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Sweet Authoritative Nothings

There is a mysterious figure making regular appearances in China’s government mouthpiece “People’s Daily”, which simply goes by the name “authoritative person” (AP). This unnamed entity always tends to show up with bad news for assorted speculators, by suggesting that various scenarios associated with monetary and/ or fiscal stimulus are actually not in China’s immediate future (the details of AP’s latest pronouncements can be found here and here).

people's daily The People’s Daily. “Authoritative Person” may be hiding somewhere in the picture to the left.

Some observers seem to believe that this represents a “renewed shift in policy” – Bloomberg e.g. quotes an economist with Mizuho Securities as follows:

“It is very significant and may signal a shift in China’s policies,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “Each time they publish this, it is normally a warning.”

Others are more careful – after all, this seems to be a case of “we’re saying one thing and doing another”, given a credit expansion of 4.6 trillion yuan in just the first quarter, which has sent narrow money supply growth soaring to more than 22% annualized.

The more measured argument is that it could be a sign that the debate about future economic policy is ongoing, resp. has been revived. No-one really knows – it is basically the Chinese version of Kremlinology.

At the end of March, China’s narrow money supply measure M1 was growing at more than 22% y/y – click to enlarge.

Although the extension of new yuan loans has slowed significantly in April from January’s heady pace (555 bn. vs. 2.5 trn.), there has still been enough pumping in the system to push M1 up again in March-April from a brief dip in February – in other words, if there is indeed a change in policy, it is not really visible yet.

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

Why I Think there Will Be a “Dollar Panic”

May 5, 2016

Why I Think there Will Be a “Dollar Panic”

The Great American Credit Collapse

Please remember this warning when you go to the ATM to get cash — and there is none.

While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us. Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage? Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

The same thing could happen to the money supply…

There’s Not Enough Physical Money

Here’s how… and why:

It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $12.6 trillion as of last month.

But there was just $1.4 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.)

What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for. After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

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

Former Fed Advisor Asks “Has The Fed Bankrupted The Nation”

April 14, 2016

Former Fed Advisor Asks “Has The Fed Bankrupted The Nation”

Volcker, Greenspan, Bernanke and Yellen.

Which one does not belong? Logic dictates that Volcker should have been odd man out. After all, there is no legendary “Volcker Put.”

The towering monetarist made no bones about never being bound by the financial markets. The same can certainly not be said of his three successors. And yet, history contrarily suggests it is to Volcker above all others that the financial markets will forever be beholden.

Many of you will be familiar with Michael Lewis’ memoir, Liar’s Poker. Yours truly first read the book in a Wall Street training program much like the one Lewis survived to describe in his autobiographical work. The take-away then, in late 1996, was that Gordon Gekko was right — greed was good.

Recently, a second reading of Liar’s Poker, following nearly a decade inside the Federal Reserve, delivered a much different message than did that first youthful reading and was nothing short of an epiphany: Paul Volcker, albeit certainly inadvertently, created the bond market.

On Saturday, October 6, 1979. Volcker held a press conference and announced that interest rates would no longer be fixed and that further the Fed would begin to target the money supply in order to curb inflation and “speculative excesses in financial, foreign exchange and commodity markets.”

Alas, this new regime was not meant to be. In trying to introduce an alternative to interest rate targeting, the Fed replaced one guessing game with another. Predicting the demand for reserves and then buying or selling securities based on that demand proved to be just as dicey as a similar exercise to target a given level of interest rates had been.

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

Ben Bernanke: “Helicopter Money May Be The Best Available Alternative”

April 11, 2016

Ben Bernanke: “Helicopter Money May Be The Best Available Alternatives

Now that the prospect of helicopter money by the ECB has so infuriated Germany, the ECB had to reach out to Schauble to “mollify” the Germans who are dreading the second coming of monetary paradrops in one century, it was only a matter of time before Citadel’s most prominent employer opined. In a blog post earlier today, Brookings’ blogger and the central banker who together with Alan Greenspan has been most responsible for the world’s unprecedented debt pile and sad economic state, Ben Bernanke, took the podium to share his views on “helicopter money” head on.

