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The Essence of Interest Rate Determination
The Essence of Interest Rate Determination
According to mainstream thinking the Central Bank is the key factor in determining interest rates. By setting short-term interest rates the Central Bank, it is argued through expectations about the future course of its interest rate policy influences the entire interest rate structure. (According to the expectations theory (ET) the long-term rate is an average of the current and expected short-term interest rates). Note that interest rates in this way of thinking is set by the Central Bank whilst individuals in all this have almost nothing to do and just form mechanically expectations about the future policy of the Central Bank. (Individuals here are passively responding to the possible policy of the Central Bank).
Following the writings of Carl Menger and Ludwig von Mises we suggest that the driving force of interest rate determination is individual’s time preferences and not the Central Bank.
As a rule people assign a higher valuation to present goods versus future goods. This means that present goods are valued at a premium to future goods.
This stems from the fact that a lender or an investor gives up some benefits at present. Hence the essence of the phenomenon of interest is the cost that a lender or an investor endures. On this Mises wrote,
That which is abandoned is called the price paid for the attainment of the end sought. The value of the price paid is called cost. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at.[1]
For instance, an individual who has just enough resources to keep him alive is unlikely to lend or invest his paltry means. The cost of lending, or investing, to him is likely to be very high – it might even cost him his life if he were to consider lending part of his means. So under this condition he is unlikely to lend, or invest even if offered a very high interest rate.
– See more at: http://www.cobdencentre.org/2015/09/the-essence-of-interest-rate-determination/#sthash.zySUavSN.dpuf
Why The Keynesian Chorus Is Cackling Like Chicken Little
Why The Keynesian Chorus Is Cackling Like Chicken Little
This is getting way too stupid. The Keynesian Chorus has launched a full blast trilling campaign, emitting a shrill cackle of warnings against a Fed rate hike. Yes, 80 months of pumping free money into the canyons of Wall Street is not enough.
Why?
Well, this is hard to type with a straight face, but according to the cackling gaggle of Keynesian Chicken Littles, the Fed has already tightened too much!
Paul Kasriel, the former chief economist at Northern Trust who now writes “The Econtrarian” blog, argues that “in recent months Fed monetary policy has become downright restrictive.”
Would that Kasriel could be dismissed as merely a Wall Street shill, but its seems that he’s taking his cues directly from John Maynard Keynes’ very vicar on earth. That would be Larry Summers, who yesterday blogged an identical bit of tommyrot:
I believe the case against a rate increase has become somewhat more compelling even than it looked two weeks ago…..First, markets have already done the work of tightening. The U.S. stock market is worth $700 billion less than it was 2 weeks ago and credit spreads have widened noticeably. Financial conditions as measured by Goldman Sachs or the Chicago Fed index have tightened in the last 2 weeks by the impact equivalent of more than a 25 BP tightening. So even if resisting inflation required a 25 BP tightening as of two weeks ago, this is no longer the case.
You can’t make this stuff up! And you don’t have to mince any words, either. This whole mantra that free money is actually tight money is the product of a tiny circle of academic scribblers and Wall Street hirelings who have invented what amounts to an alternate vocabulary of economic newspeak.
…click on the above link to read the rest of the article…
The Endless Emergency—–Why It’s Always ZIRP Time In The Casino
The Endless Emergency—–Why It’s Always ZIRP Time In The Casino
Based on the headline from the latest Jobs Friday report you wouldn’t know that we are still mired in an economic emergency—–one apparently so extreme that it might entail moving to the 81st straight month of zero interest rates at next week’s FOMC meeting. After all, the unemployment rate came in smack-dab on the Fed’s full-employment target at 5.1%.
But that’s not the half of it. The August unemployment rate was also in the lowest quintile of modern history.
That’s right. There have been 535 monthly jobs reports since 1970, yet in only 98 months or 18% of the time did the unemployment rate post at 5.1% or lower.
In a word, the official unemployment rate is now in what has been the macroeconomic end zone for the past 45 years. Might this suggest that the emergency is over and done?
Not at all. The talking heads have been out in force insisting on yet another deferral of “lift-off” on the grounds that the economy is allegedly still fragile and that the establishment survey number at 173,000 jobs came in on the light side. Even the so-called centrists on the Fed—–Stanley Fischer and John Williams—–have gone to full-bore, open-mouth, two-armed economist mode, jabbering incoherently while they await more “in-coming” economic data.
