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The emerging market currency crisis is not over yet, and could yet morph into a broader contagion that threatens to drag down oil demand.

Last week, Argentina’s peso fell by around 20 percent in just a few days, taking year-to-date losses over 50 percent. The central bank frantically hiked interest rates from 45 to 60 percent in an effort to stem the losses, hoping to halt the peso’s spiraling descent. The peso regained a bit of ground, but now trades at over 37 pesos to the dollar, compared to 27 pesos per dollar in early August and 18 pesos at the start of the year.

This may seem like a problem for Argentines, but the currency turmoil is indicative of a broader malaise sweeping over emerging markets. A whole range of currencies have lost ground this year, rattling financial markets and forcing central banks to hike interest rates.

Another way of saying the same thing is that the dollar has strengthened on the back of rate tightening from the U.S. Federal Reserve, which has battered currencies across the globe. This underscores a deeper problem with the global economy: After a decade of near-zero interest rates, how does the U.S. central bank withdraw extraordinary monetary stimulus without wreaking havoc on the global economy?

The stronger dollar hits emerging markets in several ways. First, it directly knocks down emerging market currencies in terms of their value against the dollar. But, from there, the problem gets worse. A weaker currency makes dollar-denominated debt in these countries much more expensive and much harder to pay off. That can slow down the economy because businesses have to cut back, consumers have trouble paying off debt, the risk of default rises and everything slows down.

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

China Announces New Stimulus Measures

July 26, 2018

China Announces New Stimulus Measures

Another day, another stimulus announcement by China.

One day after Beijing threw in the towel, and in addition to monetary easing announced it would be far more “proactive” in fiscally stimulating the country, Chinese banks received notice from regulators on Wednesday that a core capital requirement will be eased in order to support lending, as Beijing uses the ongoing trade war as a scapegoat to unleash another massive stimulus – think Shanghai Accord just without the foreign central bankers and without the US.

This is merely the latest in a wild scramble of easing initiatives unleashed by China in the past three months, and summarized in the chart below.

As Bloomberg reports, the PBOC told some institutions Wednesday that the so-called “structural parameter” in the Macro-Prudential Assessment of their balance sheets will be lowered by around 0.5 points, reducing required capital buffers.

Acording to Bloomberg sources, the PBOC said that the change is being made to support local financial institutions in meeting credit demand effectively, which is another way of saying allowing the country’s banks to purchase more of China’s AA- rated “junk bonds” which have tumbled in recent months.

Last week, the PBOC offered a record amount of Medium-term Lending Facility loans – with the proceeds meant to be used for purchasing the riskiest bonds – and has cut reserve-requirement ratios three times this year.

China’s scramble to stimulate the economy, both monetarily and fiscally, comes as the country’s broadest credit aggregate, Total Social Financing, has fallen to a record low as a % of China’s M2.

The financial deleveraging campaign since early 2017 has resulted in a severe negative shock to aggregate credit supply. The real economy has begun to feel the pain, as credit growth slumps and interest rates rise.

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

The Eurozone’s Coming Debt Crisis

June 13, 2018

The Eurozone’s Coming Debt Crisis

The European Central bank has signaled the end of its asset purchase program and a possible rate hike before 2019. After more than 2 trillion euro of purchases and zero interest rate policy, it is overdue.

The massive quantitative easing program has generated very significant imbalances and the risks outweigh the questionable benefits.

The balance sheet of the ECB is now more than 40% of the Eurozone GDP.

The governments of the Eurozone, however, have not prepared themselves at all for the end of stimuli.

Rather the contrary.

The Eurozone states often claim that deficits have been reduced and risks contained. However, closer scrutiny shows that the bulk of deficit reductions came from lower cost of debt. Eurozone government spending has barely fallen, despite lower unemployment and rising tax revenues. Structural deficits remain stubborn, and in some cases, unchanged from 2013 levels.

The 19 eurozone countries have collectively saved 1.15 trillion euros in interest payments since 2008 due to ECB rate cuts and monetary policy interventions, according to Handelsblatt. A reduction in costs against the losses of pensioners and savers.

