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Everyone is missing the serious problem that ultra-low interest rates have created for retirees.

Pension funds are still assuming that future returns will be in the 7½–8% range. And as people get older and have no practical way to go back to work, pension funds that are forced to reduce payments in 10 or 15 years (and some even sooner) will destroy the lifestyles of many.

So what made Europe and Japan agree that negative rates-with all their known and unknown consequences—are a solution to our current economic malaise?

I have been trying to explain this by comparing economic theories to a religion.

Everyone understands that there is an element of faith in their own religious views, and I am going to suggest that a similar act of faith is required if one believes in academic economics.

Economics and religion are actually quite similar. They are belief systems that try to optimize outcomes. For the religious, that outcome is getting to heaven, and for economists, it is achieving robust economic growth-heaven on earth.

I fully recognize that I’m treading on delicate ground here, with the potential to offend pretty much everyone. My intention is to not to belittle either religion or economics, but to help you understand why central bankers take the actions they do.

The No. 1 Commandment of a Central Bank

Central bankers are always-and everywhere-opposed to inflation. It’s as if they are taken into a back room and given gene therapy. Actually, this visceral aversion is also imparted during academic training in the elite schools from which central bankers are chosen.

This is our heritage; it’s learning derived not only from the Great Depression but also from all of the other deflationary crashes in our history (not just in the US but globally).

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

Never Go Full-Kuroda: NIRP Plus QE Will Be Contractionary Disaster In Japan, CS Warns

March 8, 2016

Never Go Full-Kuroda: NIRP Plus QE Will Be Contractionary Disaster In Japan, CS Warns

In late January, when Haruhiko Kuroda took Japan into NIRP, he made it official.

He was full-everything. Full-Krugman. Full-Keynes. Full-post-crisis-central-banker-retard.

In fact, with the BoJ monetizing the entirety of JGB gross issuance as well as buying up more than half of all Japanese ETFs and now plunging headlong into the NIRP twilight zone, one might be tempted to say that Kuroda has transcended comparison to become the standard for monetary policy insanity.

The message to DM central bank chiefs is clear: You’re either “full-Kuroda” or you’re not trying hard enough.

But as we’ve seen, the confluence of easy money policies are beginning to have unintended consequences. For instance, it’s hard to pass on NIRP to depositors without damaging client relationships so banks may paradoxically raise mortgage rates to preserve margins, the exact opposite of what central banks intend.

And then there’s the NIRP consumption paradox, which we outlined on Monday: if households believe that negative rates are likely to crimp their long-term wealth accumulation, they may well stop spending in the present and save more. Again, the exact opposite of what central bankers intend.

In the same vein, Credit Suisse is out with a new piece that explains why simultaneously pursuing NIRP and QE is likely to be contractionary rather than expansionary for the real economy in Japan.

In its entirety, the note is an interesting study on the interaction between BoJ policy evolution and private bank profitability, but the overall point is quite simple: pursuing QE and NIRP at the same time will almost certainly prove to be contractionary for the Japanese.

Here’s how the chain reaction works.

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

The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

February 28, 2016

The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote “Be Careful What You Wish For” saying that “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.”

Well, maybe not… especially if physical currency is gradually phased out in favor of some digital currency “equivalent” as so many “erudite economists” and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency – just like physical gold – provides a convenient loophole to the financial repression of keeping one’s savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.

For now cash is still legal, and NIRP – while a reality for the banks – has yet to be fully passed on to depositors.

The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: “as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”

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

Deranged Central Bankers Blowing Up the World

February 15, 2016

DERANGED CENTRAL BANKERS BLOWING UP THE WORLD

It is now self-evident to any sentient being (excludes CNBC shills, Wall Street shyster economists, and Keynesian loving politicians) the mountainous level of unpayable global debt is about to crash down like an avalanche upon hundreds of millions of willfully ignorant citizens who trusted their politician leaders and the central bankers who created the debt out of thin air. McKinsey produced a report last year showing the world had added $57 trillion of debt between 2008 and the 2nd quarter of 2014, with global debt to GDP reaching 286%.

The global economy has only deteriorated since mid-2014, with politicians and central bankers accelerating the issuance of debt. These deranged psychopaths have added in excess of $70 trillion of debt in the last eight years, a 50% increase. With $142 trillion of global debt enough to collapse the global economy in 2008, only a lunatic would implement a “solution” that increased global debt to $212 trillion over the next seven years thinking that would solve a problem created by too much debt.

