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QUESTION: Mr. Armstrong; Your proposition that the quantity of money theory is dead seems to be a true earth shattering proposition. It certainly disproves the Austrian School and the events post 2008 support your statement.

The European Central Bank is supposed to traditionally pursue the goal of monetary stability. The Germans have followed the Austrian School of Economics religiously. However, the ECB has used monetary policy instruments attempting to create an annual depreciation of the euro of just under 2 per cent without success. Since the outbreak of the financial crisis in 2008, the function and importance of the ECB has changed fundamentally and drastically.

In order to avert a core meltdown of the global financial system, the ECB went beyond the American Federal Reserve and other major central banks, launching an extremely expansive monetary policy lowering the key interest rates to negative territory. This has never been done in history and the ECB experiment has created tremendous problems moving forward. Moving the deposit rate for commercial banks parking money at the central bank to the negative range of minus 0.4 per cent combined with began buying up large amounts of government bonds and later corporate bonds of the worst quality, has completely failed to stimulate the economy.

My question is this. Have the measures taken by the ECB resulted not averting a crisis, but transforming it into a far greater risk and simply extended the entire deflationary process?

Thank you

ANSWER: Absolutely. This entire policy has failed to create inflation and has proven that inflation is not driven purely by the quantity of money. Confidence is the critical factor. The rich can move their capital to foreign lands. However, the average person cannot move their labor or money offshore.

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

Why Governments Expand the Gap Between Rich and Poor

September 8, 2017

Why Governments Expand the Gap Between Rich and Poor

QUESTION: Mr. Armstrong; You said at your Frankfurt the ECB policy of negative interest rates is actually creating a wider gap between the poor and the rich. Could you elaborate on that comment?

Thank you. Hop you come back to Frankfurt. You do realize that you get twice the crowds here than anyone.

ANSWER: Lowering interest rates to negative was really brain-dead. The rich can move their move and export it to the USA. The poor, lack the sophistication and cannot export their labor no less their meager savings. The people who drive the economy have different roles. The rich provide the capital and create jobs. The middle class to poor are the people who form the foundation and it is their consumer spending that create the underlying economic growth. Attacking the rich always reduces investment and jobs, but lowering the interest rates to negative causes the rich to leave and the poor to middle class suffer lacking the sophistication export both their labor and savings.

The key message from President Mario Draghi’s press conference of the ECB was ro say he was getting ready to slow its QE stimulus, but he’s not in a rush.

Draghi tried to be as vague as possible, because he is trapped. He knows this cannot go on forever. He realizes that once he stops, the bond market crash and there is a risk that the Eurozone government are forced to pay real interest rates and that will blow out the entire EU budget system. Draghi does not know what to do. He confirmed that the governing council had begun ‘very preliminary’ talks about how the quantitative easing might be changed; how much longer it might run, and how much it might pump into the euro economy. He actually said:

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

Draghi: Trillions In QE Have Made Economies “More Resilient”

August 23, 2017

Draghi: Trillions In QE Have Made Economies “More Resilient”

When last night we previewed this week’s annual Jackson Hole symposium at which Mario Draghi is scheduled to speak just before the market close on Friday, we said that the ECB head is warming up for the trip by speaking at the Lindau economics symposium in Germany this morning “and as such he could front run himself.” Unfortunately for many who were expecting some advance highlights, Draghi disappointed those who hoped he would preview his Jackson Hole appearance.

So what did Draghi talk about? Instead of previewing the ECB’s inevitable taper (especially as the central bank will soon run out of Bunds to buy at the current pace of monetization), the central banker defended growing criticism of his unorthodox monetary policy, and said the ECB’s policies such as QE and NIRP, saying they have been a success on both sides of the Atlantic, and that the purchase of some $15 trillion in assets has somehow made economies “more resilient.”

Speaking to the Lindau audience of 17 Nobel laureates and 350 young German economists, a nation which has been one of the stiffest critics of ECB policies such as quantitative easing, Draghi’s speech avoided any specific hints on current ECB deliberations, and instead said officials must be “unencumbered by the defense of previously held paradigms that have lost any explanatory power.”

He then launched into a vocal defense of QE, saying that “when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defense of previously held paradigms that have lost any explanatory power”

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

Could the elimination of cash prevent an economic crisis?

