether or not that is solely due to interest rate policies cannot be convincingly proved. And now, exogenous factors, such as China’s deflating credit bubble and its knock-on effect on other emerging market economies, are being blamed for the deteriorating economic outlook faced by the welfare states, and the possible contribution of monetary policy to this failure is never discussed.
Anyway, the relative stability in the welfare economies appears to be coming to an end. Worryingly for central bankers, with interest rates at the zero bound, their conventional interest rate weapon is out of ammunition. They appear to now believe in only two broad options if a slump is to be avoided: more quantitative easing and NIRP. There is however a market problem with QE, not mentioned by Haldane, in that it is counterpart to a withdrawal of high quality financial collateral, which raises liquidity issues in the shadow banking system. This leaves NIRP, which central bankers hope will succeed where ZIRP failed.
…click on the above link to read the rest of the article…
The Unwind
The Unwind
It’s my overarching thesis that the world is in the waning days of a historic multi-decade experiment in unfettered finance. As I have posited over the years, international finance has for too long been effectively operating without constraints on either the quantity or the quality of Credit issued. From the perspective of unsound finance on a globalized basis, this period has been unique. History, however, is replete with isolated episodes of booms fueled by bouts of unsound money and Credit – monetary fiascos inevitably ending in disaster. I see discomforting confirmation that the current historic global monetary fiasco’s disaster phase is now unfolding. It is within this context that readers should view recent market instability.
It’s been 25 years of analyzing U.S. finance and the great U.S. Credit Bubble. When it comes to sustaining the Credit boom, at this point we’ve seen the most extraordinary measures along with about every trick in the book. When the banking system was left severely impaired from late-eighties excess, the Greenspan Fed surreptitiously nurtured non-bank Credit expansion. There was the unprecedented GSE boom, recklessly fomented by explicit and implied Washington backing. We’ve witnessed unprecedented growth in “Wall Street finance” – securitizations and sophisticated financial instruments and vehicles. There was the explosion in hedge funds and leveraged speculation. And, of course, there’s the tangled derivatives world that ballooned to an unfathomable hundreds of Trillions. Our central bank has championed it all.
Importantly, the promotion of “market-based” finance dictated a subtle yet profound change in policymaking. A functioning New Age financial structure required that the Federal Reserve backstop the securities markets.
…click on the above link to read the rest of the article…
The REAL Reason China’s Economy Is Crashing
The REAL Reason China’s Economy Is Crashing
China 2015 = U.S. 2008
We noted in 2009, in a piece titled “China 2009 = America 2001 = Rome 11 BC“:
One of the top experts on China’s economy – [economics professor] Michael Pettis – has a very long but interesting essay arguing that China is blowing a giant credit bubble to avoid the global downturn.
Pettis documents reports and statistics from modern China, of course. But he ends with a must-read comparison to ancient Rome:
Let me post here a portion of Chapter 15 from Will Durant’s History of Roman Civilization and of Christianity from their beginnings to AD 325
The famous “panic” of A.D. 33 illustrates the development and complex interdependence of banks and commerce in the Empire. Augustus had coined and spent money lavishly, on the theory that its increased circulation, low interest rates, and rising prices would stimulate business. They did; but as the process could not go on forever, a reaction set in as early as 10 B.C., when this flush minting ceased. Tiberius rebounded to the opposite theory that the most economical economy is the best. He severely limited the governmental expenditures, sharply restricted new issues of currency, and hoarded 2,700,000,000 sesterces in the Treasury.
The resulting dearth of circulating medium was made worse by the drain of money eastward in exchange for luxuries. Prices fell, interest rates rose, creditors foreclosed on debtors, debtors sued usurers, and money-lending almost ceased. The Senate tried to check the export of capital by requiring a high percentage of every senator’s fortune to be invested in Italian land; senators thereupon called in loans and foreclosed mortgages to raise cash, and the crisis rose. When the senator Publius Spinther notified the bank of Balbus and Ollius that he must withdraw 30,000,000 sesterces to comply with the new law, the firm announced its bankruptcy.
…click on the above link to read the rest of the article…
Riskiest End of the Junk Bond Market Just Blew Up
Riskiest End of the Junk Bond Market Just Blew Up
You wouldn’t know by looking at the US Treasury market, which remained relatively sanguine this week, with only a little panic buying on Tuesday. So 10-year Treasuries ended the week near where they’d started it. But at the other end of the spectrum, the riskiest portion of the junk bond market just blew up spectacularly.
There were a lot of culprits to catch the blame. At the top of the list was the devaluation of the Chinese yuan. It caught the corporate bond markets by surprise, though it shouldn’t have, injected all kinds of stress into them, and drove up bond spreads, with investors demanding a higher yields for riskier bonds. It hit the riskiest segment of the junk bond market with a sledge hammer.