Self-evidently, the only “incoming” information that can matter between now and next Wednesday is the stock market averages. To wit, if last October’s Bullard Rip low on the S&P 500 holds at 1867, the FOMC will declare “one and done”, at least for the year; and if the market succumbs to another spot of vertigo, the Fed will concoct yet another lame excuse for delay.
Indeed, the Fed’s true Humphrey-Hawkins target is transparent. Namely, avoidance of a “risk-off” hissy fit at all hazards.
…click on the above link to read the rest of the article…
“Everyone Preparing for the Wrong Outcome”: Schiff Says QE4 is Coming, Not a Rate Hike!
“Everyone Preparing for the Wrong Outcome”: Schiff Says QE4 is Coming, Not a Rate Hike!
The printing presses are firing up all over again… err, at least the digital ledgers are, anyway.
Financial expert and infamous goldbug Peter Schiff was interviewed by Fox Business from the floor of the U.S. Stock Exchange.
Schiff warned viewers that “everyone is preparing for the wrong outcome with the U.S. economy.”
That outcome? The financial world has been waiting with feverish anticipation for “the big day” when the Federal Reserve finally raises interest rates – a quiet move big enough to shift economic tectonic plates.
But contrary to conventional wisdom about when the Federal Reserve will raise interest rates, and thus turn the page on a new era of the economy, Schiff says they can’t and won’t raise rates anytime soon – though they should have several years ago.
It didn’t happen months ago when many expected it. It won’t happen now in September, and likely not for a long time.
Why?
Because the Federal Reserve can’t raise rates without collapsing the bubble economy.
“I was saying they weren’t going to raise rates. Not because they shouldn’t, but because they can’t, because they will prick this bubble economy that they worked so hard to inflate,” Peter Schiff told Fox Business.
Instead of letting certain markets fail as they should have, they were propped up by the Fed. And these zombie banks and businesses have been sucking life out of the real economy – at great expense to average people.
“The economy has never been good. We’ve really been in a recession, I think, for the entirety of the recovery. I think the policies that the Federal Reserve has used to prop up the stock market and the real estate market have hurt the real economy. That’s why things are actually getting worse. But on Wall Street, yeah, things look good. But if the Fed takes away those monetary supports, we’re going to be in a bear market. We’re going to be in a deeper recession. We’re going to resume the financial crisis that was interrupted by this monetary policy.”
Interest rate cuts a two-edged sword for Bank of Canada: Don Pittis
Another decrease could spur exports but would announce serious pessimism
Conjure up an image of Bank of Canada governor Stephen Poloz in Hamlet pantaloons, hand to brow, declaiming to the middle distance: “To cut or not to cut?”
A confusion of contradictory economic data means it may be a melancholy choice. If the Bank of Canada were to lower interest rates for a third time this year at this Wednesday’s meeting, the cut could spur exports and challenge other countries that have pushed their currencies lower.
But there is a danger that it may instead be taken as a warning.
- Canada creates 12,000 jobs but jobless rate rises to 7%
- Buy Canada. The bullish case for the Canadian economy
- Recession confirmed as Canadian economy shrinks again
A poll of 40 economists last week by Reuters didn’t rule out another cut in rates. The consensus was that there was a one in four chance of a cut this week, and a 40 per cent chance of another cut “at some point.” But the most likely result, said the economists, was a rate freeze till 2017.
Frozen
More than a year of rates frozen at 0.5 per cent is not a resounding vote of confidence in a Canadian recovery. But in the face of that steady-as-she-goes opinion from economists, another rate cut would be a two-edged sword.
Cutting interest rates would help keep the Canadian property market strong. (Darren Calabrese/Canadian Press)
Lower rates would make it easier for Canadians to keep up their borrowing binge, helping retail sales and keeping house prices strong. More usefully, it would help secure lending for struggling or expanding businesses.
A byproduct of lower rates is a lower loonie. If, as many have said, our shrinking trade deficit can be credited to a low Canadian dollar, then a still lower loonie could be even better.
…click on the above link to read the rest of the article…
GDP figures from Statistics Canada expected to show second-quarter contraction
Lower loonie expected to boost economy in third quarter
Economists say data out this week is likely to show that Canada slipped into a technical recession in the second quarter, but the contraction should be short-lived.