The truth is, these central bankers and captured politicians knew this massive issuance of more unpayable debt wouldn’t solve anything. Their goal was to keep the global economy afloat so their banker owners and corporate masters would not have to accept the consequences of their criminal actions and could keep their pillaging of global wealth going unabated.

The issuance of debt and easy money policies of the Fed and their foreign central banker co-conspirators functioned to drive equity prices to all-time highs in 2015, but the debt issuance and money printing needs to increase exponentially in order keep stock markets rising. Once the QE spigot was shut off markets have flattened and are now falling hard. You can sense the desperation among the financial elite. The desperation is borne out by the frantic reckless measures taken by central bankers and politicians since 2008.

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

Switzerland’s Referendum on Fractional Reserve Banking

January 13, 2016

Switzerland’s Referendum on Fractional Reserve Banking

A Warmed-Up “Chicago Plan”

Many of our readers may be aware by now that a Swiss initiative against fractional reserve banking has gathered the required 100,000 signatures to force a referendum on the matter. Is is called the “Vollgeld Initiative”, whereby “Vollgeld” could be loosely translated as “fully covered money”.

logo_vollgeld-initiative_mit_Titel_hoch_2014_05 Swiss initiative against fractional reserve banking

Austrian School proponents will at first glance probably think that it sounds like a good idea: After all, it is the creation of uncovered money substitutes ex nihilo that leads to the suppression of market interest rates below the natural rate and consequently to a distortion of relative prices, the falsification of economic calculation and the boom-bust cycle.

However, a second glance reveals that the initiative has a substantial flaw. One may for instance wonder why the Swiss National Bank hasn’t yet let loose with a propaganda blitz against it, as it has done on occasion of the gold referendum. The answer is simple: the “Vollgeld” plan only wants to prohibit the creation of fiduciary media by commercial banks.

The power to create additional money from thin air is to be reserved solely to the central bank, which would vastly increase its power and leave credit and money creation in the hands of a few unelected central planning bureaucrats. In other words, it is a warmed-up version of the “Chicago Plan” of the 1930’s, which Chicago economists led by Irving Fisher and Frank H. Knight presented in the wake of the Great Depression (the debate over the plan led to the establishment of the FDIC and the Glass-Steagall Act, but its central demand obviously remained unfulfilled).

Irving and Knight Irving Fisher and Frank H. Knight, the lead authors of the original Chicago plan

As Hans Hermann Hoppe has pointed out, the Chicago School (F. H. Knight is today regarded as one of its most important founders), was seen as “left fringe” in the 1940s.

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

Switzerland To Vote On Ending Fractional Reserve Banking

December 24, 2015

Switzerland To Vote On Ending Fractional Reserve Banking

One year ago (and just two months before the shocking announcement the Swiss Franc’s peg to the Euro would end, dramatically revaluing the currency, and leading to massive FX losses around the globe and for the Swiss National Bank) the Swiss held a referendum whether to demand that their central bank should convert 20% of its reserves into gold, up from 7% currently. After the early polls showed the Yes vote taking a surprising lead, the Diebold machines kicked in and the result was a sweeping victory for the No vote, without a single canton voting for sound money.

Ironically, this unexpected nonchallance about the Swiss central bank’s balance sheet by one of Europe’s more responsible nations took place just before the same bank announced CHF30 billions in losses on its long EUR positions following the revaluation of the CHF. It also took place when not just Germany, but the Netherlands and Austria announced they would repatriate a major portion of their gold in a move which, all spin aside, signals rising concerns about the existing monetary system.

We wonder if the Swiss have changed their mind about just how prudent it is to have their central bank operate as one of the world’s largest – and worst – after its CHF 30 billion loss in Q1 FX traders, and hedge funds with $94 billion in stock holdings, since then.

We may soon have the answer, because in what is shaping up to be another historic referendum on the treatment of money, earlier today the Swiss Federal Government confirmed that it had received enough signatures and would hold a referendum as part of the so-called “Vollgeld”, or Full Money Initiative, also known as the Campaign for Monetary Reform, which seeks to ban commercial banks from creating money, and which calls for the central bank to be given sole power to create the money in the financial system.

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

Fractional-Reserve Banking is Pure Fraud, Part I – Jeff Nielson

November 24, 2015

Fractional-Reserve Banking is Pure Fraud, Part I

This is a commentary which should never have needed to be written. What is euphemistically called “fractional-reserve banking” is obvious fraud, and obvious crime. By its very definition; it transforms the banking sector of an economy into a leveraged Ponzi-scheme, and as with all Ponzi-schemes, there is no possible “happy ending” here.

