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President Trump recently called the Federal Reserve’s interest rate hikes crazy. Leaving aside President Trump’s specific complaint, which is likely motivated by the belief that low rates will help him win reelection, he is right that “crazy” is a good way to describe the Federal Reserve.

When not forced to use a government-created currency, individuals have historically chosen to use a precious metal such as gold or silver as money. The reasons include that precious metals are durable and their value tends to remain relatively stable over time. A stable currency ensures that prices accurately convey the true value of goods and services.

A main value of a precious metal is it accurately conveys the true price of money, which is the Interest rate. If the interest rate reflects the manipulation of central bankers and not true market conditions, individuals will be unable to properly allocate resources between savings and current consumption.

In contrast to market money, government-created fiat currency is anything but stable. Central banks constantly increase and decrease the money supply in an attempt to control the economy by controlling the interest rates. This causes individuals to misread market conditions, leading to a misallocation of resources. This can create an illusion of prosperity. But eventually reality catches up to the Federal Reserve-created fantasies. When that happens, there is a recession or worse, leading the Fed to start the whole boom-and-bust cycle over again.

When central banks create money, those who first get the new money enjoy an increase in purchasing power before the new money causes a real increase in prices. Those who receive the money first are members of the banking and financial elite.

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Why You Should Expect the Unexpected

October 20, 2018

Why You Should Expect the Unexpected

End of the Road

The confluence of factors that influence market prices are vast and variable. One moment patterns and relationships are so pronounced you can set a cornerstone by them. The next moment they vanish like smoke in the wind. One thing that makes trading stocks so confounding is that the buy and sell points appear so obvious in hindsight. When examining a stock’s price chart over a multi-year duration the wave movements appear to be almost predictable.

The fascinating obviousness of hindsight – it is now perfectly clear when one should have bought AMZN. Unfortunately it wasn’t quite as clear in real time. [PT]

Trend lines matching interim highs and lows, and bounded price movements within this range, display what, in retrospect, are the precise moments to buy and sell. In practice, the stock market dishes out hefty doses of humility with impartial judgment. What’s more, being right does not always translate to success. Sometimes it is more costly to be right at the wrong time than wrong at the right time.

One fallacy that has gained popularity over the last decade is the zealot belief that the Fed disappears risk from markets. That by expanding and moderating the money supply by just the right amount, and at just the right time, markets can grow within a pleasant setting of near nonexistent volatility. Some even trust that when there is a major stock market crash, the Fed, having the courage to act, will soften the landing and quickly put things back upon a path of righteous growth.

Believers in the all-powerful controls of the Fed have a 30 year track record they can point to with conviction. Over this period, the Fed has put a lamp unto the feet and a light unto the path of the stock and bond market.

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The Committee to Destroy the World: The Federal Reserve

September 18, 2018

The Committee to Destroy the World: The Federal Reserve

The general belief among average citizens is that the purpose of central banks is to help the economy by fighting inflation and mitigating financial crisis. It’s a fairy tale that politicians like to encourage. If there were any truth to it, however, where was the Federal Reserve during the crisis of 2007? Rather than helping, it was widening the crisis with its easy money policies.

While central banks are not a government entity, their primary purpose is to create money for the benefit of the government. By mindlessly printing fiat currency, central banks create a shaky illusion of financial stability. In reality, each central bank is a monopoly that controls the production of distribution of currency and interest rates. Most importantly, it also controls gold reserves. While paper currency allegedly has the backing of the government, it is the central bank that controls the value of the currency at any specific time.

The first central bank, the Central Bank of England, was created in the 17th century as a scheme to enable the king to pay off his debts. As each country established its own central bank, it has been used by its government as a personal bank account.

With the government’s permission, central banks print money for the use of commercial banks to lend out at a specified rate of interest. Together, they work at inflating the money supply through a system called fractional-reserve banking. Commercial banks are required to keep a fraction of their money in reserve. For example, if someone deposits $1,000, the bank has to keep 10 percent in its vaults. That $100 cannot be lent out. It can only lend out $900, thereby creating two separate claims on those funds: the original deposit of $1,000 and the subsequent borrower of the $900. The supply of money in circulation has been artificially increased to $1,900. That is only one of the ways central banks manipulate the fiat money supply.

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The Dollar Dilemma: Where to From Here?