However, that illusion of savings and budget stability can rapidly disappear as most Eurozone countries face massive maturities in the 2018-2020 period and wasted precious years of quantitative easing without implementing strong structural reforms. Tax wedge rose for families and SMEs, while current spending by governments barely fell, competitiveness remained poor and a massive one trillion euro in non-performing loans raised doubts about the health of the European financial system.

The main eurozone economies face more than 2.1 trillion euro in maturities between 2018 and 2021. This, added to lower tax revenues due to the slowdown and rising spending from populist demands creates an enormous risk of a large debt crisis that no central bank will be able to contain. Absent of structural reforms, the eurozone faces a Japan-style stagnation or a debt crisis.

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

Nomi Prins: Central Bank-Inspired “Major Credit Squeeze” Will Trigger Next Crisis

June 9, 2018

Nomi Prins: Central Bank-Inspired “Major Credit Squeeze” Will Trigger Next Crisis

For all the talk about tapering (in both the US and Europe), the Federal Reserve has actually done remarkably little to reduce its balance sheet. And in an interview with Macrovoices Erik Townsend, former Wall Street executive Nomi Prins expands upon some of the same themes she covered in her latest book, “Collu$ion: How Central Bankers Rigged the World”.

As Prins reminds us early on, the Fed and other central banks have expanded their balance sheets by more than $20 trillion, and despite all the chatter about withdrawing stimulus and letting its balance sheet roll off, the Fed’s balance sheet has only shrunk from $4.5 trillion to $4.3 trillion.

Central bankers, Prins argues, like to pat themselves on the back for avoiding what many feared would be runaway inflation resulting from low interest rates and quantitative easing. But of course, they did create inflation, just not the kind that could be reflected by CPI:

But the reason the markets went up and didn’t see through that is not because they believed this wasn’t an act of desperation (I think), but because there was just free money being handed out. It’s sort of like if you’re a drug addict, and you know at some point you’ll be clearheaded if you just get off the drugs and get your act together and move forwards, that’s one way to do it.

Or if someone is supplying you with lots of drugs then it just works and everything else, well then you’ll take them. And this is what happened. The Fed was that sort of supplier of last resort and a lender of last resort of capital for the market.

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

Effects of Monetary Pumping on the Real World

May 4, 2018

Effects of Monetary Pumping on the Real World

As long time readers know, we are looking at the economy through the lens of Austrian capital and monetary theory (see here for a backgrounder on capital theory and the production structure). In a nutshell: Monetary pumping falsifies interest rate signals by pushing gross market rates below the rate that reflects society-wide time preferences; this distorts relative prices in the economy and sets a boom into motion – which is characterized by widespread malinvestment of scarce capital and over-consumption; eventually, the distorted capital structure proves unsustainable – interest rates begin to rise, and boom turns to bust. Many businessmen belatedly realize that the accounting profits of the boom were an illusion – in reality, capital was consumed. Many as yet unfinished investment projects have to be abandoned, as they either turn out to be unprofitable at higher rates and/or the resources needed to complete them are lacking.

When capital runs short: several of countless housing developments in Spain which had to be abandoned when the bust of 2007-2009 started. The image on the right hand side shows a Spanish construction machinery graveyard in 2010. Money supply growth in the US and the euro area exploded after the turn of the millennium, as central banks pumped heavily to combat the demise of the tech boom. In the process they egged on an even more dangerous bubble in real estate. In their great wisdom they have now replaced the expired real estate boom with an even larger, more comprehensive bubble in everything.

Below we show updates of a chart that depicts the effect of money supply and interest rate manipulation on the capital structure. The caveat to this is that such statistical data have to be viewed with a critical eye: one must always to ask to what extent the economy is actually amenable to “measurement” – often such aggregated data obscure more than they reveal.

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

Taking the Pulse of a Weakening Economy

May 4, 2018

Taking the Pulse of a Weakening Economy

Corporate buybacks provide the key analogy for the economy as a whole.