Given the precarious state of the current credit bubble and the pandemic nervousness about it, bond investors were rattled by the moves of the People’s Bank of China. In prior crises, such as the 1997 Asian financial crisis and the 2008-2009 Global Financial Crisis, the PBOC had maintained a fixed exchange rate with the dollar. It didn’t devalue, as other countries were doing, to get out of the crisis. The yuan was seen as stabilizing the markets. Now the yuan is seen as destabilizing the markets.
It didn’t help that the Fed’s cacophony has been pointing at a September rate hike. It would be the first ever in the careers of millennials working on Wall Street. It would bring to an end the 30-year bull market in bonds. Even most middle-aged money managers have not yet experienced the alternative, other than a few short-lived dips and panics. On a visceral level, they simply can’t believe rates can ever rise over the long term. To them, rates can only go down.
…click on the above link to read the rest of the article…
SoT #41 – Wolf Richter: How Will The Global Asset Bubbles Unfold?
SoT #41 – Wolf Richter: How Will The Global Asset Bubbles Unfold?
Stock bubble, credit market bubbles and housing market bubbles. Unfettered money printing by Central Banks globally have created massive bubbles of unprecedented proportions across all asset classes.
Once Government and the Central Banks lose the power to stop markets from going down, you’ll have situation that spirals out of control quickly. – Wolf Richter, The Shadow of Truth
Wolf sees China eventually emerging as the world’s new number one, but believes that first it must “cleanse” the massive excesses – asset bubbles fueled by a massive credit bubble – with a painful financial and economic correction.
He also thinks that there’s a strong possibility that the 30% stock market correction in China is a preview of what is coming to the United States:
I am convinced that it’s very difficult to impossible to make a significant amount of money in U.S. stocks going forward. I think they’re all pretty much overpriced – way overpriced. – Wolf Richter
The biggest problem Wolf sees with the United States is the Federal Reserve. The Fed’s money printing has enabled the Government to incur a massive load of a debt and enables Congress to operate free from any budgetary contstraints:
As long as the Fed keeps buying Government bonds, Congress does not need to address this country’s fiscal problems.
Finally, we take a look at the reinflation of the housing bubble by the Fed. Wolf is one of the few blog writers who offers insightful analysis on the housing market.
– See more at: http://thedailycoin.org/?p=35741#sthash.eL9uB69m.dpuf
When Bonds Go Kaboom!
When Bonds Go Kaboom!
We’re not the only ones giving Neanderthal advice about holding on to physical cash. British newspaper the Telegraph reports:
The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress. Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008…
The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash,” an unusual suggestion from a mainstream fund manager.
The Fuse Is Lit
The markets seem to be in wait-and-see mode. Yesterday, we were waiting to see what happens in Greece. Today, we wait to see what happens in the bond markets. We watch them like we watch a stick of dynamite. For a long time, it might sit there… silent… still…
Then all of a sudden – kaboom!
At the end of January, it looked as though bond yields had finally found their bottom. With $5 trillion of sovereign debt trading at negative yields, bond prices began to fall. And yields, which move in the opposite direction to prices, started to rise.
Not for the first time did we think: The fuse is lit!
We were 33 years old when this bond market made its last turn. The yield on the 10-year Treasury bond hit a high of almost 15% in 1982. Yields have been trending downward ever since. If we had only imagined what would happen next!
…click on the above link to read the rest of the article…
A Much Bigger Threat Than Our National Debt
A Much Bigger Threat Than Our National Debt
The markets are acting as though it was already summer. They are wandering around with little ambition in either direction.
Meanwhile, we’ve been wondering about… and trying to explain… what it is we are really doing at the Diary.
We expect a violent monetary shock, in which the dollar – the physical, paper dollar – disappears.
But why?
Credit Bubble, the Sequel
As you know, we tend to take the side of the underdogs… as well as half-wits, dipsomaniacs, and unrepentant romantics.
But currently, we are standing up for the young, the poor, and all the others the credit bubble has hurt and handicapped.
It’s not that we are saints or do-gooders. We are just trying to make a living, like everybody else.
But we come at it from a different direction than most. Almost all the movers and shakers have the same bias: They want to see the credit extravaganza continue.
The Federal Reserve has already “invested” (if that’s the right word for throwing phony money down the drain in a futile and jackass effort to hold off the future) $4.5 trillion to protect the balance sheets of the elite.
This money has been amplified by zero-interest-rate policies to something like $17 trillion of stock market gains… and umpteen trillion in bond and real estate profits.
