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An Imaginary Bogeyman

What’s a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory?

In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the actual planners, have begun to berate the Fed for inadvertently summoning that great bugaboo of modern-day money cranks, the “ghost of 1937”.

Bugaboo of monetary cranks
The bugaboo of Keynesian money cranks – the ghost of 1937.

As the story goes, the fact that the FDR administration’s run-away deficit declined a bit, combined with a small hike in reserve requirements by the Fed “caused” the “depression-within-the-depression” of 1937-1938, which saw the stock market plunging by more than 50% and unemployment soaring back to levels close to the peaks seen in 1932-33.

This is of course balderdash. If anything, it demonstrates that the data of economic history are by themselves useless in determining cause and effect in economics. It is fairly easy to find historical periods in which deficit spending declined a great deal more than in 1937 and a much tighter monetary policy was implemented, to no ill effect whatsoever. If one believes the widely accepted account of the reasons for the 1937 bust, how does one explain these seeming “aberrations”?

The DJIA in 1937 (eventually, an even lower low was made in 1938, see also next chart) – click to enlarge.

As we often stress, economics is a social science and therefore simply does not work like physics or other natural sciences. Only economic theory can explain economic laws – while economic history can only be properly interpreted with the aid of sound theory.

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

Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

January 24, 2016

Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

Deflation Threatens to Swallow the World

Many high-powered people and institutions say that deflation is threatening much of the world’s economy …

China may export deflation to the rest of the world.

Japan is mired in deflation.

Economists are afraid that deflation will hit Hong Kong.

The Telegraph reported last week:

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

***

Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:

Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2 per cent per annum; Germany is at 0.3 per cent and the US at 0.5 per cent.

Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump.

Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe:

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

Betting on the Wall Street Crash

January 24, 2016

Betting on the Wall Street Crash

Exclusive: The 2008 Wall Street crash resulted from a combination of unrestrained greed and political contempt for government regulators who might have prevented the devastation. In The Big Short, the tale is told from the perspective of a few players who saw the inevitable and made money on the crash, writes James DiEugenio.

If you read Michael Lewis’s book The Big Short or see the movie by the same name, you won’t find much about how the financial crisis of 2008 was set in motion more than two decades earlier. You won’t learn much about the roles of Ronald Reagan and his disdain for big government or about Bill Clinton’s faith in neo-liberalism, trusting that the modern markets and the supposedly sophisticated investors would keep excesses in check.

Nor will you find much about economist-turned-politician Phil Gramm who incorporated many of Reagan’s and Clinton’s beliefs into legislative actions, slashing taxes on the rich in the 1980s (and thus incentivizing greed) and, in the 1990s, brushing aside Franklin Roosevelt’s painfully learned lessons from the Great Depression about the need for firewalls between the speculation of Wall Street and the hard-earned savings of Main Street.

Also out of Lewis’s narrative frame is Brooksley Born, the federal commodities regulator who foresaw the looming danger from the exotic new financial instruments that sliced and diced risky subprime mortgages and packaged them in bonds with ratings far above what they deserved – and the even riskier tendency to lay bets on how the bonds would perform.

But Born was out-muscled by bigger financial stars with larger egos, the esteemed Federal Reserve Chairman Alan Greenspan (originally a Reagan appointee) and Clinton’s brash Deputy Treasury Secretary Lawrence Summers, a rising star in the neo-liberal establishment which treated the market’s “invisible hand” as a new-age god.

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

Top-Down “Solutions” = Institutionalized Serfdom, Bottom-Up Solutions = Reviving Opportunity

January 24, 2016

Top-Down “Solutions” = Institutionalized Serfdom, Bottom-Up Solutions = Reviving Opportunity

If the “solution” doesn’t enable the accumulation of capital in all its forms by individuals and households, it isn’t a real solution–it’s just another top-down scheme that institutionalizes subsistence serfdom.

Phrases like reviving the American Dream emit the lingering stench of empty political rhetoric mouthed by bought-and-paid-for candidates. But if we wave aside this foul smell, we’re left with a very profound topic: reviving broad-based opportunity.

Longtime collaborator Gordon T. Long and I discuss what it will take to revive opportunity in a new 27-minute video Reviving the American Dream.