“A number of positive elements are coming through,” said TD Bank chief economist Beata Caranci. “Even if, like we’re expecting, we get a contraction in the second quarter, the consumption numbers are likely to be fairly healthy.”
According to Thomson Reuters, economists expect Statistics Canada to report that the economy contracted at an annualized rate of 1.0 per cent in the second quarter.
- Recession? Knowing if we’re in one matters: Don Pittis
- Alberta has lost 35,000 oilpatch jobs, petroleum producers say
- How a recession would shake up the election campaign
- Stephen Harper avoids recession label on eve of GDP numbers
Among other data expected from Statistics Canada this week are July trade figures on Thursday and the jobs report for August on Friday.
The Bank of Canada cut its key interest rate by a quarter of a percentage point to 0.5 per cent in July amid concerns about the impact falling oil prices and weak exports on the economy.
In its July monetary policy report, the central bank estimated the Canadian economy contracted at an annual pace of 0.5 per cent in the second quarter, but predicted things would pick up in the second half of the year.
Caranci says the benefit of the lower loonie to Canada’s export sector should boost growth in the third quarter.
Although exports were supposed to see a boost sooner, Caranci says the sector’s sensitivity to the loonie has diminished over the past decade as the U.S. — Canada’s biggest trading partner — has been importing more from China and Mexico.
“For every percentage point of deprecation you get to the Canadian dollar you’re getting less of a lift to exporters,” Caranci said. “You’re getting not only less sensitivity but also a more delayed response, so it’s coming in much later than we had been forecasting.”
China: Doomed If You Do, Doomed If You Don’t
China: Doomed If You Do, Doomed If You Don’t
Whichever option China chooses, it loses.
Many commentators have ably explained the double-bind the central banks of the world find themselves in. Doing more of what’s failed is, well, failing to generate the desired results, but doing nothing also presents risks.
China’s double-bind is especially instructive. While there an abundance of complexity in China’s financial system and economy, we can boil down China’sdoomed if you do, doomed if you don’t double-bind to this simple dilemma:
If China raises interest rates to support the RMB ( a.k.a. yuan) and stem the flood tide of capital leaving China, then China’s exports lose ground to competing nations with weaker currencies.
This is the downside of maintaining a peg to the U.S. dollar. The peg provides valuable stability and more or less guarantees competitive exports to the U.S., but it ties the yuan to the soaring dollar, which has made the yuan stronger simply as a consequence of the peg.
But if China pushes interest rates down and floods its economy with cheap credit, the tide of capital exiting China increases, as everyone attempts to escape the loss of purchasing power as the yuan is devalued.
This is the double-bind China finds itself in: weakening the yuan to shore up exports incentivizes capital flow out of China, forcing the central bank to torch reserves to mediate the flood tide of capital fleeing China.
But efforts to support the yuan crush exports based on a cheap currency, creating the potential for mass layoffs in sectors with razor-thin margins and convoluted black box financing. Nobody knows how many times the stuff in warehouses has been pledged as collateral, or how much debt is floating around the shadow banking system in China.
Forget the Fake Statistics: China Is a Tinderbox (August 10, 2015)
…click on the above link to read the rest of the article…
Why we need to lie to ourselves about the state of the economy
Why we need to lie to ourselves about the state of the economy
Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world’s gross domestic product. Photo: Louie Douvis
Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation.
Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe.
Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.
Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.
The 2008 global financial crisis was a warning of the unstable nature of these arrangements. But there has been no meaningful change. Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world’s gross domestic product. In many countries, debt has reached unsustainable levels, and it is unclear how or when it is to be reduced without defaults that would wipe out large amounts of savings.
Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies.
The official policy is “extend and pretend”, whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road. The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles.
Read more: http://www.smh.com.au/comment/satyajit-das-column-20150825-gj7bcy.html#ixzz3kKkNLNv0
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The Central Bankers’ Malodorous War On Savers
The Central Bankers’ Malodorous War On Savers
Well, that didn’t take long!
After just three days of market turmoil the monetary politburo swung into action. This time they sent out B-Dud to promise still another monetary sweetener. Said the head of the New York Fed,
“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.”.