In “What tools does the Fed have left? Part 3: Helicopter money” the former Fed head who first infamously hinted at helicopter money in his November 2002 speech “Deflation: Making Sure “It” Doesn’t Happen Here” when he quoted Milton Friedman, once again started off with a Friedman quote:

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” (Milton Friedman, “The Optimum Quantity of Money,” 1969)

He then pulls a quote from his own book “The Courage to Act”

“The deflation speech saddled me with the nickname ‘Helicopter Ben.’ In a discussion of hypothetical possibilities for combating deflation I mentioned an extreme tactic—a broad-based tax cut combined with money creation by the central bank to finance the cut. Milton Friedman had dubbed the approach a ‘helicopter drop’ of money. Dave Skidmore, the media relations officer…had advised me to delete the helicopter-drop metaphor…

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

The Precious Metals Conspiracy

April 11, 2016

The Precious Metals Conspiracy

Tricky and Dangerous Assumptions

For at least a few weeks now, we have noticed a growing drumbeat from a growing corps of analysts. Gold is going to thousands of dollars. And silver is going to outperform. Reasons given are myriad. Goldman Sachs apparently said to short gold, so if one assumes that the bank always advises clients to take the other side of its trades — a tricky and dangerous assumption at best — then one should buy gold.

Goild conspiracy A metallic conspirator and his flying factotum… Image via sceptic.com

Then there’s the change in ETFs, for example the Sprott Physical Silver Fund has had inflows and Sprott bought more silver. And there’s currency wars, money printing, negative interest rates, etc. Most of these stories are based in fact (well except the belief that Goldman’s research is always wrong).

However, they have little to do with the price of gold. The money supply has grown steadily since 2011 while the prices of gold and silver have not. Hell, the money supply has been growing since forever. And the price of gold has gone up as well as down.

Something tells us that this effort to draw in buyers is concerted. Certainly there has been an 8.4% increase in silver held in trust for SLV. This is the result of relentless buying of SLV shares. When buyers push up the price of SLV relative to the price of silver, that creates an arbitrage opportunity for Authorized Participants.

They buy silver metal, create SLV shares, and sell the newly issued shares. They can do that as much as they want while there’s a profit to do so. But of course this pushes down the price of SLV until it is very close to the price of silver. SLV is somewhere between metal and futures. It can be a speculative play on price, but it’s bought with less leverage and it can also be a long-term holding for many people.

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

Ron Paul Warns “The Conflict Between Government & Liberty Is At A Boiling Point”

April 8, 2016

Ron Paul Warns “The Conflict Between Government & Liberty Is At A Boiling Point”

This is excerpted from the introduction of Ron Paul’s Liberty Defined: 50 Essential Issues that Affect Our Freedom.

Liberty means to exercise human rights in any manner a person chooses so long as it does not interfere with the exercise of the rights of others. This means, above all else, keeping government out of our lives. Only this path leads to the unleashing of human energies that build civilization, provide security, generate wealth, and protect the people from systematic rights violations. In this sense, only liberty can truly ward off tyranny, the great and eternal foe of mankind.

The definition of liberty I use is the same one that was accepted by Thomas Jefferson and his generation. It is the understanding derived from the great freedom tradition, for Jefferson himself took his understanding from John Locke (1632–1704). I use the term “liberal” without irony or contempt, for the liberal tradition in the true sense, dating from the late Middle Ages until the early part of the twentieth century, was devoted to freeing society from the shackles of the state. This is an agenda I embrace, and one that I believe all should embrace.

To believe in liberty is not to believe in any particular social and economic outcome. It is to trust in the spontaneous order that emerges when the state does not intervene in human volition and human cooperation. It permits people to work out their problems for themselves, build lives for themselves, take risks and accept responsibility for the results, and make their own decisions.