Central banks have been running a grand experiment for 9 years, and now we’re about to find out if it succeeds or fails. For 9 unprecedented years, central banks have pushed the pedal of monetary stimulus to the metal: near-zero interest rates, monumental purchases of bonds, mortgage-backed securities, stocks and corporate bonds, injecting trillions of dollars, yuan, yen and euros into the global financial system, all in the name of promoting a “synchronized global recovery” that in many nations remains the weakest post-World War II recovery on record.

The two goals of this unprecedented stimulus were 1) bringing consumption forward and 2) generating a “wealth effect” as the owners of assets rising in value would translate their perception of feeling wealthier into more borrowing and consumption that would then feed a self-sustaining virtuous cycle of expansion.

The Federal Reserve has finally begun reducing its stimulus programs of near-zero interest rates and bond purchases, the idea being that the “recovery” is now robust enough to continue without the extraordinary monetary stimulus of the past 9 years since the Global Financial Meltdown of 2008-09.

Will the “synchronized global recovery” continue as interest rates rise and central bank assets purchases decline? Policy makers and economists evince confidence as they collectively hold their breath–is the recovery now self-sustaining?

2018 is the first test year. Global assets–stocks, bonds and real estate–remain at levels that are grossly overvalued by traditional measures, and most economies are still expanding modestly. But since the other major central banks have only recently begun to “taper” / reduce their securities purchases, the real test has yet to begin.

The pulses of asset valuations and productive expansion are weakening. Asset valuations are either no longer expanding or are actively falling; markets everywhere feel heavy, as if all they need is one good shove to slip into major declines.

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

Why Trade Wars Ignite and Why They’re Spreading

April 13, 2018

Why Trade Wars Ignite and Why They’re Spreading

The monetary distortions, imbalances and perverse incentives are finally bearing fruit: trade wars.

What ignites trade wars? The oft-cited sources include unfair trade practices and big trade deficits. But since these have been in place for decades, they don’t explain why trade wars are igniting now.

To truly understand why trade wars are igniting and spreading, we need to start with financial repression, a catch-all for all the monetary stimulus programs launched after the Global Financial Meltdown/Crisis of 2008/09.

These include zero interest rate policy (ZIRP), quantitative easing (QE), central bank purchases of government and corporate bonds and stocks and measures to backstop lenders and increase liquidity.

The policies of financial repression force risk-averse investors back into risk assets if they want any return on their capital, and brings consumption forward, that is, encourages consumers to borrow and buy now rather than delay purchases until they can be funded with savings.

As Gordon Long and I explain in the second part of our series on Trade Wars, financial repression generates over-capacity and over-consumption: with credit almost free to corporations and financiers, new production facilities are brought online in the hopes of earning a profit as the global economy “recovers.”

Soon there is more productive capacity than there is demand for the good being produced: this is over-capacity, and it leads to over-production, which as a result of supply and demand, leads to a loss of pricing power: producers can’t raise prices due to global gluts, so they end up dumping their over-production wherever they can.

If the producers are state-owned enterprises subsidized by governments and central banks, these producers can sell at a loss because their only function is to sustain employment; profitability is a bonus.

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

Can Money Pumping Stimulate Economic Growth?

March 21, 2018

CAN MONEY PUMPING STIMULATE ECONOMIC GROWTH?

According to most economic experts when an economy falls into a recession the central bank can pull it out of the slump by means of money pumping. This way of thinking implies that money pumping can somehow grow the economy. Indeed US historical evidence supposedly does show that easy money policy seems to work. For instance on average between 1970 and 2018.2 it took about 11 months before increases in money supply caused increases in the growth rate of industrial production (see chart).

The question is how is this possible? After all if money printing can grow the economy then why not to print plenty of it and make massive economic growth? By doing that, central banks could have created an everlasting prosperity for every individual on the planet.

For most commentators the arrival of a recession is due to unexpected events such as shocks that push the economy away from a trajectory of stable economic growth. Shocks weaken the economy i.e. cause lower economic growth so it is held.

We suggest that as a rule a recession emerges in response to a decline in the growth rate of money supply. Usually this takes place in response to a tighter stance of the central bank.