The status quo “solution” to the decline of opportunities for meaningful work is predictably top-down: guaranteed income for all, a.k.a. “welfare for all.” This is of course a re-hash of the Keynesian Cargo Cult’s 1930 fix for the Great Depression, except on a far grander scale.

There are three completely unsupported assumptions in every proposed “welfare for all” scheme:

1. The trillions of dollars/ euros/ yen etc. required to fund “welfare for all” can be raised from taxing profits and wages. Yet wages and profits are both set to decline sharply in the near-term as the global recession tightens its grip and longer term from the unstoppable forces of automation.

2. Paying people to do nothing will free people to become artists, entrepreneurs, etc. This is a noble ideal, but if we look at communities that have become dependent on top-down central-state welfare, we find despair, social depression and the collapse of real community.

“Welfare for all” debilitates the community by stripping away the sources of meaningful work and positive social roles. I explain this further in my book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.

…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 U.S. Is At The Center Of The Global Economic Meltdown

January 20, 2016

The U.S. Is At The Center Of The Global Economic Meltdown

While the economic implosion progresses this year, there will be considerable misdirection and disinformation as to the true nature of what is taking place. As I have outlined in the past, the masses were so ill informed by the mainstream media during the Great Depression that most people had no idea they were actually in the midst of an “official” depression until years after it began. The chorus of economic journalists of the day made sure to argue consistently that recovery was “right around the corner.” Our current depression has been no different, but something is about to change.

Unlike the Great Depression, social crisis will eventually eclipse economic crisis in the U.S. That is to say, our society today is so unequipped to deal with a financial collapse that the event will inevitably trigger cultural upheaval and violent internal conflict. In the 1930s, nearly 50% of the American population was rural. Farmers made up 21% of the labor force. Today, only 20% of the population is rural. Less than 2% work in farming and agriculture. That’s a rather dramatic shift from a more independent and knowledgeable land-utilizing society to a far more helpless and hapless consumer-based system.

What’s the bottom line? About 80% of the current population in the U.S. is more than likely inexperienced in any meaningful form of food production and self-reliance.

The rationale for lying to the public is certainly there. Economic and political officials could argue that to reveal the truth of our fiscal situation would result in utter panic and immediate social breakdown. When 80% of the citizenry is completely unprepared for a decline in the mainstream grid, a loss of savings through falling equities and a loss of buying power through currency destruction, their first response to such dangers would be predictably uncivilized.

…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…

Canadians Panic As Food Prices Soar On Collapsing Currency

January 13, 2016

Canadians Panic As Food Prices Soar On Collapsing Currency

It was just yesterday when we documented the continuing slide in the loonie, which is suffering mightily in the face of oil’s inexorable decline.

As regular readers are no doubt acutely aware, Canada is struggling through a dramatic economic adjustment, especially in Alberta, the heart of the country’s oil patch. Amid the ongoing crude carnage the province has seen soaring property crime, rising food bank usage and, sadly, elevated suicide rates, as Albertans struggle to comprehend how things up north could have gone south (so to speak) so quickly.

The plunging loonie “can only serve to worsen the death of the ‘Canadian Dream'” we said on Tuesday.

As it turns out, we were exactly right.

The currency’s decline is having a pronounced effect on Canadians’ grocery bills. As Bloomberg reminds us, Canada imports around 80% of its fresh fruits and vegetables. When the loonie slides, prices for those good soar. “With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress,” Bloomberg continues.

Of course with the layoffs piling up, you can expect more households to fall into the “lower-income” category where they will have to struggle to afford things like $3 cucumbers, $8 cauliflower, and $15 Frosted Flakes. Have a look at the following tweets which underscore just how bad it is in Canada’s grocery aisles.

View image on Twitter

Follow

Steve Ladurantaye @sladurantaye

Three bucks. For a cucumber.

2:24 PM – 12 Jan 2016

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

For Commodities, This Is The Next Great Depression

January 7, 2016

For Commodities, This Is The Next Great Depression

While the “sell in 1973, and go away” plan had worked out for some in the commodity space, the destruction of the last decade has only one historical comparison… the middle of The Great Depression.

The 10-year rolling annualized return for commodities is -5.1% – the lowest since 1938…

During the same period Stocks are up 7.3% annualized, Bonds 6.6%, and Cash unchanged. Dip-buying opportunity? Maybe.