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

Remember the people involved

March 23, 2016

Remember the people involved

When I was in University, I vividly remember one of my economics professors telling students to always remember the people involved when analyzing a policy change. I was reminded of this sage advice upon reading Matthew McCaffery’s Mises Daily article titled, “Who will pay for it?” is the wrong question to ask politicians. McCaffery’s point is the question often focuses too much on the question of who and how to pay which distracts from more important issues such as what is being paid for? I would add to that, who is being paid? By emphasizing the basic problem of finding the money, what is sometimes overlooked is the problem of whether new government programs will actually work of whether they will be wasteful and counterproductive, and who the tax consumers are.

Asking questions such as “who will pay for it?” and “what, specifically, is being paid for?” are particularly pertinent given the federal budget is to be unveiled today. Early reportssuggest cumulative budget deficits over the next two years will be well above $50 billion (about 1.3% of GDP). The question, “who will pay for it?” is answered quickly as the federal government has only three sources of revenue: current taxpayers, future taxpayers and increasing the money supply (inflation) by selling bonds to the Bank of Canada.

The consequences of higher taxes and more inflation doesn’t seem to faze many people, including some well-known economists in Canada. Doug Bandow observed that left-wing activists tend to favor corporate taxation. They imagine a society divided between businesses and people. However, firms are owned by people, employ people, sell to people, and contract with people. Taxing companies means taxing people.

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

US Money Supply and Debt – Early Warning Signs Remain Operative

March 18, 2016

US Money Supply and Debt – Early Warning Signs Remain Operative

Still Slowing Down

Year-end distortions have begun to slowly come out of the data, and while broad true US money supply growth remains fairly brisk, it has begun to slow again relative to January’s y/y growth rate, to 7.8% from 8.32%.

Many dollars in the format of a gift box

So far it remains in the sideways channel (indicated by the blue lines below) between approx. 7.4% and 8.6%, in which it has meandered since mid 2013. We believe the next break “below the shelf” is likely to be a significant event.

Broad true US money supply TMS-2, annual growth rate: still in the channel, but slowing again from January’s brief upward spike – click to enlarge.

Readers may recall that it was primarily the US treasury’s general account at the Fed which was responsible for the recent upward spike in the growth rate of TMS-2, combined with a year-end surge in deposit money. We suspect the latter had to do with offshore dollars being moved to domestic accounts at year-end for various accounting-related reasons. This suspicion has been confirmed by the fact that the move has been largely reversed in the new year.

As an aside, total bank credit growth (total loans and leases, excl. mortgage debt) stands at 8.24% y/y as of the end of February, which is still well below the peak growth rates seen in previous boom periods (these were closer to 13%).

As can be seen below, the amount of money held in the general account has declined further in February as well, but it seems to us that this money has merely moved into other demand deposits, i.e., there has simply been a shift from one categorization to another:

Money held in the treasury’s general account at the Fed – the recent record spike has begun to reverse – click to enlarge.

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

Deutsche Bank: Negative Rates Confirm The Failure Of Globalization

March 13, 2016

Deutsche Bank: Negative Rates Confirm The Failure Of Globalization

Negative interest rates may or may not be a thing of the past (many thought that the ECB had learned its lesson, and then Vitor Constancio wrote a blog post showing that the ECB hasn’t learned a damn thing), but the confusion about their significance remains. Here is Deutsche Bank’s Dominic Konstam explaining how, among many other things including why Europe will need to “tax” cash before this final Keynesian experiment is finally over, negative rates are merely the logical failure of globalization.

Misconceptions about negative rates

Understanding how negative rates may or may not help economic growth is much more complex than most central bankers and investors probably appreciate. Ultimately the confusion resides around differences in view on the theory of money. In a classical world, money supply multiplied by a constant velocity of circulation equates to nominal growth. In a Keynesian world, velocity is not necessarily constant – specifically for Keynes, there is a money demand function (liquidity preference) and therefore a theory of interest that allows for a liquidity trap whereby increasing money supply does not lead to higher nominal growth as the increase in money is hoarded. The interest rate (or inverse of the price of bonds) becomes sticky because at low rates, for infinitesimal expectations of any further rise in bond prices and a further fall in interest rates, demand for money tends to infinity. In Gesell’s world money supply itself becomes inversely correlated with velocity of circulation due to money characteristics being superior to goods (or commodities). There are costs to storage that money does not have and so interest on money capital sets a bar to interest on real capital that produces goods. This is similar to Keynes’ concept of the marginal efficiency of capital schedule being separate from the interest rate.