June 23, 2018

The Dollar Dilemma: Where to From Here?

Introduction: Where We Are

It’s a fallacy to believe the US has a free market economy. The economy is run by a conglomerate of individuals and special interests, in and out of government, including the Deep State, which controls central economic planning.

Rigging the economy is required to prevent market forces from demanding a halt to the mistakes that planners continuously make. This deceptive policy can last only for a limited time. Ultimately, the market proves more powerful than government manipulation of economic events. The longer the process lasts, the greater the bubble that always bursts. The planners in charge have many tools to perpetuate confidence in an unstable system, but common sense should tell us that grave dangers lie ahead.

Their policies strive to convince the unknowing that the dollar is strong and its status as the world’s reserve currency is secure, no matter how many new dollars they create of out of thin air. It is claimed that our foreign debt is always someone else’s fault and never related to our own monetary and economic mismanagement.

Official government reports inevitably claim inflation is low and we must work harder to increase it, claiming price increases somehow mystically indicate economic growth.

The Consumer Price Index is the statistic manipulated to try to prove this point just as they use misleading GDP numbers to do the same. Many people now recognizing these reports are nothing more than propaganda. Anybody who pays the bills to maintain a household knows the truth about inflation.

Ever since the Great Depression, controlling the dollar price of gold and deciding who gets to hold gold was official policy. This advanced the Federal Reserve’s original goal of demonetizing precious metals, which was fully achieved in August 1971.

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The Fed’s “Inflation Target” is Impoverishing American Workers

June 21, 2018

The Fed’s “Inflation Target” is Impoverishing American Workers

Redefined Terms and Absurd Targets

At one time, the Federal Reserve’s sole mandate was to maintain stable prices and to “fight inflation.” To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply. Rising prices are a consequence – a very painful consequence – of money printing.

Fed Chair Jerome Powell apparently does not see the pernicious effects of inflation (at least he seems to be looking around… [PT]) Photo credit: Andrew Harrer / Bloomberg

Naturally, the Fed and all other central bankers prefer the definition of inflation as a rise in prices which insidiously hides the fact that they, being the issuers of currency, are the real culprit for increased prices.

Be that as it may, the common understanding of inflation as rising prices has always been seen as pernicious and destructive to an economy and living standards. In the perverted world of modern economics, however, the idea of inflation as an intrinsic evil has been turned on its head and monetary authorities the world over now have “inflation targets” which they hope to attain.

America’s central bank is right in line with this lunacy. According to the Fed’s “May minutes”, it wants

Translated into understandable verbiage, the Fed wants everyone to pay at least 2% higher prices p.a. for the goods they buy.

Yes, by some crazed thinking US monetary officials believe that consumers paying higher prices is somehow good for economic activity and standards of living! Of course, anyone with a modicum of sense can see that this is absurd and that those who espouse such policy should be laughed at and summarily locked up in an asylum! Yet, this is now standard policy, not just with the Fed, but with the ECU and other central banks.

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

US Money Supply Growth Jumps in March , Bank Credit Growth Stalls

May 10, 2018

US Money Supply Growth Jumps in March , Bank Credit Growth Stalls

A Movie We Have Seen Before – Repatriation Effect?

There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.

The y/y growth rate of TMS-2 increased from 2.68% in February to 4.85% in March. The 12-month moving average nevertheless continued to decline and stands now at 4.1%.

The sole component of TMS-2 showing sizable growth in March was the US Treasury’s general account with the Fed. This is included in the money supply because, well, it is money. The Treasury department will spend it, therefore this is not money that can be considered to reside “outside” of the economy (such as bank reserves).

We were wondering what was behind the spurt in the amount held in the general account. While there was a decline in the growth rate of US demand deposits, the slowdown in momentum did not really offset the surge in funds held by the Treasury.

This reminded us of a subject discussed by the Treasury Borrowing Advisory Committee (TBAC) in the second half of 2016 in the wake of the change in money market fund regulations. This led to a repatriation of money MM funds previously lent out in the euro-dollar market to European issuers of commercial paper (mainly European banks).

Readers may recall that there was a mysterious surge in the growth rate of the domestic US money supply (again, only visible in TMS 1 & 2) into November 2016, despite a lack of QE and no discernible positive momentum in the rate of change of inflationary bank lending growth.

