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A movement in Europe would require banks to fully back deposits

In 1666, King Charles II put control of the money supply into private hands. The privatization of the money-creation process gave birth to the system we use today.

Christmas did not offer much good cheer to the world’s bankers, who have received a sustained kicking since the financial crisis erupted in 2008.

In the latest blow, Switzerland announced that it would hold a referendum on a radical proposal that would strip commercial banks of the ability to create money, depriving them of a great deal of their profit-making capabilities. If the Swiss proposal catches on around the world, it could shred core business assumptions that have underpinned the banking model over the past three centuries.

From Babylon to central bank

The earliest banks we know of, in ancient Babylon, were temples that doubled as repositories where one could store wealth. At some point, the guardians of the stored treasure realized they could put this accumulated wealth to work, and banks accordingly began to lend capital. Borrowers would pay interest on what they borrowed, and this interest would ultimately find its way back to the lenders after the banks had taken a cut. The banks became trusted intermediaries that brought lender and borrower together and ensured neither would be cheated. Paper money emerged after people found it was easier to buy things using deposit slips from their bank than carrying gold around.

The next evolution happened when bankers realized that since depositors almost never simultaneously withdrew all their funds, banks could lend more capital than had been deposited. This allowed banks to “create” money in the sense that bankers could issue loans not necessarily backed up by hard deposits.

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

Central Bank Money Printing—-The Rotten Philosophy Beneath

January 5, 2016

Central Bank Money Printing—-The Rotten Philosophy Beneath

If advocates of freedom were to make up a list of New Year’s resolutions for 2016, one of the most important items should be ending government’s monopoly control over money. In a free society, people in the marketplace should decide what they wish to use as money, not the government.

For more than two hundred years, practically all of even the most free market advocates have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been that competitive markets and free consumer choice are far better than government control and planning – except in the realm of money and financial intermediation.

This belief has been taken to the extreme over the last one hundred years, during which governments have claimed virtually absolute and unlimited authority over national monetary systems through the institution of paper money.

At least before the First World War (1914-1918) the general consensus among economists, many political leaders, and the vast majority of the citizenry was that governments could not be completely trusted with management of the monetary system. Abuse of the monetary printing press would always be too tempting for demagogues, special interest groups, and shortsighted politicians looking for easy ways to fund their way to power, privilege, and political advantage.

The Gold Standard and the Monetary “Rules of the Game”

Thus, before 1914 the national currencies of practically all the major countries of what used to be called the “civilized world” were anchored to market-based commodities, either gold or silver. This was meant to place money outside the immediate and arbitrary manipulation of governments.

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

I was asked: Whatever Happened to Inflation after all this Money-Printing?

December 27, 2015

I was asked: Whatever Happened to Inflation after all this Money-Printing?

So where’s my free lunch?

I was asked once again why all this central-bank “money-printing” along with global zero-interest-rate or even negative-interest-rate policies haven’t caused a big bout of inflation, considering how currencies are getting watered down.

It’s a crucial question that baffled many minds for a while, but now, as this thing has been dragging out for seven years, bouncing from one major central bank to the next, without end in sight, the answer is becoming clearer.

This chart by NBF Economics and Strategy shows the growing pile of assets, expressed in dollars, that the “four big central banks” – Fed, ECB, Bank of Japan, and Bank of England – have heaped on their balance sheets: nearly $11 trillion. This does not include what China is doing. The forecasts for 2016 and 2017 assume that the Fed and the Bank of England will stay away from QE, that the BoJ will add annually ¥80 trillion (with a T) to its pile and the ECB €60 billion, with exchange rates unchanged:

Consumer Price Inflation v. Asset Price Inflation

So this global binge of QE has caused inflation, a lot of it, but not consumerprice inflation. It has caused rampant asset price inflation, with stocks, bonds, real estate, classic cars, art… all skyrocketing over the years.

Just about the only major asset class that didn’t experience gains is the commodities sector. There, prices have collapsed. And we’ll get to that in a moment.

So why has QE caused rampant asset price inflation but little consumer price inflation? Because the money never went to consumers – in form of wages. They would have spent most of it, thus driving up demand that could have created some inflationary pressures in consumer prices. But they never got this money.

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

The Poison of Central Planning

December 9, 2015

The Poison of Central Planning

As is well known, central banks around the world have deployed a range of “unconventional policies” in recent years, ranging from imposing zero to negative interest rates, to outright money printing (QE).

