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In the eyes of many people, the Federal Reserve (Fed) is an indispensable institution. We are told it supports growth and employment, fends off the negative shocks, and fights inflation. Nothing could be farther from the truth. The Fed’s fiat money regime is economically and socially highly destructive — causing far-reaching societal and political consequences that extend beyond what most people would imagine.

Fiat money is inflationary, it debases the purchasing power of money; it benefits a few at the expense of the many; it causes boom-and-bust cycles that hurt many people economically; it makes people run into too much debt, leading to over-indebtedness; it corrupts society’s morals; it makes government grow at the expense of individual liberty; it encourages the state’s aggressiveness and fuels its war machine.

Tragically, however, people consider falsely the Fed as their “knight in shining armor” coming to their rescue in times of trouble rather than what the institution really is: the very source of economic and societal grievance. People do not blame the Fed for the trouble it causes, but instead welcome Fed action for overcoming the damage it has caused in the first place. That is why many people keep their fingers crossed that the Fed’s latest “exit plan” will succeed.

The Fed’s Exit Plan

In the course of the financial and economic crisis of 2008–2009, the Fed lowered interest rates to basically zero. It also increased its balance sheet from $879.4 billion at the end of 2007 to $4.5 trillion in September 2017. It did this by purchasing US Treasuries and agency mortgage-backed securities (MBS) in the amount of $2.4 trillion and $1.7 trillion, respectively, thereby having injected additional ‘base money’ into the US banking system.

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

Norway’s Interest Rate Conundrum

March 12, 2016

Norway’s Interest Rate Conundrum

Current Situation

The ECB recently stimulated more than expected, cutting rates by five basis points and expanding quantitative easing. It is already expected that Norges Bank (The Norwegian Central Bank) will cut rates next week, seeing accelerating inflation as temporary. They have a 2.5% inflation target mandate “over time,” giving them lee-way. They see demand falling off while the local economy, driven by exports, recovering. Therefore, they feel that they can cut rates. My previous articles challenged the assumptions that the oil sector will recover, showing that new technology reduces long term prices below offshore break-even points, and exports can make up the difference, illustrating that key sectors, like fishing, can be replicated in Canada, Maine, Russia and Japan.

We are experiencing 1970’s style stagflation, coming from the supply side, not demand. Prices are going up because Norges Bank continues to destroy the Norwegian Krone, turning it into the Nordic Peso. This is where they are “hiding” the damage to save rest of the economy. For example, housing prices will rise in NOK but fall in USD or gold (universal commodity) terms. It’s a shell game, leading to long term decline or even worse, an unexpected period of elevated inflation, requiring a rapid rise in interest rates. Housing remains at risk in this situation (Norway does not have 30 year fixed loans, most people float monthly).

I am in no position to stop them from making trips to Thailand, fruit from Spain and iPhones from California more expensive, but at least I can share my knowledge with others.

The dashboard, above, lines up key figures, showing how low rates drive inflation, gradually eroding public wealth. It is important to notice that inflation is much higher than interest paid at the bank, punishing responsible behavior. A person’s savings diminishes over time in terms of purchasing power.

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

“There’s A Feeling Of Bits Of Ice Cracking All At Once” – This Is The ‘Big New Threat’ To Oil Prices

February 27, 2016

“There’s A Feeling Of Bits Of Ice Cracking All At Once” – This Is The ‘Big New Threat’ To Oil Prices

One week ago, we reported that even as traders were focusing on the daily headline barrage out of OPEC members discussing whether or not they would cut production (they won’t) or merely freeze it (at fresh record levels as Russia reported earlier today) a bigger threat in the near-term will be whether the relentless supply of excess oil will force Cushing, and PADD 2 in general, inventory to reach operational capacity.

As Genscape added in a recent presentation, when looking specifically at Cushing, the storage facility is virtually operationally full (at 80%) with just 4-5 more months at current inventory build left until the choke point is breached, and as we have reported previously, storage requests for specific grades have already been denied.