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Krugman Dismisses That an Increase in Money Supply Causes Inflation

April 15, 2018

KRUGMAN DISMISSES THAT AN INCREASE IN MONEY SUPPLY CAUSES INFLATION

In the New York Times article on March 27, 2018 – Immaculate inflation strikes again – Paul Krugman argues that those economists who are of the opinion that the key factor that causes inflation is increases in money supply are very wrong. According to Krugman, the key factor that sets in motion inflation is unemployment. Whilst a decline in the unemployment rate is associated with a strengthening in the rate of inflation an increase in the unemployment rate is associated with a decline in the rate of inflation.

Note that for Krugman inflation is about general increases in the prices of goods and services, which we suggest is a flawed definition. To ascertain what inflation is all about we have to establish how this phenomenon emerged. We have to trace it back to its historical origin.

The essence of inflation

The subject matter of inflation is an act of embezzlement. Historically inflation originated when a country’s ruler such as king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process, the king would falsify the content of the gold coins by mixing it with some other metal and return diluted gold coins to the citizens.

On this Rothbard wrote,

More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks”, but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.^[1]

On account of the dilution of the gold coins, the ruler could now mint a greater amount of coins and pocket for his own use the extra coins minted. What was now passing as a pure gold coin was in fact a diluted gold coin.

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The Case for a Gold Currency: Part 1

April 5, 2018

THE CASE FOR A GOLD CURRENCY: PART 1

The gold standard is a system where the nation’s money supply is determined by the supply of gold that is mined. Over time we have had different types of gold standard economies and countries have even suspended the gold standard during wars (e.g.: WWI). Until WWI the world had the international gold standard. Under a gold standard, paper money like $ and £ are not money- they are simply substitutes for a specific weight of gold.

History of Gold:

Mankind has used gold for thousands of years as money. However, the modern gold standard system is the most important.

International Gold Standard system (1870-1914) (Classical Gold Standard)

This was when money was redeemable for gold and there were few interruptions. This was the most stable monetary order in the history of gold. Every major currency such as the £, US$ and Franc were all redeemable for gold. Gold was the real money. £ is simply a name to define a weight of gold. Under this system, exchange rates were fixed based on how much weight of gold equalled 1 unit of currency. £1 was 1/4^th of an ounce and $1 was 1/20.67^th of an ounce, resulting in an exchange rate of $4.86/£.

In the long run, the money supply growth was extremely limited. Money supply could only grow if the amount of gold mined was increased. As a result, this made the value of money very stable. For example, after the 1848 California gold rush, inflation averaged 1.5% per year (according to Larry White), but as the amount of gold mined slowed, then there was gentle deflation. The net result is that between 1800 and 1900, the price level fell slightly. The reason is because as saving and investment increase and technology improved, the output of goods and services grew faster than the money supply, resulting in deflation. However, since 1971, when Nixon ended Bretton Woods, the dollar has lost 82% of its value.

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Why QE didn’t send gold up to $20,000

March 7, 2018

Why QE didn’t send gold up to $20,000

Why didn’t quantitative easing, which created trillions of dollars of new money, lead to a massive spike in the gold price?

The Quantity Theory of Money

The intuition that an increase in the money supply should lead to a rise in prices, including the price of gold, comes from a very old theory of money—the quantity theory of money—going back to at least the philosopher David Hume. Hume asked his readers to imagine a situation in which everyone in Great Britain suddenly had “five pounds slipt into his pocket in one night.” Hume reasoned that this sudden increase in the money supply would “only serve to increase the prices of every thing, without any farther consequence.”

Another way to think about the quantity theory is by reference to the famous equation of exchange, or

MV = PY
money supply x velocity of money over a period of time = price level x goods & services produced over that period

A traditional quantity theorist usually assumes that velocity, the average frequency that a banknote or deposit changes hands, is quite stable. So when M—the money supply— increases, a hot potato effect emerges. Anxious to rid themselves of their extra money balances M, people race to the stores to buy Y, goods and services, that they otherwise couldn’t have afforded, quickly emptying the shelves. Retailers take these hot potatoes and in turn spend them at their wholesalers in order to restock. But as time passes, business people adjust by ratcheting up their prices so that the final outcome is a permanent increase in P.