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

Norway’s Interest Rate Conundrum

March 12, 2016

Norway’s Interest Rate Conundrum

Current Situation

The ECB recently stimulated more than expected, cutting rates by five basis points and expanding quantitative easing. It is already expected that Norges Bank (The Norwegian Central Bank) will cut rates next week, seeing accelerating inflation as temporary. They have a 2.5% inflation target mandate “over time,” giving them lee-way. They see demand falling off while the local economy, driven by exports, recovering. Therefore, they feel that they can cut rates. My previous articles challenged the assumptions that the oil sector will recover, showing that new technology reduces long term prices below offshore break-even points, and exports can make up the difference, illustrating that key sectors, like fishing, can be replicated in Canada, Maine, Russia and Japan.

We are experiencing 1970’s style stagflation, coming from the supply side, not demand. Prices are going up because Norges Bank continues to destroy the Norwegian Krone, turning it into the Nordic Peso. This is where they are “hiding” the damage to save rest of the economy. For example, housing prices will rise in NOK but fall in USD or gold (universal commodity) terms. It’s a shell game, leading to long term decline or even worse, an unexpected period of elevated inflation, requiring a rapid rise in interest rates. Housing remains at risk in this situation (Norway does not have 30 year fixed loans, most people float monthly).

I am in no position to stop them from making trips to Thailand, fruit from Spain and iPhones from California more expensive, but at least I can share my knowledge with others.

The dashboard, above, lines up key figures, showing how low rates drive inflation, gradually eroding public wealth. It is important to notice that inflation is much higher than interest paid at the bank, punishing responsible behavior. A person’s savings diminishes over time in terms of purchasing power.

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

Downtrend In the Growth Rate of Money Supply Poses a Threat to Bubble Activities

March 7, 2016

DOWNTREND IN THE GROWTH RATE OF MONEY SUPPLY POSES A THREAT TO BUBBLE ACTIVITIES

The yearly growth rate of real gross domestic product eased to 1.9% in Q4 from 2% in the previous quarter.

Using our large scale econometric model we can suggest that the yearly growth rate of GDP could fall to 1.7% by Q3 before bouncing to 2.4% by Q4. By Q4 next year we forecast also a figure of 2.4%.

Other latest data portrays a mixed picture of economic activity. The yearly growth rate of durable goods orders jumped to 1.8% in January from minus 0.1 in the month before.

Meanwhile the Kansas Fed manufacturing index fell to minus 12 in February from minus 9 in January.

Also, in the housing market there are mixed signals with the yearly growth rate of existing home sales climbing to 11% in January from 7.5% in December while the yearly growth rate of new home sales plunged to minus 5.2% in January from 9.9% in the month before.

Furthermore, Conference Board’s consumer confidence index has weakened in February from January with the index falling to 92.2 from 97.8.

Changes in various indicators by themselves do not provide the information about the underlying reason for these changes. In our writing we have suggested that the key is the state of the pool of real wealth.

We suggest that strong increases in the yearly growth rate of money supply prior to its major peak in October 2011, when the yearly growth rate closed at 14.8%, were instrumental in undermining the pace of real wealth generation.

Since October 2011 the yearly growth rate of our measure of money AMS has been following a choppy declining trend. We hold that this is undermining various bubble activities, which sprang up on the back of past strong monetary rises.

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

The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

February 28, 2016

The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote “Be Careful What You Wish For” saying that “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.”