Silvana Comugnero

Photo via americanpatriotdaily.com

We have seen a number of people argue that “QE” does not really involve “money printing”, but as we have explained at length, these arguments are misguided (see e.g. our in-depth discussion of the modus operandi of the Fed here: “Can the Fed Print Money?”).

Additional money created in the US economy since January of 2008 (inside the blue rectangle). The Fed created most of it – click to enlarge.

As far as we understand it, the first error is the belief that only bank reserves are created, when in reality, bothbank reserves and deposit money are created in QE operations (the latter is clearly “money”, as it can be used for the final payment of goods and services in the economy). The second error is to argue that because new money isn’t just dropped from helicopters (not yet, anyway), but involves asset purchases, it somehow doesn’t qualify as “printing”. However, it is important to keep in mind that the money used for these purchases is still created ex nihilo, at the push of a button.

As an aside, it has by now become clear that the ECB also creates both reserves and deposit money to the extent of its securities purchases, whereas Japan’s case still requires some digging on our part which we haven’t gotten around to yet (Japan e.g. excludes deposits held by securities companies from its money supply data; in some ways this is sensible, as it allows for a more fine-grained analysis of money and its potential uses, but it may also disguise how much money the BoJ is really creating).

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

Albert Edwards Explains Why The “Global Economy Will Be Thrown Into Chaos”

November 13, 2015

Albert Edwards Explains Why The “Global Economy Will Be Thrown Into Chaos”

SocGen’s permarealist, Albert Edwards, has been the one person who for the past decade has firmly held the belief that a “deflationary Ice Age” is upon the world – courtesy of an unmanageable debt load – no matter what central banks do.

There is, of course, one way to short circuit said Ice Age, and it involves paradropping money in an act of terminal fiat desperation (the outcome is always hyperinflation) onto the general population, something which as we reported last Friday is already in the works courtesy of first Adair Turner and the IMF, and soon all other “very serious people”. Keep an eye on Japan as this is where said paradropping will be attempted first as Ben Bernanke suggested back in 2003 when he said to “consider for example a tax cut for households and businesses that is explicitly coupled with incremental Bank of Japan purchases of government debt – so that the tax cut is in effect financed by money creation.”

But before we get there, here is a snapshot of where, according to Edwards, we are now and why “there” is getting very close.

In his latest note he says, quite simply, that it is now too late to put the “Orc-like monster” of excess debt and declining cash flows back in the bottle, and why “the global economy will be thrown into chaos.”

The deeply held wish of central bankers not to de-rail the fragile economic recovery is on display for all to see as they grasp at the slightest excuse for their continued inaction. The UK’s central bank governor, Mark Carney, exceeded all dovish expectations recently in his latest rate flip-floppery. But what is this? The Fed has finally summoned up its courage and looks set to raise rates next month.

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

The Bubble Finance Cycle——What Our Keynesian School Marm Doesn’t Get

November 13, 2015

The Bubble Finance Cycle——What Our Keynesian School Marm Doesn’t Get

The world of Bubble Finance economies created by the Fed and other central banks is fundamentally different than that prevailing under the “Lite Touch” monetary policies which preceded the Greenspan era.

Those essentially reactive and minimally invasive central bank intrusions into the money and capital markets prevailed from the time of the Fed’s 1951 liberation from the US Treasury by the great William McChesney Martin through September 1985. That’s when the US Treasury/White House once again seized control of the Fed’s printing presses and ordered Volcker to trash the dollar via the Plaza Accord. In due course, the White House trashed him, too.

The problem today is that the PhDs running the Fed have an economic model which is a relic of the Lite Touch era. It is not only utterly irrelevant in today’s casino driven system, but is actually tantamount to a blindfold. It causes them to look at a dashboard full of lagging indicators, while ignoring the explosive leading indicators starring them in the face.

The clueless inhabitants of the Eccles Building do not recognize that they have created a world in which Wall Street supersedes main street; and in which the monetary inflation that eventually brings the business cycle to a halt is soaring financial asset prices, not wage rates and new car prices.

During the Light Touch era recessions were triggered by sharp monetary tightening that caused interest rates to surge. This soon garroted business and household borrowing because credit became too expensive. And this interruption in the credit expansion cycle, in turn, caused spending on business fixed assets and household durables to tumble (e.g. auto and appliances), setting in motion a cascade of recessionary adjustments.