Goldman summarizes the dire near-term options before the industry as follows:

The large builds in gasoline and crude stocks have brought PADD 2 storage utilization near record high levels. While the recent decline in Midcontinent refining margins should help avoid breaching storage capacity, by finally bringing gasoline back into deficit, this will likely only exacerbate the build in crude inventories in coming months and should require further weakness in PADD2 crude prices to spread this build to the USGC. Weaker gasoline demand/exports, or higher margins/runs or finally resilient crude imports/production, could create binding storage issues beyond the intermittent Cushing WTI cash price weakness observed so far, which would require another large leg lower in crude prices to shut production in the Midcontinent and Canada. As we have argued, this continued testing of storage constraints should keep price and margin volatility elevated.

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

What A Cashless Society Would Look Like

January 31, 2016

What A Cashless Society Would Look Like

Calls by various mainstream economists to ban cash transactions seem to be getting ever louder, while central bankers have unleashed negative interest rates on economies accounting for 25% of global GDP, with $5.5 trillion in government bonds yielding less than zero. The two policies are rapidly converging.

Bills and coins account for about 10% of M2 monetary aggregates (currency plus very liquid bank deposits) in the US and the Eurozone. Presumably the goal of this policy is to bring this percentage down to zero. In other words, eliminate your right to keep your purchasing power in paper currency.

By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).

This in turn could boost consumption, GDP and inflation to pay for the massive debts we have accumulated (leaving aside the very controversial idea that citizens should now have to pay for the privilege of holding their hard earned money in a more liquid form, after it has already been taxed). So at long last we can finally get out of the current economic funk.

The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.

However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that.

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

Canada’s “Other” Problem: Record High Household Debt

January 20, 2016

Canada’s “Other” Problem: Record High Household Debt

Earlier today, the Bank of Canada surprised some market participants by failing to cut rates.

True, the loonie was plunging and another rate cut might very well have accelerated the decline, further eroding the purchasing power of Canadians who are already struggling to keep up with the inexorable rise in food prices, but there are other, more pressing concerns.

Like the fact that some analysts say the CAD should shoulder even more of the burden as Canada struggles to adjust to a world of sub-$30 crude. In short, if Stephen Poloz could manage to drive the loonie lower, the CAD-denominated price of WCS might stand a chance of remaining above the marginal cost of production. Barring that, the shut-ins will start and that means even more job losses in Canada’s oil patch, which shed some 100,000 total positions in 2015.

Alas, Poloz elected to stay put, characterizing the current state of monetary policy as “appropriate.”

We’re reasonably sure that assessment won’t hold once the layoffs pick up and as we noted earlier, the longer Poloz waits, the larger the next cut will ultimately have to be, which means that if the BOC waits too long, Poloz may have to rethink his contention that the effective lower bound is -0.50%.

While there are a laundry list of concerns when it comes to assessing the state of the Canadian economy and the impact of either higher rates (the loonie is supported but growth is further choked off) or lower rates (the economy gets a boost but consumer spending is stifled as Canadians watch their purchasing power evaporate), perhaps the most important thing to remember is that Canada is now the most leveraged country in the G7.

According to a new report from the Parliamentary Budget Officer (PBO) the household debt-to-income ratio is now a whopping 171% which means, for anyone who is confused, “that for every $100 in disposable income, households had debt obligations of $171.”

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

Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking

January 7, 2016

Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking

It’s Not a Pet, It’s a Falcon: How the decline of the RMB destroys belief in central banking and a successful reflation

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;

– The Second Coming- W.B. Yeats

First catch your falcon, as the formidable Mrs Beeton might have said if she was in need of a method of catching her main course (see Mrs Beeton’s Book of Household Management 1861- ‘Recipe for Jugged Hare’).

Having caught your wild falcon, you can now begin the training process. You are attempting to impose your will upon a creature that, in its wild state, catches, kills and devours other birds. This is creative destruction in its rawest form as those acts of savagery provide the fuel to keep our falcon flying. Taming such wild forces is not easy, whether they be birds of prey or the desires, wishes, greed and fear of millions of people determining prices through their supply and also their demand.