UBS thinks so: Tactically we can see a bounce in Q1 before the capitulation starts

Tactically, in September 2015, we actually expected a more significant oversold bounce in commodities from last year’s late September risk bottom into ideally early Q2 2016 before we anticipated more weakness into later 2016. So far, the bounce failed since particularly in the energy complex we saw further weakness into December and the metals have been actually just trading sideways. Nonetheless, according to our Q1 US dollar pullback call, we still see the chance for another rebound attempt in commodities into later Q1, and if so the move can be significant (short covering). Such a rebound would however not change our underlying cyclical roadmap for commodities, and this means that any rebound in Q1 should be limited in price and time before we expect another and potential final capitulation wave to start into H2 2016, where we expect the CCI index to minimum test its 2008 low at 350 to worst case 320.

Commodities… on the way into a multi-year buying opportunity

All in all we are sticking to our last year’s projection and strategy call that commodities are on the way into an important H2 2016/early2017 cyclical bottom. What is missing in our view is the final act in this first bear market.

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

Stretching Your Resources In Uncertain Times

December 23, 2015

Stretching Your Resources In Uncertain Times

money public domain With the cost of everything going up and the future uncertain, stretching your resources and re-purposing items becomes more of a necessity. I am always looking for new ways to get the “max for the minimum.”

Some recent posts here reminded me of some of these things. My grandparents and parents were a young family when the great depression hit. What kinds of things did they do to make ends meet when things were expensive or scarce?

Unfortunately, many of them who went through this period in time are no longer with us. However, I remember a few things they did or heard of them doing, that now, looking back, were obviously brought about by the times they lived in. Even after times improved somewhat, some still stuck to certain ways of doing things. Old habits are hard to break.

Hunting and gardening were basically a given back then. Most everyone outside the city limits did one or both of this along with bartering services for goods. A little carpentry or plumbing work for a couple of chickens.

I remember my grandfather mixing his old used motor oil with a little bit of kerosene and spraying the underside and inner fender wells of his pick up truck just before winter. He claimed it helped protect the truck from incurring rust damage over the winter months. Getting more serviceable years out of the truck.

I am sure environmentalists would have a cow over this nowadays, but it was a way of taking something that didn’t appear to have any usefulness left ,and yet, finding one more use for it. The county used to spray old used oil to keep the dust down on dirt roads during the spring and summer months. Don’t see that happening anymore.

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

Alternative Currencies of the Great Depression

December 22, 2015

Alternative Currencies of the Great Depression

QUESTION: Mr. Armstrong, have you ever heard of a short lived Wörgl Experiment in Austria? It was shut down by the Austrian Central Bank they say because it was successful. Have you looked into this experiment they claim defied deflation and inflation?

ANSWER: Yes. This was by no means an isolated instance. True, it was touted as the “Miracle of Wörgl” during the Great Depression. A very similar “experiment” took place in the United States when over 200 cities issued their own currency. You have to understand the dynamics of the period. This was the very age of AUSTERITY where the assumption was that the collapse was due to a lack of confidence in government so they increased tax collection and cut spending, which unleashed both deflation and a dwindling money supply. This led many cities to create their own money due to the lack of money in circulation that was impacted by hoarding.

The Wörgl Experiment began on July 31, 1932, the very month that the Dow Jones bottomed. The experiment involved issuing “Certified Compensation Bills” that were was a form of local currency known as Scrip or Freigeld. The monetary theories of the economist Silvio Gesell were applied by the town’s then mayor, Michael Unterguggenberger. What differed with Gesell’s idea was that the currency would expire. Believe it or not, there are some government’s looking into currency that expires. Since World War II, Europe has issued currency that expired roughly every 10 years. This forced people to bring out the old currency to be swapped and thus prevented hoarding.

The central part of Gesell’s idea was how to stop the HOARDING of money. This is why FDR confiscated gold. He too saw the problem of people hoarding money and not spending it. This is part of every economic decline. If there is no CONFIDENCE in the future, people save more. This is simply human.