Naturally, the people who own these things – and not coincidentally provide early stage funding for congressional and presidential candidates – do not want to see a new movie.
They want to see the sequel, Credit Bubble 5. Then Credit Bubble 6. And so on…
And the show goes on! They buy their candidates. They place their ads. The newspapers they support voice their opinions. Their corporations wheel and deal on Wall Street, spinning off bonuses, fees… and even higher stock prices.
And the pet economists appointed to run central banks do their bidding.
…click on the above link to read the rest of the article…
What We Learned over Dinner from a Swiss Central Banker
What We Learned over Dinner from a Swiss Central Banker
Dear Diary,
Today… what we learned over dinner from a surprisingly smart central banker.
But first, to the markets…
The Dow shot up 121 Dow points yesterday, recovering most of Tuesday’s slide.
In a series of business meetings Tuesday and Wednesday, we explained why nobody but us is rooting for a depression.
Yes, there’s no point in hiding it. We would like to see a depression. Short, swift, and decisive – a quick and sharp end to the biggest credit expansion in all of history.
As secretary of the Treasury Andrew Mellon said after the 1929 stock market crash:
Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.
Credit Cannot Increase Forever
“It’s unbelievable,” said colleague Merryn Somerset Webb. Merryn is the editor ofMoneyWeek magazine in London.
“London property prices just keep going up and up. It’s so expensive our writers can’t afford to live here anymore. I’m thinking of moving the business to Edinburgh.”
You can’t build a solid economy on the jelly of unaffordable housing, unpayable debts, and unsustainable asset prices. But that’s what we’ve got.
The only way to get down to something more reliable… more real… and healthier… is to wash away the financial glop and goo that has accumulated during the last 30 years.
…click on the above link to read the rest of the article…
Bank Reserves and Loans: The Fed is Pushing On a String
Bank Reserves and Loans: The Fed is Pushing On a String
The money multiplier effect no longer works.
As you (hopefully) know, we live in a fractional reserve banking system: if the bank is required to have $1 in cash reserves for every $10 in loans, it means the bank creates $10 of new money when it issues a $10 loan. When the $10 loan is paid off, that money vanishes from the system.
At that point, the bank is insolvent, i,e, its losses exceed its assets.The problem with fractional reserve lending is the leverage. A 10-to-1 reserve ratio means that if the bank issues a $10 loan, the borrower defaults and the borrower’s collateral (home, auto, etc.) only fetches $8 on the open market, the bank lost $2, which is more than the bank’s cash reserves ($1).
In credit bubbles, the reserve requirements may reach absurd levels of leverage. At a reserve ratio of 100-to-1, a $2 loss of value in a $100 loan will push the bank into insolvency, as it only held $1 in cash as reserves against the $100 loan.
Reserve requirements and leverage are one set of constraints on new loans; the other constraint is the income, creditworthiness and willingness of the borrower.If households and businesses decide not to borrow more, regardless of the interest rate, then raising or lowering the reserve requirements will have no effect.
This is where the Federal Reserve finds itself today. The Fed is anxious to spark more lending/borrowing, and it has lowered interest rates to near-zero and made it easy for banks to build reserves–two things that in previous eras would have sparked increased borrowing.
But in our debt-saturated, stagnant-income era, the Fed is pushing on a string.Frequent contributor Dave P. explains why with the aid of two of his charts:
Banks can create new money, but only within the limits of the reserve requirements set by the Fed.
…click on the above link to read the rest of the article…
What does $200 trillion of debt really mean for the global economy?’
What does $200 trillion of debt really mean for the global economy?
A few years ago, in the depths of the recession caused by the financial crisis, I began an investigation into the consequences of several economic trends that I thought were bound to put a permanent end to the boom times that my generation, the post-war ‘baby boomers’, had grown up in. These trends included the threat to jobs caused by fierce global competition, helped by the rise of digital technology; the financialization of the economy and the relative decline of real industry; the resulting rise in inequality, and also the excessive build-up of debt, which was of course the main cause of the crash.
But the crash didn’t put an end to the build-up of debt – the credit bubble just deflated slightly, as $20 trillion or so vanished off the face of the earth. This wealth never really existed of course – it consisted only of numbers in bank accounts or over-optimistic valuations of shares or property – but even so, a lot of people saw their pension funds and other investments reduced in value.
Despite all the concerns over debt since the crisis, the credit bubble has been growing again and is now bigger than ever, both globally and in some (though not all) ‘advanced’ nations, notably Japan and the UK, two of the most indebted economies. We don’t appear to have learnt much from the crash.
What does it mean when total world debt amounts to something in the region of $200 trillion, or roughly three times annual world output?
…click on the above link to read the rest of the article…