As a result various activities that sprang up on the back of the previous strong money growth rate (usually this emerges because of loose central bank monetary policy) come under pressure.

These activities cannot support themselves – they survive because of the support that the increase in money supply provides. The increase in money diverts to them real wealth from wealth generating activities. Consequently, this weakens these activities i.e. wealth-generating activities.

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

The End of (Artificial) Stability

February 21, 2018

The End of (Artificial) Stability

The central banks’/states’ power to maintain a permanent bull market in stocks and bonds is eroding.

There is nothing natural about the stability of the past 9 years. The bullish trends in risk assets are artificial constructs of central bank/state policies. As these policies are reduced or lose their effectiveness, the era of artificial stability is coming to a close.

The 9-year run of Bull-trend stability is ending as a result of a confluence of macro dynamics:

1. Central banks are under pressure to reduce, end or reverse their unprecedented monetary stimulus, and the consequences are unpredictable, given the market’s reliance on the certainty that “central banks have our back” is ending.

2. Interest rates / bond yields may well plummet in a global recession, but if we look at a 50-year chart of interest rates, we see a saucer-shaped bottoming in play. Technician Louise Yamada has been discussing the tendency of interest rates/bond yields to trace out a multi-year saucer bottom for over a decade, and we can now discern this.

Even if yields plummet in a recession, as many analysts predict, this doesn’t necessarily negate the longer term trend of higher yields and rates.

3. The global economy is overdue for a business-cycle recession, which is characterized by a retrenchment of credit and the default of marginal debt. The “recovery” is the weakest recovery in the past 60 years, and now it’s the longest expansion.

4. The mainstream financial media is telling us that everything is going great in the global economy, but this sort of complacent (or even euphoric) “it’s all good news” typically marks the top of stocks, just as universal negativity marks secular lows.

5. What happens to markets characterized by uncertainty? Once certainty is replaced by uncertainty, markets become fragile and thus exposed to sudden shifts of sentiment. This destabilization is expressed as volatility, but it’s far deeper than volatility as measured by VIX or sentiment indicators.

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

The Irresponsible ECB

February 20, 2018

The Irresponsible ECB

Ultra-loose monetary policy stopped being appropriate long ago, and is especially inadvisable now, with the global economy – especially the developed world – experiencing an increasingly strong recovery. As recent stock-market turbulence shows, refusal to normalize policy faster is drastically increasing the risks to financial stability.

FRANKFURT – The Dow Jones Industrial Average’s recent “flash crash,” in which it plunged by nearly 1,600 points, revealed just how addicted to expansionary monetary policy financial markets and economic actors have become. Prolonged low interest rates and quantitative easing have created incentives for investors to take inadequately priced risks. The longer those policies are maintained, the bigger the threat to global financial stability.

The fact is that ultra-loose monetary policy stopped being appropriate long ago. The global economy – especially the developed world – has been experiencing an increasingly strong recovery. According to the International Monetary Fund’s latest update of its World Economic Outlook, economic growth will continue in the next few quarters, especially in the United States and the eurozone.

Yet international institutions, including the IMF, fear the sudden market corrections that naturally arise from changes in inflation or interest-rate expectations, and continue to argue that monetary policy must be tightened very slowly. So central banks continue to postpone monetary-policy normalization, with the result that asset prices rise, producing dramatic market distortions that make those very corrections inevitable.

To be sure, the US Federal Reserve has moved away from monetary expansion since late 2013, when it began progressively reducing and ultimately halting bond purchases and shrinking its balance sheet. Since the end of 2015, the benchmark federal funds rate has been raised to 1.5%.

But the Fed’s policy is still far from normal. Considering the advanced stage of the economic cycle, forecasts for nominal growth of more than 4%, and low unemployment – not to mention the risk of overheating – the Fed is behind the curve.

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

Three Crazy Things We Now Accept as “Normal”

February 10, 2018

Three Crazy Things We Now Accept as “Normal”

How can central banks “retrain” participants while maintaining their extreme policies of stimulus?

Human habituate very easily to new circumstances, even extreme ones. What we accept as “normal” now may have been considered bizarre, extreme or unstable a few short years ago.