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Plunge in Interbank Lending: The Straw that Broke the Fed’s Back

February 13, 2018

Plunge in Interbank Lending: The Straw that Broke the Fed’s Back

Interbank lending took a historic dive. Readers ask “What’s happening?” Let’s investigate.

Interbank Lending Long Term

The plunge in interbank lending is both sudden and dramatic. What’s going on?

Fed Tightening Two Ways

The short answer is a straw broke the Fed’s back.

A more robust explanation is the Fed is tightening two ways: The first by hiking, the second by letting assets on the balance sheet roll off.

Both measures have a tendency to push up long-term interest rates. This is another explanation for the long-end rising. Despite conventional wisdom, inflation and wages have little to do with it.

We can see the effect in other charts.

LIBOR

Year-Over-Year M2 Growth

Money supply growth is falling as are excess reserves.

Excess Reserves

The Fed started balance sheet reduction in October of 2017. Unwinding the balance sheet escalates greatly in 2018.

The treasury unwind started at $6 billion per month, increasing by $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
The mortgage debt unwind started at $4 billion per month, increasing in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

Does the Fed Know What It’s Doing?

Janet Yellen answered that question directly in her speech A Challenging Decade and a Question for the Future, at the Herbert Stein Memorial Lecture National Economists Club on October 20, 2017.

The FOMC does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual and prospective economic conditions. Indeed, as the so-called taper tantrum of 2013 illustrated, even talk of prospective changes in our securities holdings can elicit unexpected abrupt changes in financial conditions.

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

Inflation Alert: The Velocity Of Money Has Finally Bottomed

February 8, 2018

Inflation Alert: The Velocity Of Money Has Finally Bottomed

Forget the Trump tax cuts, the Senate budget deal, the Fed’s Quantitative Tightening and the collapse in foreign buying of US Treasuries: after years of dormancy, the biggest catalyst for a sharp inflationary spike has finally emerged, and it is none of the above. Behold: the velocity of money.

Over the past decade we have shown this chart on numerous occasions and usually in the context of failed Fed policy. After all, based on the fundamental MV = PQ equation, it is virtually impossible to generate inflation (P) as long as the velocity of money (V) is declining.

None other than the St. Louis Fed discussed this in a report back in 2014:

Based on this equation, holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference. According to this view, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. Why, then, has inflation remained persistently low (below 2 percent) during this period?

The issue has to do with the velocity of money, which has never been constant. If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.

The regional Fed went on to note that during the first and second quarters of 2014, the velocity of the monetary base was at 4.4, its slowest pace on record. “This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession.

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

MONEY AND THE STOCK MARKET: IS THERE ANY RELATION?

January 26, 2018

MONEY AND THE STOCK MARKET: IS THERE ANY RELATION?

Is it true that changes in money supply are an important driving force behind changes in the stock price indexes?

Intuitively it makes sense to argue that an increase in the growth rate of money supply should strengthen the growth rate in stock prices.

Conversely, a fall in the growth rate of money supply should slow down the growth momentum of stock prices.

Some economists who follow the footsteps of the post-Keynesian (PK) school of economics have questioned the importance of money in driving stock prices^[1]. It is held that rises in stock prices provide an incentive to liquidate long-term saving deposits, thereby boosting the money supply.

The received money then employed in buying stocks and other financial assets. According to the PK the trend is reversed when stock prices are falling. Hence, changes in stock prices cause changes in money supply and not the other way around.

Does a shift of money from savings to demand deposits affect money supply?

Is it possible to have an increase or a decline in money supply because of a shift of money from long-term saving deposits to demand deposits and vice versa?^[2]

Can there be such thing as saving deposits? The existence of such deposits implies that money somehow can be saved. We hold that individuals do not save money. They only exercise demand for money in order to be able to employ it as a medium of exchange whenever they deemed it necessary.

For instance, out of his production of twelve loaves of bread a baker may consume two loaves of bread and save ten loaves. He then exchanges these ten loaves for ten dollars with a shoemaker.

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China–Leading Indicator? Stocks, Credit Policy, Rebalancing and Money Supply

December 14, 2017

CHINA – LEADING INDICATOR? STOCKS, CREDIT POLICY, REBALANCING AND MONEY SUPPLY

Chinese 10yr bond yields have been rising steadily since October 2016. They never reached the low or negative levels of Japan or Germany. 1yr bonds bottomed earlier at 1.76% in June 2015 having tested 1% back in 2009.