October 1, 2016

COULD THE ELIMINATION OF CASH PREVENT AN ECONOMIC CRISIS?

Given the still subdued economic growth many experts are of the view that the presence of cash has constrained central banks from setting negative rates to stimulate a subdued economic activity. In a future economic or financial crisis, current low rates would restrict the effectiveness of monetary policy, so it is held.

The presence of cash it is argued prevents the central banks from lowering policy rates to a level, which is going to meaningfully revive economic activity. What prevents the dramatic lowering of rates is that this is going to severely hurt savers who keep their cash in various bank accounts and this is seen as politically unacceptable.

The abolishment of cash it is held is going to enhance the ability of the central banks to use negative rates (perhaps as low as minus 5 per cent per year) and this would provide central banks with additional flexibility and tools to deal with a slowdown.

Would the abolishing of cash promote economic growth?

By advocating the abolishment of cash, many experts are implying that cash can be replaced by electronic money. We hold that electronic money can function only as long as individuals know that they can convert it into fiat money, i.e. cash on demand (see, e.g., Lawrence H. White “The Technology Revolution and Monetary Evolution,” Cato Institute’s 14th annual monetary conference, May 23, 1996).

Without a frame of reference or a yardstick, the introduction of new forms of settling transactions is not possible.

Money emerged out of barter conditions to permit more complex forms of trade and economic calculation. The distinguishing characteristic of money is that it is the general medium of exchange, evolved from private enterprise from the most marketable commodity. On this Mises wrote,

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

Traveling Circus

September 24, 2016

Traveling Circus

After Wednesday’s policy statements by the Fed and Bank of Japan, a harsh light is being shined on the incredible nature of their communications. It would be wise in the current environment to structure investment portfolios with a pro-volatility bias.

Central banks in G7 economies have been carrying a heavy load for a very long time, especially noticeable to all since 2009. Zero and negative sovereign interest rates, asset purchase programs and whack-a-mole currency devaluations have avoided a counterfactual that would have included credit exhaustion, debt deflation and economic contraction.

Their now conventional unconventional monetary policies have been overlaid by communications policies that have fostered a narrative of economic normality and cyclicality. It all seems rather disingenuous given their successful coup de marché, and maybe a bit delusional too given their serious demeanors discussing Philips curve stuff in the face of balance sheet time bombs.

And now…central banks seem exhausted too, not only in terms of being able to stimulate consumption and levitate asset prices, but also in terms of their communications policies that suggest they can.

The BOJ may have jumped the shark when it embarked on a new program called “QQE with yield curve control” whereby it will pin 10 year JGB yields at 0%. The BOJ also signed on to a new program called “inflation overshooting commitment” whereby it will keep creating sufficient base money until CPI inflation exceeds 2%. Let there be no mistake: this is formalized QE Infinity.

It was a tacit admission that lowering funding rates further would have no stimulative impact on the Japanese economy, and that all it can do at this point is expand the size of its balance sheet. BOJ watchers do not understand why more attention wasn’t paid to the short end of the curve, which would be easier to manage.

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

Negative Interest Rates and the War on Cash (1)

September 10, 2016

Negative Interest Rates and the War on Cash (1)

Irving Underhill City Bank-Farmers Trust Building, William & Beaver streets, NYC 1931

It’s been a while, but Nicole Foss is back at the Automatic Earth -which makes me very happy-, and for good measure, she starts out with a very long article. So long in fact that we have decided to turn it into a 4-part series, if only just to show you that we do care about your health and well-being, as well as your families and social lives. The other 3 parts will follow in the next few days, and at the end we will publish the entire piece in one post.

Here’s Nicole:

Nicole Foss: As momentum builds in the developing deflationary spiral, we are seeing increasingly desperate measures to keep the global credit ponzi scheme from its inevitable conclusion. Credit bubbles are dynamic — they must grow continually or implode — hence they require ever more money to be lent into existence. But that in turn requires a plethora of willing and able borrowers to maintain demand for new credit money, lenders who are not too risk-averse to make new loans, and (apparently effective) mechanisms for diluting risk to the point where it can (apparently safely) be ignored. As the peak of a credit bubble is reached, all these necessary factors first become problematic and then cease to be available at all. Past a certain point, there are hard limits to financial expansions, and the global economy is set to hit one imminently.