But always and everywhere the pre-recession inflection point was marked by a so-called wage and price spiral resulting from an overheated main street economy. Yellen’s Keynesian professors in the 1960s called this “excess demand”, and they should have known.

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

Professor Bernanke’s Bogus Contra-factual, Part 2: Why The Friedman/Bernanke Thesis About The Great Depression Was Dead Wrong

October 29, 2015

Professor Bernanke’s Bogus Contra-factual, Part 2: Why The Friedman/Bernanke Thesis About The Great Depression Was Dead Wrong

In explaining to the FT’s Martin Wolf why he bailed out the Wall Street gamblers at Goldman Sachs and Morgan Stanley while crushing millions of ordinary American savers and retirees, Bernanke typically repaired to his go to argument. It had nothing to do with the mild excesses of inventories and labor that had built up in the main street economy owing to the Greenspan housing and credit boom, as explained in Part 1.

That’s because Bernanke was not aiming to ameliorate the mild economic liquidation that ensued after the Lehman event; and which, as previously demonstrated, would have runs its course and self-corrected without any help from the Fed in any event.

No, Ben S. Bernanke will be someday remembered as the world’s most destructive battleship admiral. Not only was he fighting the last war, but his whole multi-trillion money printing campaign after September 15, 2008 was aimed at avoiding an historical Fed mistake that had never even happened!

As Bernanke explained it:

I should have done more (to mitigate anti-Fed sentiments). But I was very much engaged in trying to put out the fire. So I don’t know what to say. It was kind of predictable. The Federal Reserved failed in the 1930s. I think we did much better than in the 1930s.

The claim that the Fed resorted to “extraordinary policies” of ZIRP and QE because it was fighting a recurrence of Great Depression 2.0 is completely, profoundly, unequivocally and destructively wrong.

It is the giant fig leaf that obscures what really happened during and after the crisis. Namely, that the main street economy recovered on its own, and that the flood of money generated by Bernanke never left the canyons of Wall Street, thereby causing the destruction of honest price discovery in the financial markets once and for all.

So doing, the Fed and other central banks have turned financial markets into dangerous, unstable casinos. In the name of precluding the contra-factual——that is, Great Depression 2.0—-they have generated the mother of all financial bubbles.

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

Can the Fed Print Money?

October 28, 2015

Can the Fed Print Money?

Every morning is the dawn of a new error – Anonymous

It Can and it Does

In light of the upcoming October Fed (non-)decision, we want to briefly revisit a subject that still appears to be causing some confusion. We most recently encountered this confusion again in a quarterly update by the Hoisington Investment Management Company. To be sure, we very often, if not to say almost always, have tended to agree with the economic conclusions of Lacy Hunt and Van Hoisington since we have first come across their work (we may arrive at these conclusions in a somewhat different manner, but the conclusions as such are usually not much different).

2015-10-27_213416 Money from nothing and chicks for free – how the Fed does it.
Image credit: dreamstime

US true money supply TMS-2: this broad aggregate contains all the items that can be properly defined as money – click to enlarge.

In their third quarter update we have come across one sentence that we believe requires comment, as we have seen similar things asserted elsewhere and we believe it is important to be 100% clear on the topic. In addition to the assertion we want to challenge, which is highlighted below, we also quote the preceding paragraph, because it serves to elucidate a few additional conceptual problems.

“Despite the unprecedented increase in the Federal Reserve’s balance sheet, growth in M2 over the first nine months of this year fell below its average rate of growth over the past 115 years, a time when the growth in the monetary base was stable and quite modest. In addition, velocity of money, which is an equal partner to money in determining nominal GDP, has moved even further outside the Fed’s control. The drop in velocity to a six decade low is consistent with a misallocation of capital and an increase in debt used for either unproductive or counterproductive purposes.

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

Highly Respected Economist Warns: “Hyperinflation Is On The Table… It Will Be Completely Uncontrollable”

October 20, 2015

Highly Respected Economist Warns: “Hyperinflation Is On The Table… It Will Be Completely Uncontrollable”

Thibaut Lepouttre is a highly educated and well respected economist from Belgium. But unlike many of his counterparts who often toe the line of mainstream politicians and financial pundits, he’s not one to sugarcoat the seriousness of the current global economic, financial and monetary environment. According to Lepouttre, while the Federal Reserve has worked feverishly to prevent a widespread destabilization of the system, their machinations will soon be revealed as an abject failure.