Let’s get some advice from the field of falconry for our central bankers, and the other handmaidens of state control, as they seek to impose their wishes on the will and acts of millions-

‘Falconry is a great sport, but there is a lot of time involved. You will want to have enough time to train your bird. If you don’t have the time, or the willingness, then you might as well not do it at all. If you are one of those people who is not patient, falconry may not be for you. You should not take up falconry if you want the falcon as a pet, or something to show off.

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

Betting on Deflation May Be a Huge Mistake. Here’s Why…

January 5, 2016

Betting on Deflation May Be a Huge Mistake. Here’s Why…

Precious Metals Market Update

Precious metals investors heading into 2016 worry the dollar will continue marching ahead, right over the top of gold and silver prices. The Fed is telegraphing additional rate hikes throughout the year, and commodity prices – led by crude oil – are falling. There have been tremors in the biggest beneficiary markets of all when it comes to the Fed’s QE largesse – U.S. equities and real estate. And the possibility of a recession is growing, both in the U.S. and around the world.

There are plenty of reasons we might see even lower official inflation numbers and a stronger dollar in 2016. But don’t think for a second that consumer prices or living costs will fall. They haven’t, they aren’t, and they never will in a sustained way – thanks to the Fed’s creation in 1913. This is where the deflationists have it wrong.

The impact of further disinflationary forces or even a deflationary episode on precious metals prices is a bit harder to predict.

The bear case for precious metals is rather simple. Should metals trade like commodities, they are likely to follow other raw materials lower. If we get a liquidity crunch akin to the 2008 financial crisis, just about everything will be sold as investors raise cash to meet margin calls or flee to the dollar as a perceived safe-haven.

There is also the possibility that metals prices will simply be managed lower. Growing numbers of investors realize that Wall Street is not a bulwark of free markets. Major banks have admitted to rigging markets against their own customers, and the Federal Reserve aggressively intervenes in markets in its quest to centrally plan the world economy. Why wouldn’t the Fed also be active in trading precious metals? Those dismissing the notion that metals prices are manipulated are naive.

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

A Question of Money – Interest – Bankers

September 8, 2015

A Question of Money – Interest – Bankers

QUESTION:

Mr Armstrong, interesting article today, the story of the store of value (at least long term) has always confused me. One can look at saving accounts also as an asset as it yields the interest payment and one relinquishes the access to the money. No difference to bonds.

But your article causes some questions: as you stated before the FED buying bonds does not increase real money supply, so what caused the decline of purchasing power of money in the asset class of equities? Is it that the manipulating of interest rates distorted the actual confidence and time preference in the economy which can be measured by the velocity?

You posted earlier that the velocity has declined. People do not want to invest but save which is not an option for big money as it doesn’t yield any or very little return. Hence enterprises buy back shares and smart money has no other option.

Interest rate hike by the FED, eventually increasing retail participation, a cooling world economy, sovereign debt crisis and the flight to the Dollar. The outcome of your computer, a rise in US stock markets including a possible phase transition, seems comprehensible.

The only thing what leaves me with amazement is what do they really intend? I don’t believe that the families who run the banking system, operating for centuries in money business, do not understand that. I can only assume that for being protected by government the banking cartel buys the governments time and keep financing the deficits.

Best regards,

ANSWER: The problem in so many areas is that we can focus on one issue, but the answer is a complexity of variables.

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

The Economy is in Liquidation Mode

August 12, 2015

The Economy is in Liquidation Mode

Capital Consumption

If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business?

The birthplace of roller disco turned out to be edible, sort of
Photo via realskatestories.com

You milk it. You spend nothing on capital improvements, slash maintenance, and reduce operating expenses. There’s no return on investment, so you cut to the bone and wring out as much cash as possible. When a business has no future, you operate in liquidation mode.