Borrowers are increasingly maxed out and afraid they will not be able to service existing loans, let alone new ones. Many families already have more than enough ‘stuff’ for their available storage capacity in any case, and are looking to downsize and simplify their cluttered lives. Many businesses are already struggling to sell goods and services, and so are unwilling to borrow in order to expand their activities.

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

There is no such thing as a negative interest rate

September 10, 2016

There is no such thing as a negative interest rate

We Austrian economists are used to having terms corrupted, misused and redefined by statists and others who love and advocate strong central control of money and power. The term “inflation” is a prime example. We Austrians refer to “inflation” as creating new fiat money–as in inflation of the money supply. This is in sharp contrast to what we commonly hear in the mainstream media and from all Keynesian influenced economists, who use the term to describe a general increase in prices. Now nearly everyone thinks of inflation in this sense, so much so that we Austrians must always be careful to say “inflation of the money supply” whenever we use the term “inflation”.

Those of us of a libertarian political persuasion, which includes many (but not all) Austrian economists, likewise bristle at how modern statists have hijacked and corrupted the term “liberal”. Liberal is a term that is derived from the word “liberty”. Ludwig von Mises even penned a book titled “Liberalism“. Naturally, it contains not one reference to what today’s so-called liberals advocate; i.e., erosion of property rights and statist intervention in almost all aspects of life.

However, now we Austrian economists are faced with a term that is new. It is NOT a term that has had a prior meaning and has been corrupted and re-defined.. It is a new, made up and wholly fabricated term– “Negative Interest Rate”.

Interest is founded on time preference

The rate of interest is founded on an innate trait of the human condition. All other things being equal, humans desire goods and services earlier rather than later. Austrian economists refer to this human trait as “time preference”. Those who desire things sooner rather than later are said to have a high time preference. Likewise, those who desire things later rather than sooner are said to have a low time preference.

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

Global Debt with Negative Rates Reaches $12 Trillion

July 5, 2016

Global Debt with Negative Rates Reaches $12 Trillion

QUESTION:

Dear Mr. Armstrong,

I am really confused regarding long-term interest rates – I had thought they were controlled by the markets – but it seems at time that the central banks control them by buying the governments debt. Can you shed some light on this? Can the central banks just keep printing and buying bonds to keep their yields down or is the private market a bigger force – and if so, who in their right mind buy negative yielding debt?

Confused, and yours gratefully,

George

ANSWER: The central bank can control short-term rates. They are trying to control long-term buying in government debt and in theory the bank would then start to lend long-term. You have to separate government from private debt. Just as sometimes silver rallies more than gold or the other way around, the same is true between public and private debt. Despite the fact that governments are trying negative rates, the net effect has been for European banks to send the cash to their US branch and park it at the Fed. Rates are rising in the peripheral markets already.

Rates have been increasing in some countries and declining in others. Central banks cannot “control” long-term rates. All they can do is try to “influence” it by buying debt in an attempt to reduce the supply. But they cannot FIX LONG-TERMrates. That is purely a market function. Capital is running away from government debt. The bondholders have been willing to sell this to them and many are starting to shift to corporate debt. Many pensions have started that process while others have tried to buy emerging debt with higher yields.

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

Negative interest rates are coming to America

June 21, 2016

Negative interest rates are coming to America

Well, that didn’t take long! Negative Interest Rate Policy appears to be a gift that keeps on giving.

Just a little while ago I wrote that, in essence, if the Federal Reserve wants to keep the financial party going a little bit longer, it will have to continue lowering interest rates to below zero, as this is the only way to keep broke debtors alive and prevent the gigantic debt bubble from imploding. And now we find out that the Federal Reserve has resolved any legal impediments (such as the Federal Reserve Act) that have kept it from doing just that.

To recap, negative interest rates are a way to pay debtors to hold onto their debt instead of defaulting on it or repudiating it, thus preventing the debt pyramid from pancaking and taking the entire financial system with it. But this effect is temporary, for at least two reasons.

First, negative interest rates are essentially a tax on savings, causing people to think of other ways to store their wealth: land, precious metals, boxes of brass knobs, what have you. In due course, money stops being regarded as wherewithal and starts being regarded as an unreliable way to conduct business.