Needless to say, “B-Dud” is a moniker implying extreme disrespect, and Bill Dudley deserves every bit of it. He is a crony capitalist fool and one of the Fed ring-leaders prosecuting a relentless, savage war on savers. Its only purpose is to keep carry trade speculators gorged with free funding in the money markets and to bloat the profits of Wall Street strip-mining operations, like that of his former employer, Goldman Sachs.
The fact is, any one who doesn’t imbibe in the Keynesian Kool-Aid dispensed by the central banking cartel can see in an instant that 80 months of ZIRP has done exactly nothing for the main street economy. Notwithtanding the Fed’s gussied-up theories about monetary “accommodation” and closing the “output gap” the litmus test is real simple.
To wit, artificial suppression of free market interest rates by the central bank is designed to cause households to borrow more money than they otherwise would in order to spend more than they earn, pure and simple. Its nothing more than a modernized version of the original, crude Keynesian pump-priming theory—–except it dispenses with the inconvenience of getting politicians to approve spending increases and tax cuts in favor of the writ of a small posse of unelected monetary mandarins who run the FOMC and peg money market interest rates at will.
…click on the above link to read the rest of the article…
Wall Street and the Cycle of Crises
Wall Street and the Cycle of Crises
Regular readers of the leftish press have recently been presented with a raft of pleas coming from intelligent and occasionally articulate economists that the Federal Reserve not to raise interest rates. The general point being argued is that interest rates are the price of borrowed money, that raising them serves as a regressive tax because poorer borrowers pay a higher percentage of their incomes in interest expense than do rich people, and that the economy is still not fully recovered and higher interest rates risk sending ‘it’ lower again. Aiding the effort is the general loveliness of the people making the pleas versus the pissed-white-guys-in-suits contingent of monetary cranks who hate everything that the Federal Reserve does on the opposing side.
However, a wrinkle in the veil of loveliness can be found in ambiguity around the stated issues from none other than the Federal Reserve. The Federal Reserve is aware of the arguments of loveliness and is now wavering ever-so-slightly in raising rates only because a few stock markets have quite righteously shat the bed. Unless one conflates financial crapola with ‘the economy,’ a conflation the forces of loveliness insist is not warranted, then the Federal Reserve is now ambiguously poised to do the wrong thing for the wrong reasons (says the loveliness choir). The fact that all that the Federal Reserve seems to care about is ever-rising stock prices would seem to beg the question of why the forces of loveliness read so much more into the power of interest rates?
…click on the above link to read the rest of the article…
Trouble South Of The Border
Trouble South Of The Border
Too big to fail is a seven-year phenomenon created by the most powerful central banks to bolster the largest, most politically connected US and European banks. More than that, it’s a global concern predicated on that handful of private banks controlling too much market share and elite central banks infusing them with boatloads of cheap capital and other aid. Synthetic bank and market subsidization disguised as ‘monetary policy’ has spawned artificial asset and debt bubbles – everywhere. The most rapacious speculative capital and associated risk flows from these power-players to the least protected, or least regulated, locales.
The World Bank and IMF award brownie points to the nations offering the most ‘financial liberalization’ or open market, privatization and foreign acquisition opportunities. Yet, protections against the inevitable capital outflows that follow are woefully inadequate, particularly for emerging markets.
The financial world has been focused largely on the volatility of countries like China and Greece recently. But Mexico, the third largest US trading partner (after Canada and China), has tremendous exposure to big foreign banks, and the largest concentration of foreign bank ownership of any country in the world (mostly thanks to NAFTA stipulations.)
In addition, the latitude Mexico has provided to the operations of these foreign financial firms means the nation is more exposed to the fallout of another acute financial crisis (not that we’ve escaped the last one).
There is no such thing as isolated “Big Bank” problems. Rather, complex products, risky practices, leverage and co-dependent transactions have contagion ramifications, particularly in emerging markets whose histories are already lined with disproportionate shares of debt, interest rate and currency related travails.
Mexico has benefited to an extent from its proximity to the temporary facade of US financial health buoyed by Fed policy, but as such, it faces grave dangers should any artificial bubble pop, or should the value of the US dollar or US interest rates rise.