Three economic examples come to mind:

1. Near-zero interest rates. If someone had announced to a room of economists and financial journalists in 2006 that interest rates would be near-zero for the foreseeable future, few would have considered it possible or healthy. Yet now the Federal Reserve and other central banks have kept interest rates/bond yields near-zero for almost nine years.

The Fed has raised rates a mere .75% in three cautious baby-steps, clearly fearful of collapsing the “recovery.”

What would happen if mortgages returned to their previously “normal” level around 7% from the current 4%? What would happen to auto sales if people with average credit had to pay more than 0% or 1% for a auto loan?

Those in charge of setting rates and yields are clearly fearful that “normalized” interest rates would kill the recovery and the stock bubble.

2. Massive money-creation hasn’t generated inflation. In classic economics, massive money-printing (injecting trillions of dollars, yuan, yen and euros into the financial system) would be expected to spark inflation.

As many of us have observed, “official” inflation of less than 2% does not align with “real-world” inflation in big-ticket items such as rent, healthcare and college tuition/fees. A more realistic inflation rate is 7%-8% annually, especially in the higher-cost regions of the US.

But setting that aside, there is a puzzling asymmetry between low official inflation and the unprecedented expansion of money supply, debt and monetary stimulus (credit and liquidity). To date, most of this new money appears to be inflating assets rather than the real world. But can this asymmetry continue for another 9 years?

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

Why the Financial System Will Break: You Can’t “Normalize” Markets that Depend on Extreme Monetary Stimulus

January 3, 2018

Why the Financial System Will Break: You Can’t “Normalize” Markets that Depend on Extreme Monetary Stimulus

Central banks are now trapped.

In a nutshell, central banks are promising to “normalize” their monetary policy extremes in 2018. Nice, but there’s a problem: you can’t “normalize” markets that are now entirely dependent on extremes of monetary stimulus. Attempts to “normalize” will break the markets and the financial system.

Let’s start with the core dynamic of the global economy and nosebleed-valuation markets: credit.

Modern finance has many complex moving parts, and this complexity masks its inner simplicity.

Let’s break down the core dynamics of the current financial system.

The Core Dynamic of the “Recovery” and Asset Bubbles: Credit

Credit is the foundation of the current financial system, for credit enables consumers to bring consumption forward, that is, buy more stuff today than they could buy with the cash they have on hand, in exchange for promising to pay principal and interest with their future income.

Credit also enables speculators to buy more assets than they otherwise could were they limited to cash on hand.

Buying goods, services and assets with credit appears to be a good thing: consumers get to enjoy more stuff without having to scrimp and save up income, and investors/speculators can reap more income from owning more assets.

But all goods/services and assets are not equal, and all credit is not equal.

There is an opportunity cost to any loan (i.e. credit), as the income that will be devoted to paying principal and interest in the future could have been devoted to some other use or investment.

So borrowing money to purchase a product or an asset now means foregoing some future purchase.

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

Weekly Commentary: Epic Stimulus Overload

December 27, 2017

Weekly Commentary: Epic Stimulus Overload

Ten-year Treasury yields jumped 13 bps this week to 2.48%, the high going back to March. German bund yields rose 12 bps to 0.42%. U.S. equities have been reveling in tax reform exuberance. Bonds not so much. With unemployment at an almost 17-year low 4.1%, bond investors have so far retained incredible faith in global central bankers and the disinflation thesis.

Between tax legislation and cryptocurrencies, there’s been little interest in much else. As for tax cuts, it’s an inopportune juncture in the cycle for aggressive fiscal stimulus. And for major corporate tax reduction more specifically, with boom-time earnings and the loosest Credit conditions imaginable, it’s Epic Stimulus Overload. History will look back at this week – ebullient Republicans sharing the podium and cryptocurrency/blockchain trading madness – and ponder how things got so crazy.