Whereas many of his colleagues suggest the possibility of inflation is an unlikely scenario, Lepouttre says that we will see it begin to manifest in the near-term in the form of higher prices for essential resources. In his latest interview he explains why we’re within the prime target dates for inflation to take hold, the snowball effect that will lead to uncontrollable hyperinflation, and how to strategically position assets ahead of this unprecedented monetary event.

There is no doubt that the Federal Reserve has almost run out of options to get the economy going.

(Watch at Youtube)

Let’s go back to the basics of the economy. It takes a while when money gets printed before it really gets circulated in the system. In normal economic times, it takes like 24 to 36 months before a newly printed $100 bill is really brought into circulation, and you can see the trickle down effects of that.

The problem in the current economic situation is the fact that the velocity of money is much slower than it used to be. Due to the lower velocity of the money, it takes much longer before you feel the trickle down effects. So instead of the 24 to 36 months, it’ll take, I’ll say 60-72 months before we see any of the trickle down effects into the real economy.

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

Bishop: Ben Carson Upsets Washington Post for Questioning Fiat Money

October 12, 2015

Bishop: Ben Carson Upsets Washington Post for Questioning Fiat Money

Tho Bishop writes:

Neurosurgeon-turned-Presidential candidate Ben Carson has been under attack this week by our PC-enforcers in the media. While most of the media scorn has been directed at Carson’s defense of gun ownership following last week’s shooting in Oregon – Matt O’Brien of the Washington Post slapped at Carson for flirting with the gold standard.

In an article on Friday criticizing Jeb Bush for not condemning the gold standard harshly enough (Bush only offered a timid “I don’t think so” when asked whether the US should make such a move), O’Brien highlighted some surprisingly sound comments Dr. Carson made earlier this week during an interview with NPR. While discussing the nation’s current debt, Carson said:

“[T]he only reason that we can sustain that kind of debt is because of our artificial ability to print money, to create what we think is wealth, but it is not wealth, because it’s based upon our faith and credit. You know, we decoupled it from the domestic gold standard in 1933, and from the international gold standard in 1971, and since that time, it’s not based on anything. Why would we be continuing to do that?”

Because of views like this, O’Brien dismisses Carson as not being a “candidate of serious policy.”

Unfortunately for O’Brien, he spends the rest of his column demonstrating that his own views on the gold standard, which he refers to as “the world’s worst idea today”, should not be taken seriously.

Along with offering the typical flawed-Friedmanite narrative of how the Federal Reserve’s dedication to preserving the gold standard, O’Brien is concerned about the impact a gold standard has on interest rates.

Without a hint of irony, O’Brien suggests that interest rates guided by the market simply lack the wisdom of our current PhD Standard:

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

Is Quantitative Easing the Same as Printing Money?

October 9, 2015

Is Quantitative Easing the Same as Printing Money?

QUESTION: Mr. Armstrong;

Thank you for coming to Athens. After the presentation, there were so many questions that the moderator did not have time for. You answered some for the crowd afterwards that I had never heard anyone ever explain. You said Quantitative Easing was not money printing nor did it really increase the money supply. You also said to the crowd that fiat is not paper money, but anything declared by government including pegs.

Could you elaborate on those statements.

Thank you for your enlightenment.

ANSWER: Quantitative easing is not responsible for increasing the money supply or printing money. It is a swap of bonds for cash so they are not outright printing money. It is a swap transaction. This combined with the idea that paper money is fiat and precious metals are tangible are all seriously wrong. Fiat is the attempt by government to decree the value of money. This is no different from a peg that broke, such as the Swiss/euro peg, or the Bretton Woods attempt to fix gold in terms of dollars. ANY attempt to flat line the value of money by decree is fiat, regardless of whether the instrument is paper or seashells.

This idea that Quantitative Easing is printing money is very pre-1971 thinking and is a throwback to Bretton Woods. Such an assumption focuses on the differentiation between debt and money or cash. Pre-1971, you could not borrow against government debt so there was a clear difference between debt and money. The theory that it was less inflationary to borrow than print made sense only when there was a real difference between debt and cash or money.