…click on the above link to read the rest of the article…
Yes, We Have No Bananas–or Rate Hikes
Yes, We Have No Bananas–or Rate Hikes
The world’s most powerful central bank is relying on a novelty tune to maintain the hyper-speculative status quo.
Back in the Roaring 1920s, a novelty song entitled Yes! We Have No Bananas (1923) was a major hit. The song made fun of a fruit vendor who answered “yes” to every query–even when he didn’t have the requested item–for example, bananas.
Today, in the Roaring Teens, the Federal Reserve has their own novelty tune:yes, we have no rate hikes.
Just like the always-positive fruit vendor in the 1920s who answered “yes” to every question, the Fed answers “yes” every time someone asks if they are indeed going to raise interest rates a smidgen.
Despite their automatic affirmative, we have no rate hikes. The reason why, oddly enough, goes right back to banana vendors–in this case, banana vendors in China, who are speculating on margin (i.e with borrowed money) in China’s casino stock market.
The reason why the Fed is wary of raising rates isn’t the real-world impact. As I have noted here many times, a quarter-point increase won’t torpedo any auto loan or mortgage being issued to qualified buyers.
If a buyer can’t qualify for a home loan because rates clicked up .25%, they have no business buying a house anyway–they are not qualified by any prudent lending standards.
As for subprime auto loans–the firms issuing these loans don’t care if rates click up .25%–the subprime market world of high rates and high fees is unaffected by a tiny uptick in rates.
Who’s affected by a meager .25% uptick? Speculators: every speculator from the banana vendors on the street to hedge funds gambling billions in foreign exchange markets is exposed to massive tidal forces unleashed by higher rates in the U.S.
…click on the above link to read the rest of the article…
The Federal Reserve – Which CREATED Quantitative Easing – Admits QE Doesn’t Work
The Federal Reserve – Which CREATED Quantitative Easing – Admits QE Doesn’t Work
Even the Fed Admits QE Doesn’t Work
The Vice President of the Federal Reserve Bank of St Louis (Stephen Williamson) writes in a new Fed white paper (as explained by Zero Hedge):
- The theory behind Quantitative Easing (QE) is “not well-developed”
- The evidence in support of Ben Bernanke’s views on the transmission mechanisms whereby asset purchases affect outcomes are “mixed at best”
- “All of [the] research is problematic,” Williamson continues, as “there is no way to determine whether asset prices move in response to a QE announcement simply because of a signalling effect, whereby QE matters not because of the direct effects of the asset swaps, but because it provides information about future central bank actions with respect to the policy interest rate.” In other words, it could be that the market is just reading QE as a signal that rates will stay lower for longer and that read is what drives market behavior, not the actual bond purchases.
- “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. [Background.] For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.”
…click on the above link to read the rest of the article…
Turkey Turmoiling: Lira Plunges To Record Low On Financial, Political, Terrorism Fears
Turkey Turmoiling: Lira Plunges To Record Low On Financial, Political, Terrorism Fears
Turkey’s lira is once again in free fall, after testing all-time lows against the dollar during multiple sessions of late as political turmoil and civil war wreak havoc on the currency.
On Tuesday, the central bank failed to hike rates and delivered what was generally said to be a confused set of guidelines for navigating the normalization of monetary policy in developed markets.
In short, a perfect storm of political upheaval, indeterminate monetary policy, and growing violence between Ankara and the country’s Kurdish population have conspired to send the lira on a terrifying ride and as you’ll note from the headline roundup presented below, it looks as though things are going to get a whole lot worse before they get better.
- TURKEY WON’T RAISE RATES UNTIL FED DOES: HALK YATIRIM’S TOKALI
- TURKEY LIRA NOT YET AT LEVEL TO HURT COMPANIES, AKBEN SAYS: AA
- TURKEY REPEAT ELECTIONS AUTHORIZED BY BRD BEFORE 90 DAYS: SABAH
- ERDOGAN: COALITION FAILURE MEANS TURKEY NEEDS TO ASK THE PEOPLE
- ERDOGAN: TURKEY HAS A SERIOUS GOVT FORMATION AND TERROR PROBLEM
- ERDOGAN: TURKEY’S SYSTEM HAS CHANGED, OTHERS WON’T ACCEPT IT
- GUNFIRE HEARD OUTSIDE ISTANBUL’S DOLMABAHCE PALACE: HURRIYET