Your rink generates cash flow, but this is no profit. It’s simply the conversion of accumulated capital into present income. You are consuming capital, almost literally eating the business.

roto A fad that went away… roller skating rink in the 70s
Photo credit: Picnicface

I have used a family farm as an example to paint a clear picture of capital consumption. Imagine using your farm, not to grow food, but to swap for it. You tear down the barn to sell the oak beams for flooring, auction off the back 40 (acres), put the tractor on Craigslist, then finally sell the farm and house. All to buy the produce you can no longer harvest.

Let this sink in. The farm’s falling crop yield can’t feed you any longer, but you still need to eat. You’re liquidating the farm merely to buy groceries.

The conventional view encourages you to be grateful that the purchasing power of the farm is high, that it trades for a big stash of food. While it may be true that you can eat for years on the proceeds, it’s small consolation for the loss of what had been an evergreen income.

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

The Mood On The Ground In Greece: “Some Have Raised The Prospect Of Civil War”

June 30, 2015

The Mood On The Ground In Greece: “Some Have Raised The Prospect Of Civil War”

Earlier today, John O’Connell, CEO of Davis Rea, spoke to Canada’s BNN from what may be Greece’s top tourist attraction, the island of Santorini, to give a sense of the “mood on the ground.” Not surprisingly, his feedback was that, at least as far as tourists are concerned, nobody is worried. After all, it is not their funds that are capital constrained plus should the Drachma return as the local currency, the purchasing power of foreigners will skyrocket.

What he did point out, however, that was quite notable is the diametrically opposing views between old and young Greeks when it comes to Grexit. According to O’Connell, “the old people want to vote for Europe cause they have a lot to lose, they have their pensions, but the younger population – they are already poor, they are already unemployed – and they don’t have much to lose. Their attitude is it’s going to be tough, it’s already tough, and so why not just move on go back to the Drachma, and they’re ok with that. Their attitude is in 5 to 10 years I’ll be better off. They believe there’s a lot of misinformation. They believe they’re being pressured by European countries particularly Germany that are holding them to very difficult terms.”

He continues: “whatever the polls may way, the young population is going to vote to leave the Euro and deal with the problems long-term.”

Finally, his take on capital controls and tourism: “You are going to see a big, big drop off in tourism because people are not going to want to come here. People are going to worry that if people do come here with a lot of Euro, are they going to be allowed to leave with those Euros. It’s going to have a dramatic impact on the Greek economy at some point, a lot of the people that live here are underestimating how bad it could get in the short term.”

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

Think Different About Purchasing Power

May 1, 2015

Think Different About Purchasing Power

The Tip of the Iceberg

The dollar is always losing value. To measure the decline, people turn to the Consumer Price Index (CPI), or various alternative measures such as Shadow Stats or Billion Prices Project. They measure a basket of goods, and we can see how it changes every year.

However, companies are constantly cutting costs. If we see nominal – i.e. dollar – prices rising, it’s despite this relentless increase in efficiency.

Prices in perspective – click to enlarge.

This graphic illustrates the disparity (I credit Tom Selgas for a brilliant visualization, which I recreated from memory). CPI measures only the orange zone, the tip of the iceberg. Most people don’t see the gray zone, and that’s a result of the greatest sleight of hand ever.

We need an accurate way to measure monetary debasement. For example, in retirement planning it’s tempting to divide your net worth by the cost of consumer goods. This seems to show your purchasing power. For example, if you have $200,000 and the cost of groceries for a year is $20,000 then you can eat for ten years.

However, this approach is flawed. To see why, let’s briefly consider primitive times when there was no lending or banking. People had to set aside some of their income, to buy a durable good like salt or silver—hoarding. When they could no longer work, they sold a little bit every week to buy food—dishoarding. People accumulated wealth while working, and dissipated it in retirement.

Life got a lot better with the advent of lending, because interest enables people to live on the income generated by their savings. People no longer consumed their principal, worrying about outliving their savings.