Second, with a gigantic bubble in bonds now decades old and bond yields now going negative, it is a matter of time before the realization hits that negative-yield bonds are not any sort of safe haven. Their value is now strictly a matter of their market valuation, which can plummet the moment people decide to dump them, with no floor anywhere. After all, there are plenty of other ways to lose money, and negative-yield bonds are nothing special.
…click on the above link to read the rest of the article…

Jeff Gundlach: “Things Are Going To Get Pretty Scary”

June 18, 2016

Jeff Gundlach: “Things Are Going To Get Pretty Scary”

One day before the Fed’s June statement, Jeff Gundlach once again accurately predicted the somber mood that would ensue as a result of Yellen’s Wednesday decision and press conference when he correctly said that “Central Banks Are Losing Control.” Today, in the aftermath of James Bullard stunning U-turn where he cast aside years of fake hawkishness and emerged as the market manipulating dove he had been all along, Gundlach appeared on CNBC, to discuss many things, among which his latest take on central banks.

Specifically, he said that central banks are “out of control” because they don’t understand the consequences of their own policies. On CNBC’s “Halftime Report“, the DoubleLine bond guru projected that markets are likely to see another round of negative interest rates before central bankers realize they aren’t working and that fiscal stimulus may be the better option. “The policies that they’re implementing don’t have the consequences that they’re looking for,” he said.

Gundlach pointed out the chart which we said back in 2010 is the only one that matters: the S&P’s liquidity “flow” manifested by the Fed’s balance sheet overlaid on top of the Fed’s balance sheet:

He said that “it’s really uncanny how the S&P500 rallied when they were doing QE and expanding their balance sheet, and how the S&P never goes anywhere when they stopped expanding their balance sheet. They stopped QE3 back in December of 2014 and the S&P500, the DJIA, the Nasdaq are all exactly the same when they stopped expanding their balance sheet. The S&P has been dead money for 18 months.”

That – once again – resolves the whole “flow vs stock” debate.

So what went wrong? According to Gundlach, chief among central bank mistakes was negative rates.

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

Negative-Interest-Rate absurdity is another “rabbit out of the hat.”

May 14, 2016

Negative-Interest-Rate absurdity is another “rabbit out of the hat.”

For the second time this year, Spain’s caretaker government just managed to sell 50-year bonds in a €3 billion ($3.4 billion) deal. Despite maturing in the year 2066, when many of us won’t even be alive and the duty to pay back the debt (assuming it still exists) will have been handed down to our children’s children, the bonds will pay an annual interest rate of just 3.45%. Not only that, but the issuance was over-subscribed by €7 billion.

This is a mind-blowing turn-up for a country that just four years ago needed an unprecedented bailout from the Troika to save its saving banks and avert total financial collapse. It is also a resounding testament to the power of central bank policy to turn economic reality on its head.

Less than three years ago, when Draghi had only just begun doing “whatever it takes” to save the single currency, the Spanish government had to pay a 5% yield to get investors to buy their one-year bonds. Now investors are willing to take 50-year bonds off the government’s hands in exchange for an annual interest rate of 3.45%, despite all the attendant risks involved.

While the Spanish economy has improved somewhat since then, that is largely due to the fact that the government has sacrificed long-term stability for short-term growth, going so far as to plunder half of the nation’s social security reserve fund in order to keep spending at its current levels. The remaining half is exclusively invested in Spanish bonds. Even Brussels now admits that Spain’s public debt is out of control.

To make matters worse, Spain doesn’t have an elected government to speak of and could struggle to form one even after the next round of elections, on June 26.

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

Gold and Negative Interest Rates

April 28, 2016

Gold and Negative Interest Rates

The Inflation Illusion

We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates.

We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of interest we have to subtract inflation from the nominal rate, so to speak remove the illusion of inflation.

1-real FF rate The “real” federal funds rate (effective FF rate minus CPI-U y/y rate of change)

Real interest rates have been negative fairly often, including for most of the period since 2009. The main problem consists of choosing the appropriate measure of inflation.

Since the calculation of price inflation is highly subjective and easy to manipulate, one possibility is to adjust nominal prices to gold to calculate real interest rates. In the chart below you can see nominal U.S. 10-year Treasury rates versus gold-adjusted rates since 1962.