From my analytical vantage point, the nation’s housing markets have been about the only thing holding the U.S. economy back from full-fledged overheated status. Sales have been solid and price inflation steady. And while construction has recovered significantly from the 2009/2010 trough, housing starts remain at about 60% of 2004-2005 period peak levels. It takes some time for residential construction to attain take-off momentum. Well, liftoff may have finally arrived. As long as mortgage rates remain so low, we should expect ongoing housing upside surprises. An already strong inflationary bias is starting to Bubble. Is the Fed paying attention?

December 22 – Reuters: “Sales of new U.S. single-family homes unexpectedly rose in November, hitting their highest level in more than 10 years, driven by robust demand across the country. The Commerce Department said… new home sales jumped 17.5% to a seasonally adjusted annual rate of 733,000 units last month. That was the highest level since July 2007… New home sales surged 26.6% from a year ago.”

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

Surveying the Damage of Low Interest Rates

December 15, 2017

Surveying the Damage of Low Interest Rates

Few would disagree that it was necessary to slash interest rates in the immediate aftermath of the 2008 global financial crisis. But after a decade of ultra-loose monetary policies across advanced economies, growth remains tepid, financial risks have proliferated, and middle-class savers have lost out.

WASHINGTON, DC – For years after the 2008 financial crisis, policymakers congratulated themselves for having averted a second Great Depression. They had responded to the global recession with the kind of Keynesian fiscal and monetary stimulus that the moment required.

But nine years have passed, and official interest rates are still hovering around zero, while growth has been mediocre. Since 2008, the European Union has grown at a dismal average annual rate of just 0.9%.

The broad Keynesian consensus that emerged immediately after the crisis has become today’s prevailing economic dogma: as long as growth remains substandard and annual inflation remains below 2%, more stimulus is deemed not just appropriate, but necessary.

The arguments underlying this dogma do not hold water. For starters, measures of inflation are so poor as to be arbitrary. As Harvard’s Martin Feldstein notes, governments have no good way to measure price inflation for services and new technologies, which account for an ever greater share of advanced economies’ GDP, because quality in these sectors varies substantially over time. Moreover, real estate and other assets are not even included in the accounting.

The dictate that inflation must rise at an annual rate of 2% is also arbitrary. Swedish economist Knut Wicksell’s century-old concept of a “natural” interest rate – at which real (inflation-adjusted) GDP growth follows a long-term average while inflation remains stable – makes sense. But why should the inflation rate always be 2%? And why aren’t services, new technologies, or, say, Chinese manufactured goods excluded from the measure of core inflation, alongside energy and food?

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

It’s More Than Just the Absences of Acceleration, It’s the Synchronization Where There Should Be None

December 6, 2017

IT’S MORE THAN JUST THE ABSENCE OF ACCELERATION, IT’S THE SYNCHRONIZATION WHERE THERE SHOULD BE NONE BY JEFFREY P. SNIDER

According to the latest ECB figures, as of yesterday total “liquidity” added to the European banking system for that central bank’s ongoing monetary “stimulus” was just shy of €2 trillion. The outstanding balance in the core current account (reserves) held on behalf of the banking system was €1.296 trillion. In the deposit account, banks are holding €686 billion at -40 bps in “yield.”

To create all these euro-denominated numbers, the European Central Bank through its constituent National Central Banks (NCB) has purchased €2.21 trillion through its three main active LSAP’s (Large Scale Asset Purchases): the PSPP, or QE, which buys up sovereign bonds and is the reason for running them through the NCB’s (out of original concern exactly who would bear any default risk); the CBPP3, or the third time the ECB has bought covered bonds from banks; and the Corporate Sector Purchase Program which is self-explanatory.

The numbers given above don’t appear to balance because of the way all this stuff is accounted for. The NCB transactions of QE and other material operations actually subtract from the ECB’s asset side because it isn’t doing them, becoming instead -€1.21trillion in so far accumulated autonomous factors. On the other side, the liability side of the simple balance sheet, there are outstanding €769 billion in normal liquidity operations (OMO) at the MRO.

The net of all these hundreds of billions and trillions is actually unclear. I don’t mean that in an accounting sense, for all the euros are there in the various statements. Rather, what these massive transactions have produced where it counts is truly negligible.

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

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