Well, maybe not… especially if physical currency is gradually phased out in favor of some digital currency “equivalent” as so many “erudite economists” and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency – just like physical gold – provides a convenient loophole to the financial repression of keeping one’s savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.

For now cash is still legal, and NIRP – while a reality for the banks – has yet to be fully passed on to depositors.

The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: “as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”

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

Stocks, the Economy and the Money Supply – What to Watch

January 27, 2016

Stocks, the Economy and the Money Supply – What to Watch

In previous articles we have occasionally discussed the interaction between economic indicators and the stock market. Among the topics we have touched upon: for one thing, the capitalization-weighted indexes can hardly be called “leading indicators” of the economy anymore. In fact, if one studies specific major turning points over the past two decades or so, it is clear that the market seems to “know” very little (at least not in advance).

The impression one gets is actually that the major indexes are acting like coincident rather than leading indicators of the economy. However, the market is not completely bereft of leading indicator qualities. What seems to be leading the economy are not the cap-weighted indexes, but market internals.

Even while the SPX still rose, resp. went sideways in 2015, market internals began to deteriorate (here shown: S&P hi/low percent, NYSE a/d line, SPX stocks above 200 & 50 day ma) – click to enlarge.

We believe we can explain why this is the case. In an economy in which the money supply can be expanded ex nihilo by central planners and/or commercial banks, the pace of money supply growth tends to lead both stock market returns and the performance of the economy as measured in terms of aggregate data.

Readers may have noticed our habit of adding the qualifier “as measured by aggregate data”. We are doing this because the boom period is a kind of Potemkin village: seemingly busy economic activity and surging accounting profits are masking the fact that a great deal of capital is consumed. Simply put, accounts are falsified, because loose monetary policy distorts and falsifies the entire economy’s price structure.

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

War On Cash Escalates: China Readies Digital Currency, IMF Says “Extremely Beneficial”

January 20, 2016

War On Cash Escalates: China Readies Digital Currency, IMF Says “Extremely Beneficial”

Remember when Bitcoin and its digital currency cohorts were slammed by authorities and written off by the elite as worthless? Well now, as the war on cash escalates, officials from The IMF to China are seeing the opportunity to control the world’s money through virtual (cash-less) currencies. Just as we warned most recently here, state wealth control is the goal and, as Bloomberg reports, The PBOC is targeting an early rollout of China’s own digital currency to “boost control of money” and none other than The IMF’s Christine Lagarde added that “virtual currencies are extremely beneficial.”

By way of background, as we explained previously, What exactly does a “war on cash” mean?

It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.

These limits are broadly called “capital controls.”

Why Now?

Why are governments suddenly so keen to ban physical cash?

The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.

Forcing Those With Cash To Spend or Gamble Their Cash

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

The Fed’s Stunning Admission Of What Happens Next

January 17, 2016

The Fed’s Stunning Admission Of What Happens Next

Following an epic global stock rout, one which has wiped out trillions in market capitalization, it has rapidly become a consensus view (even by staunch Fed supporters such as the Nikkei Times) that the Fed committed a gross policy mistake by hiking rates on December 16, so much so that this week none other than former Fed president Kocherlakota openly mocked the Fed’s credibility when he pointed out the near record plunge in forward breakevens suggesting the market has called the Fed’s bluff on rising inflation.

All of this happened before JPM cut its Q4 GDP estimate from 1.0% to 0.1% in the quarter in which Yellen hiked.

To be sure, the dramatic reaction and outcome following the Fed’s “error” rate hike was predicted on this website on many occasions, most recently two weeks prior to the rate hike in “This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession” when we demonstrated what would happen once the Fed unleashed the “Ghost of 1937.”

As we pointed out in early December, conveniently we have a great historical primer of what happened the last time the Fed hiked at a time when it misread the US economy, which was also at or below stall speed, and the Fed incorrectly assumed it was growing.

We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession.

Here is what happened then, as we described previously in June.

[No episode is more comparable to what is about to happen] than what happened in the US in 1937, smack in the middle of the Great Depression.

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

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