Nominal vs. gold-adjusted treasury yields (actually, the calculation of “price inflation” or a “general level of prices” is not merely subjective – it is literally impossible) – click to enlarge.

Ben Bernanke says in his article:

“The fundamental economic constraint on how negative interest rates can go is that, beyond a certain point, people will just choose to hold currency, which pays zero interest. (It’s not convenient or safe for most people to hold large amounts of currency, but at a sufficiently negative interest rate, banks or other institutions could profit from holding cash, for a fee, on behalf of customers).

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

Asset Recycling – Robbing Pensions to Cover Govt. Costs

April 25, 2016

Asset Recycling – Robbing Pensions to Cover Govt. Costs

We are facing a pension crisis, thanks to negative interest rates that have destroyed pension funds. Pension funds are a tempting pot of money that government cannot keep its hands out of. The federal government of Canada, for example, is looking to reduce the cost of government by shifting Canada’s mounting infrastructure costs to the private sector. They want to sell or lease stakes in major public assets such as highways, rail lines, and ports. In Canada, they hid a line in last month’s federal budget that revealed that the Liberals are considering making public assets available to non-government investors, such as public pension funds. They will sell the national infrastructure to pension funds, robbing them of the cash they have to fund themselves. This latest trick is being called “asset recycling,” which is simply a system designed to raise money for governments. This idea is surfacing in Europe as well as the United States, especially among cash-strapped states.

This is the other side of 2015.75; the peak in government (socialism). Everything from this point forward is a confirmation that these people are in crisis mode. They are rapidly destroying Western culture because they are simply crazy and the people who blindly vote for them are out of their minds. They are destroying the very fabric of society for they cannot see what they are doing nor where this all leads. Once they wipe out the security of the future, the government will crumble to dust to be swept away by history. We deserve what we blindly vote for.

Draghi at War with Reason & Other Central Banks

April 22, 2016

Draghi at War with Reason & Other Central Banks

Tensions are starting to rise between Germany and the ECB because Draghi will not admit his negative interest rates are causing an economic meltdown. “We continue to expect them (interest rates) to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.” Draghi is absolutely clueless and this experiment has no end game. The rest of the central banks are starting to see that Draghi is risking it all for he cannot admit failure. Inflation is a function of interest rates insofar as the rate of interest is compatible with the expected rate of inflation. This is fundamental. Punishing savers and wiping out pensions is not the way to create a future. This will not end very nicely.

All Draghi is doing is making the smart banks richer. They don’t have to pay anything, but they charge people money for having an account. Yet, if you want to take out a mortgage for 10 years, fully collateralized, they demand 5%. The smart bankers are making the widest spreads in history on a percentage basis between bid and ask. Is Draghi insane? Or is he simply looking at this from the perspective of his former employer — Goldman Sachs?

“A Total Illusion from QE and Financial Engineering”

April 22, 2016

“A Total Illusion from QE and Financial Engineering”

The 10-Year Treasury Is Less Than You Think

When the Fed was created in 1914, it was set to task of controlling short-term interest rates in an attempt to iron out financial cycles. It succeeded for many years. But by avoiding the natural rebalancing (and occasional pain) from free markets, we just got a bigger bubble into 1929. Then, when it finally burst, we got the greatest depression in all of modern history!

Since the Fed and other central banks were created, they have always manipulated short-term interest rates to try to encourage borrowing and spending in slowdowns – to make the natural economic cycle “go away.”

And every time, it suppresses the economic cycles that were already in place, until finally they come roaring back.

So it always strikes me as funny to see highly educated, seemingly reasonable people in pin-striped suits and pantsuits stand in front of us and basically say that there’s a free lunch after all – that we can get something for nothing!

To them, economics is no longer a matter of supply and demand, free markets and rebalancing. They think we’ve found a way to program the economy so we never have a recession again.

All the apparent education and sophistication of these top economists, financial officials and central bankers boils down to this simple automaton explanation: if we don’t keep taking more of the financial drug that we used to keep the bubble going, like zero interest rates and QE, we will collapse and go into detox.

It’s the same logic of any extreme addict. When a serious drug addict comes off a high, he realizes the only non-painful choice is to take more of the drug.

As Charlie Sheen said: “the key to drinking is to not stop.”

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

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