Mathematically-based principles are often illustrated best through use of an extreme, numerical example. We have no need to construct any hypothetical extremes, however, when we already have real-life insanity, in our current monetary/regulatory framework.

Here it is important to note that in order to conceal the fraud, crime, and insanity of our present system to the greatest degree possible, the bankers hide their dirty deeds within their own convoluted jargon. Thus presenting “fractional-reserve banking” to readers requires some brief investment of time in definition of terms, starting with this term, itself.

Fractional-reserve banking evolved literally based upon the temptation of all bankers to perpetrate fraud. Empirically it has always been observed, down through the centuries, that under normal circumstances, only a tiny percentage of depositors will come to claim their cash/wealth at any one time. Thus the temptation is for bankers to “lend” more funds than they actually possess, i.e. they are “lending” what does not even exist: “fractional-reserve banking” – the ultimate euphemism of banking and fraud.

It goes without saying that anyone or any entity which endeavours to “lend” something which does not exist is perpetrating fraud. But before examining this inherent fraud more closely, it is important to back-up, and look at the Law. Note that even when banks “lend” the money which they actually do hold on deposit (as trustees for the depositors) that this is already wholly/totally illegal. It is the crime known as “conversion”.

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

If We Don’t Change the Way Money Is Created and Distributed, Rising Inequality Will Trigger Social Disorder

November 13, 2015

If We Don’t Change the Way Money Is Created and Distributed, Rising Inequality Will Trigger Social Disorder

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation, low social mobility and systemic instability.

If we don’t change the way money is created and distributed, wealth inequality will widen to the point of social disorder.

Everyone who wants to reduce wealth inequality with more regulations and taxes is missing the key dynamic: the monopoly on creating and issuing money necessarily widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.

Control of money issuance and access to low-cost credit create financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.

Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.

Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.

There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.

The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.

This is the magic of fractional reserve lending. The bank is only required to hold a small percentage of outstanding loans as reserves against losses. If the reserve requirement is 5%, the bank can issue $1,900,000 in new loans based on the $100,000 in cash: the bank holds assets of $2,000,000, of which 5% ($100,000) is held in cash reserves.

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

The Yield Curve and GDP – a causal relationship?

October 31, 2015

The Yield Curve and GDP – a causal relationship?

One of the most reliable indicators of an imminent recession through recent history has been the yield curve. Whenever longer dated rates falls below shorter dated ones, a recession is not far off. Some would even say that yield curve inversion, or backwardation, help cause the economic contraction.

To understand how this can be we first need to understand what GDP really is. Contrary to popular belief, GDP only has an indirect relation to material prosperity. Broken down to its core component, GDP is simply a measure of money spent on goods and services during a specified period, usually a year or a quarter.

However, since money itself is a very fleeting concept we need to dig deeper to fully understand the relation between the slope of the yield curve and GDP. The core of money is its function as the generally accepted medium of exchange, but today that is much more than the cash in your wallet. For example, the base money, provided by the central bank, consist of currency in circulation and banks reserves held at the central bank.

From these central bank reserves the commercial banking system can leverage up, through fractional reserve lending practice, several times over. It is important to note that broader money supply measures, such as M2, is merely a reflection of banks leverage on top of base money. As a bank makes a loan to a borrower the bank creates fund which can be used as means of payments to whatever the borrower wants to spend the newly acquired money on. Obviously, these money claims will in turn create new deposits, which can be used to create new loanable funds and so on ad infinitum.

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

Why Europe Is About To Plunge Further Into The NIRP Twilight Zone, And What It Means For Depositors

October 22, 2015

Why Europe Is About To Plunge Further Into The NIRP Twilight Zone, And What It Means For Depositors

In some respects, today’s ECB presser was a snoozer. Reporters asked the same old questions (some of which we’ve been asking for years) and, more importantly, there were no glitter attacks.

Our ears did perk up however, when Mario Draghi admitted that, unlike the governing council’s last meeting, cutting the depo rate further into negative territory was indeed discussed.