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

THE THEFT OF YOUR PURCHASING POWER

April 24, 2015

THE THEFT OF YOUR PURCHASING POWER

One doesn’t need to be an economist or savvy in finance to see that prices are climbing. In a nutshell, inflation is the increase in the money base or the amount of money in existence. Rising prices are but a symptom of this process of devaluing our money.

This is a chart from the St. Louis Federal Reserve. It is the job of that branch of the Fed to track and report the money supply. As you can see, the money base has been inflating since the early 1970s when Nixon took the U.S. off the gold standard, allowing unfettered money creation.

Now that our dollars no longer represent the value they once did, such as a piece of paper exchangeable for gold or silver, they are called Federal Reserve Notes. Note is another term for an IOU. In addition to these notes, ‘money’ has been created in many forms of electronic debt, resulting in the shenanigans we have today and the inevitable disastrous outcome.

As a consequence to us, the little guys, our dollars don’t stretch nearly as far in terms of buying what we want and need. Over the years this enormous inflation has largely been buffered as America has been successful in exporting the worst of the effects of money creation to other places, mostly developing countries. We have been able to do this because the U.S. Dollar has been the world’s reserve currency, which means at the end of each day almost all nations settle international trade in dollars.

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

Central Banks’ 2% Plan to Impoverish You

December 11, 2014

Central Banks’ 2% Plan to Impoverish You

The 2% target is low enough that the household frogs in the kettle of hot water never realize they’re being boiled alive because the increase is so gradual.

A comment by correspondent David C. suggested the importance of demonstrating the impoverishing consequences of central banks reaching their 2% inflation target. David observed: “That central bankers aren’t all hanging by their necks from lamp posts everywhere is a testament to how scarce are those who grasp exponents and compounding.”

Anyone with basic Excel skills can calculate the cumulative impoverishment caused by central banks’ “modest” 2% annual inflation. Here is my worksheet:

Column 1: year
Column 2: index starting with 100
Column 3: annual inflation sum (2% of previous year’s total index)
Column 4: cumulative total index

1 100.00 2.00 102.00
2 102.00 2.04 104.04
3 104.04 2.08 106.12
4 106.12 2.12 108.24
5 108.24 2.16 110.41
6 110.41 2.21 112.62
7 112.62 2.25 114.87
8 114.87 2.30 117.17
9 117.17 2.34 119.51
10 119.51 2.39 121.90

Ten years of modest 2% inflation robs households of nearly 20% of their purchasing power. What was $100 in year 1 costs about $122 after 10 years of “modest” 2% inflation. Put another way, $100 in year one is only worth $81 in year 10.

11 121.90 2.44 124.34
12 124.34 2.49 126.82
13 126.82 2.54 129.36
14 129.36 2.59 131.95
15 131.95 2.64 134.59
16 134.59 2.69 137.28
17 137.28 2.75 140.02
18 140.02 2.80 142.82
19 142.82 2.86 145.68
20 145.68 2.91 148.59

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

More QE? These Charts Show the Pauperization of Workers in the UK and America since 2008 | Wolf Street

October 19, 2014

More QE? These Charts Show the Pauperization of Workers in the UK and America since 2008 | Wolf Street.

Designated losers of monetary policy

Since the financial crisis, the government of the UK and the Bank of England have jumped through hoops and twirled around in extraordinary gyrations to bail out one of the largest financial centers in the world, the uniquely powerful and at once unaccountable speck of land, the City of London, an incorporated area within London known as the Square Mile; or rather bail out its financial institutions, its way of doing business, and its bonuses; and along the way, bail out banks further afield.

Done in the now classic way. Key ingredient: the Bank of England printed enormous amounts of money, repressed interest rates, and stirred up inflation, which hit 5% in 2011. But somebody had to pay for it: savers and workers. It demolished real wages and purchasing power of the people who make up the rest of the country.

This chart by FactSet shows how average hourly earnings growth (blue line, in percent, seasonally adjusted, year-over-year) has been relentlessly below CPI (yellow line, in percent, year-over-year). It’s the process of pauperization by inflation:

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

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