The pattern and path of Chinese rates is quite different from that of US Treasuries. Last month rates increased to their highest since 2014 and the Shanghai Composite index finally appears to have taken notice. The divergence, however, between Shanghai stocks and those of the US is worth investigating more closely.

The chart below shows the yield on 10yr Chinese Government Bonds since 2007 (LHS) and the 3 month inter-bank deposit rate over the same period (RHS):-

china 10yr vs 3 m interbank - 10yr

Source: Trading Economics

From a recent peak in 2014, yields declined steadily until October 2016, since when they have begun to rise quite sharply.

The next chart shows the change in yield of Government bonds and AAA Corporate bonds across the entire yeild curve:-

China_Government_vs_Corp_AAA_Yield_Curve

Source: PBoC

The dates I chose were 29^th September – the day before the People’s Bank of China (PBoC) announced their targeted lending plan. The 22^nd November – the day before the Shanghai index reversed and 6^th December – bringing the data set up to date.

The general observation is simply that yields have risen across the maturity spectrum, but the next chart, showing the change in the spread between government and corporate paper reveals some additional nuances:-

China_Government_vs_AAA_Corp_Spread

Source: PBoC

Spreads have generally widened as monetary conditions have tightened. The widening has been most pronounced in the 30yr maturity. The widening of credit spreads may be driven by the prospect of $1trln of corporate debt which is due to mature between now and 2019.

Another factor may be the change in policy announced by the PBoC on September 30^th. Bloomberg – China’s Central Bank Unveils Targeted Lending Plan to Aid Growth provides an excellent overview:-

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The Zealous Pursuit of State-Sponsored Collapse

December 9, 2017

The Zealous Pursuit of State-Sponsored Collapse

When Bakers Go Fishing

Government intervention into a nation’s economy is as foolish as attempting to control the sun’s rise and fall by law or force. But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions. The United States government is no exception.

From the “When the government helps the economy” collection: Breaking a few eggs while baking the bridge to nowhere omelet. [PT]

Over the years, layers and layers of interference by various federal, state, and local agencies have built up like grime on a kitchen window. The grease shines and smells of something fierce. The layers of government grime also drip and ooze into every crack and crevice of the economy.

These days, for example, it is impossible to carry out a simple private transaction with your barber or barista without some form of government interference. Has your barber obtained the required license and paid the obligatory fees to be able to legally taper your neck line? Has your barista’s espresso bean grinder passed city health inspection?

Is the hot Cup of Joe served in a paper cup of appropriate recycled material composition? Did the hot beverage exceed the legally accepted temperature standard? Did state and local governments receive their tax exaction upon payment?

The licensing racket – left panel: the basic definition of the racket; middle panel: how long it takes and what it costs to obtain licenses for assorted jobs in the US; right panel: the inexorable growth of rules and regulations. One shouldn’t be surprised that the pace of real economic growth has steadily declined since peaking in the late 19^th century (or if one wants to focus on the modern era, since it peaked not too long after WW2).

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Pool of Funding the Heart of Economic Growth

December 8, 2017

POOL OF FUNDING THE HEART OF ECONOMIC GROWTH

Most experts are of the view that massive monetary pumping by the US central bank, the Fed, during the 2008 financial crisis saved the US and the World from another Great Depression.

If increases in money supply is an important catalyst for economic growth then the World poverty should have been eliminated a long time ago! Most countries have central banks that know how to print money – why then the World poverty still exists?

We suggest that at no stage increases in money supply can be an important driving factor of economic growth.

Some experts do not agree with this. Following the logic that monetary spending by one individual becomes an income of another individual and the spending of another individual becomes an income of the first individual, they hold that this raises the economy’s overall income and in turn overall economic growth.

Note that in this way of thinking, money stimulates consumer outlays, which in turn strengthens overall income and overall economic activity i.e. demand creates supply.

In this way of thinking what funds i.e. provides support to economic growth is the increase in money supply.

We suggest that individuals, which are engaged in the various stages of production, in order to support their lives and wellbeing, require an access to final consumer goods and not money as such.

At any point in time, there is a finite pool of final consumer goods. Hence, the early recipients of a newly created money are going to benefit from the increase in money supply at the expense of the late recipients or no recipients at all of the newly created money.

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

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