This is significant for a number of reasons. At the general level, it shows that DM central bankers are ready and willing to plunge the world further into the Keynesian Twilight Zone. As we outlined last month, this means the Riksbank and the SNB are now on watch. If the ECB cuts again, the Riksbank will be forced to act as well and as Barclays recently opined, the SNB may be compelled to go nuclear on depositors, as removing the negative rate exemption for domestic banks would force them to pass along the “cost” to customers:

“In contrast, a cut in the ECB’s deposit rate further into negative territory likely would have a significant impact on the EURCHF exchange rate and provoke a more immediate response from the SNB. Indeed, we expect that a cut in the ECB’s deposit rate may have a greater effect on EURCHF than on other EUR crosses. Switzerland applies its negative deposit rate to only a fraction of reserves, currently about 1/3rd of sight deposits by our calculation. In contrast, negative deposit rates apply to all reserves held at the ECB, Riksbank and Denmark’s Nationalbank. Consequently, a cut to the ECB’s deposit rate likely has a larger impact both on the economy and on the exchange rate than a proportionate cut by the SNB. An SNB response to an ECB deposit rate cut could take one of two forms:

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

EU Moloch in a Fresh Bid to Inflate

October 4, 2015

EU Moloch in a Fresh Bid to Inflate

Brussels Alters Capital Requirements to “Spur Lending”

Saints preserve us, the central planners in Brussels are giving birth to new inflationist ideas. Apparently the 2008 crisis wasn’t enough of a wake-up call. It should be clear by now even to the densest observers that a fractionally reserved banking system that flagrantly over-trades its capital is prone to collapse when the tide is going out. 2008 was really nothing but a brief reminder of this fact.

The political and bureaucratic classes will certainly never go back to sound money or free banking. The State’s paws will remain firmly embedded in the business of money, as the modern-day welfare/warfare states and the ever-growing hordes of cronies and zombies they have to keep well-fed have become utterly dependent on fiat money inflation. This will continue until the bitter end. New measures are now being designed to hasten its arrival.

3 EURO FRONT

Before we continue, ask yourself if the euro zone actually needs more monetary inflation – even from the perspective of those who erroneously believe inflation to be an economic panacea:

The euro area’s money supply over time. We are on purpose using the narrow aggregate M1, which is the closest approximation to money TMS. The broader aggregates include items that are actually not money, but credit transactions. This leads to double-counting. Money= the means of final payment for goods and services in the economy, chart via ECB – click to enlarge.

It is fair to say that this expansion of the money supply hasn’t made society at large any more prosperous; quite the contrary in fact. It has however been beneficial to the State and others with first dibs on newly created money, as real wealth has been redistributed to these privileged groups.

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

Peak Oil Ass-Backwards (part 2): Crashing OilPrices Aren’t Due to an Oil Glut But to DemandDestruction and Peaking Credit

September 14, 2015

Peak Oil Ass-Backwards (part 2): Crashing Oil Prices Aren’t Due to an Oil Glut But to Demand Destruction and Peaking Credit

As I began to mention at the end of the first part of this three-parter, I’ve only just recently come to the conclusion that oil prices aren’t going to have a tendency to rise due to the tightening of supply imposed by peak oil, but to depreciate. This of course flies in the face of the common logic of supply and demand, but when factoring in the method by which the majority of our money is created, a deflationary effect can be seen to come into play. This has taken me an absurdly long time to clue into, for although I’d steadfastly amassed a bunch of pieces (various information), I hadn’t realized they were actually all part of the same puzzle.

With peak oil and fractional-reserve banking being the first two pieces of this puzzle, the third piece that I needed to factor in (which oddly enough I’d already written about) is the fact that money is a proxy for energy. As I wrote in a previous post, Money: The People’s Proxy,

Simply put,… the core function of money is that it enables us to command energy – the energy used to move our bodies with, to power our machines, to feed to domesticated animals whose energy we then use to do work (which nowadays generally means entertaining us), etc. In other words, it might be tough and/or inconvenient, but one can get by without money. You can’t get by without energy.

In other words, at their core, our economies don’t run on money, they run on energy. Moreover, it doesn’t even really matter what you use as your form of currency – coins, pieces of paper, gold, zero and one digibits, conch shells, whatever – because if you don’t have the energy to perform the work and/or create the products your society expects, the money is virtually useless and worthless.

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

Europe’s Banks – Insolvent Zombies

September 9, 2015

Europe’s Banks – Insolvent Zombies

The Walking Dead

Now that Europe’s fractionally reserved banking system has been regulated into complete inertia, it is a good time to assess the current bottom line, so to speak. We should mention here that there are essentially two ways of dealing with the banking system. One is to introduce an unhampered free market banking system based on strong property rights and nothing else. Such a system would work best if it were based on sound money, i.e., a market-chosen medium of exchange. The regulations governing such a system would fit on a napkin.

zombie bank2

Image credit: Warner Bros, processing fmh

The Euro-Stoxx bank index, weekly, over the past 10 years. Recently the index has been unable to overcome resistance in the 160-162 area. The bust and the reaction of the authorities to the bust has made zombies out of Europe’s big banks – click to enlarge.