…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…

Part Deux ‐ Shorting the Federal Reserve

October 4, 2015

Part Deux ‐ Shorting the Federal Reserve

The sequence of events leading up the French Revolution are likely unfamiliar to most. Yet money printing and a debauched French currency played no small part in those events. As a sequel to “Shorting the Federal Reserve”, 720 Global aims to provide an historical example of excessive money printing which lead to financial crisis, and ultimately the revolution of a major sovereign nation. More than a history lesson, this article effectively illustrates the road on which the U.S. and many other nations currently travel. The story relayed in this article is not a forecast for what may happen but a simple reminder of what has repeatedly happened in the past.

As you read, notice the story lines the French politicians used to persuade the opposition and justify money printing. Note the similarities to the rationales used by central bankers and neo‐ Keynesians today. Then, as now, it is promoted as a cure for economic ills with manageable consequences and where failure to generate a sustainable recovery are thought to be a failure of not having acted boldly enough.

Our gratitude to the late Andrew D. White, on whose work we relied heavily. The exquisite account of France circa the 1780‐1790’s was well documented in his paper entitled “Fiat Money Inflation in France” published in‐1896. Any unattributed quotes were taken from his paper.

Before The Presses Rolled

During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt tightening was not popular and the King certainly didn’t want a revolution on his hands.

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

Deflation Warning: The Next Wave

October 1, 2015

Deflation Warning: The Next Wave

The global economic slump is accelerating

The signs of deflation are now flashing all over the globe. In our estimation, the possibility of an associated financial crisis is now dangerously high over the next few months.

As we’ve been saying for a while, our preferred model for how things are going to unfold follows the Ka-Poom!Theory as put out by Erik Janszen of iTulip.com.

That theory states that this epic debt bubble will ultimately burst first by deflation (the “Ka!”) before then exploding (the “Poom!”) in hyperinflation due to additional massive money printing efforts by frightened global central bankers acting in unison.

First an inwards collapse, then an outwards explosion. Ka-Poom!

We’ve been tracking the deflationary impulse for a while, and declared deflation the winner back in July of this year.

A Failed Strategy

What exactly do we mean by deflation? Back in 2008 the central banks of the developed world, as well as China, had a choice:

admit that prior policies geared towards encouraging borrowing at a faster rate than income growth were a horrible idea, or
double down and push those failed policies even harder

As we all know, they chose option #2. And so here we are, just 8 years later, with nearly $60 trillion in new debt piled on top of the prior mountain — while GDP grew by only $12 trillion over the same time period:

(Source)

[Note: Global nominal GDP is projected to be $68.6 trillion in 2015, virtually unchanged from 2013]

In other words, instead of saying to ourselves: Hmmm…. it was probably a terrible idea to pile up debt at 2x the rate of income growth, what the world did instead was to double down on that terrible idea and pile on more debt at 5x the rate(!) of nominal GDP growth.

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

Making Sense Of The Sudden Market Plunge

August 22, 2015

Making Sense Of The Sudden Market Plunge

Are you prepared for further turmoil?

The global deflationary wave we have been tracking since last fall is picking up steam. This is the natural and unavoidable aftereffect of a global liquidity bubble brought to you courtesy of the world’s main central banks. What goes up must come down — and that’s especially true for the world’s many poorly-constructed financial bubbles, built out of nothing more than gauzy narratives and inflated with hopium.

What this means is that the traditional summer lull in financial markets has turned August into an unusually active and interesting month. August, it appears, is the new October.

Markets are quite possibly in crash mode right now, although events are unfolding so quickly – currency spikes, equity sell offs, emerging market routs and dislocations, and commodity declines – that it’s hard to tell for sure. However, that’s usually the case right before and during big market declines.

Before you read any further, you probably should be made aware that, at Peak Prosperity, our market outlook has been one of extreme caution for several years. We never bought into so-called “recovery” because much of it was purely statistical in nature, and had to rely on heavily distorted and tortured ‘statistics’ to be believed. Okay, lies is probably a more accurate term in many cases.

Further, most of the gains in financial assets engineered by the central banks were false and destined to burstbecause they were based on bubble psychology, not actual returns.

Which bubbles you ask? There are almost too many to track. But here are the main ones:

Corporate bond bubble
Corporate earnings bubble
Junk bond bubble
Sovereign debt bubble
Equity bubbles in various markets (US, China) and sectors (Tech, Biotech, Energy)
Real estate bubbles, especially in the commodity exporting countries
Central bank credibility bubble (perhaps the largest and most dangerous of them all)

What’s the one thing that binds all of these bubbles together? Central bank money printing.

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

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