The other way is to construct what we have now: a banking cartel administered and backstopped by a central bank, based on fiat money the supply of which can be expanded at will and involving continual violations of property rights. Fractional reserve banking represents a violation of property rights, because it is based on the assumption that two or more persons can have a legally valid claim on the same originally deposited sum of money (for an extensive backgrounder on this, see our series on FR banking – part 1, part 2 and part 3). This legal fiction is very convenient for the banks and the State, but it sooner or later renders the banking system inherently insolvent (a de facto, but not a de iure insolvency).

Given this system’s inherent insolvency, the regulations governing it obviously won’t fit on a napkin. Instead they fill several volumes the size of telephone directories and keep growing like weeds.

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

Peak Oil Ass-Backwards (part 1): PeakOil, Meet Fractional-Reserve Banking

September 1, 2015

Peak Oil Ass-Backwards (part 1): PeakOil, Meet Fractional-Reserve Banking

(image by Viktor Hertz)

If the ongoing crash of oil prices over the past year – and now the stock market crashes of last week – have continuously taught me one thing, that would be that I’ve got very little clue regarding the economic implications ofpeak oil. To explain this I’ll have to take a circuitous, roundabout route here, but if you’ve been as afflicted as I’ve been then you might find the following a bit illuminating.

For starters, even though I learned about peak oil in 2005, fractional-reserve banking in 2006, and pretty much instantly proceeded to put two and two together, I still ended up falling for what I might unfairly call the “peak oil orthodoxy.” I’m not sure where I first came across this “orthodoxy” I speak of, but an example as good as any – and maybe even better than any – would be that of author and a former Chief Economist at CIBC (one of Canada’s Big Five banks), Jeff Rubin.

As Rubin explained it in his first of two peak oil books, because peak oil implies a curtailment on the supply of oil, and since the demand end of a growing economy is by definition increasing, the notion of supply and demand imply that prices will head upwards if supply is limited. Because of this, upon oil’s peak its price will eventually rise to such ungodly high levels that it’ll become unaffordable by many. Following that, its demand will therefore peter out, and so thanks to the new glut in supply the price will crash to equally ungodly low levels. Once things settle down and the consumer can once again afford the now lower-priced oil, the process will repeat itself since the new (and increasing) demand will once again bump up against the limits imposed by peaking oil supplies. As a result, another crash will occur. On and on the process repeats itself, but with the higher price spikes followed by higher troughs.

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

A Lesson From the Greek Crisis: Safe Deposit Boxes Are Not Safe

July 9, 2015

A Lesson From the Greek Crisis: Safe Deposit Boxes Are Not Safe

Last week the Greek government imposed capital controls to prevent cash from escaping from the Greek banking system, which is on the brink of collapse. These repressive financial measures, which were invented by “Hitler’s banker” Hjalmar Schacht in the 1930s, include the closing of banks, limiting cash withdrawals from ATMs to 60 euros ($67) per day, and the banning of all money transfers via credit and debit cards to accounts held in foreign countries. Despite these Draconian controls, Greek banks continue to hemorrhage cash and, after yesterday’s referendum, it is probable that the daily limit on withdrawals from ATMs will be tightened. Worse yet, the reeling Greek public suffered another shock yesterday when Deputy Finance Minister Nadia Valavani revealed to Greek television that the government and banks had already agreed that people would also not be allowed to withdraw cash from safe deposit boxes for as long as the controls were in place. This may be part of a fallback plan if theECB ends its bailout of the Greek banks. The government with the banks’ connivance would seize the cash euros stored in these boxes and compensate their lessees by crediting an equal sum of euros to their increasingly inaccessible checking deposits. The cash would then be fed into ATMs to postpone the day of reckoning for Greece’s zombie fractional-reserve banks.

In the meantime, the market has been working to provide a private, nonbank alternative for Greeks to safely store cash. In Dublin, Ireland enterprising diamond dealer Seamus Fahy, who owns Merrion Vaults, is offering a 15% discount for Greeks who are able to evade the fascist capital controls and smuggle their cash out of the country.

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

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