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

The Eurozone Sovereign Debt Crisis and a Potential OTC Interest Rate Derivatives Crisis

December 19, 2015

THE EUROZONE SOVEREIGN DEBT CRISIS AND A POTENTIAL OTC INTEREST RATE DERIVATIVES CRISIS

Summary

After considering the alternative scenarios of Grexit, debt renegotiation, transferring of debt, a deflationary spiral and so on, it is concluded that this will either result (ceteris paribus) in an increase in sovereign debt yields or a decrease in the volume of sovereign debt issued. This is worrying; not only due to the events in Greece and the ripples it has sent throughout the Eurozone but also because elections are approaching in other peripheral countries.
The effect that this has on Repo market rates (where “government bond collateral” accounted “for almost 80% of EU-originated repo collateral” in the European repo market) would then have a subsequent, significant impact on EURIBOR rates (EURIBOR being a key rate for unsecured lending which many derivatives – OTC interest rate derivatives especially – are linked to).
Given that EURIBOR has remained relatively low in recent years and governments have sought to keep interest rates low in an effort to stimulate a recovery, this would be a sudden shock to a vulnerable, sensitive system.
It is further argued (using Keynes’ theoretical analysis) that the sharp increase in liquidity preference and the depression of the marginal of efficiency of capital is, in general, far greater than that which occurred during the Great Depression and that, due to the especially uncertain climate of monetary policy, this means that Central Banking has been the reason why the OTC Interest Rate Derivatives market has been systemically primed for a crisis.
I further argue that the potential scale of the OTC Interest Rate Derivatives crisis dwarfs both the Credit Default Swaps and Collateralised Debt Obligations positions that were associated with the Great Recession.
It is also argued that the risks are greater than the Great Depression and that, if the money and banking system remains unreformed, the world could be plunged into a crisis that belittles the Great Depression itself.

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

Peter Schiff: “Mission Accomplished”

December 18, 2015

Peter Schiff: “Mission Accomplished”

Mission Accomplished

On May 1, 2003 on the flight deck of the USS Abraham Lincoln then President George W. Bush, after becoming the first U.S. president to land on an aircraft carrier in a fixed wing aircraft (in a dashing olive drab flight suit), declared underneath an enormous “Mission Accomplished” banner that “major combat operations” in Iraq had been concluded, that regime change had been effected, and that America had prevailed in its mission to transform the Middle East. 13 years later, after years of additional combat operations in Iraq, and a Middle East that is spiraling out of control and increasingly disdainful of America’s influence, we look back at the “Mission Accomplished” event as the epitome of false confidence and premature celebration.

The image of W on the flight deck comes to mind in much of the reaction to this week’s decision by the Federal Reserve to raise interest rates for the first time in nearly a decade. While many in the media and on Wall Street talked of a “concluded experiment” and the “dawning of a new era,” few realize that we are just as firmly caught in the thickets of failed policy as were Bush, Cheney, and Rumsfeld in the misunderstood quagmire of 2003 Iraq.

In its initial story of the day’s events, The Washington Post (12/16/15) declared that by raising the Fed Funds rate to one quarter of a percent The Fed is “ending an era of easy money that helped save the nation from another Great Depression.” Putting aside the fact that 25 basis points is still 175 points below the near 2.0% rate of core inflation that the government has reported over the past 12 months (and should therefore be considered undeniably easy), the more important question to ask is into what environment the Fed is apparently turning this page.

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

World Leaders Just Agreed To A “Historic” Climate Accord… Which Is Non-Binding And Has No Enforcement Language

December 12, 2015

World Leaders Just Agreed To A “Historic” Climate Accord… Which Is Non-Binding And Has No Enforcement Language

Great news! The “greatest threat to future generations of the world” has apparently been solved. World leaders Saturday adopted an historic international climate accord in Paris, the first-ever agreement to commit almost every country to fight climate change. However, as we knew all along and just got confirmation, the 31-page pact does not have binding language or a mechanism to force countries to live up to the promises to cut greenhouse gases emissions or provide money for developing and poor nations to cope with the effects of global warming.

Basically, COP21 was a massive taxpayer-funded boondoggle, in which “leaders” enjoyed all the perks of Paris for two weeks, burned through hundreds of millions in public funding, and created millions of tons in greenhouse gases (what do you think to private jets and government 747s use to fly?) that has achieved absolutely nothing.

In other words…

Nonetheless, leaders and the environmental community hailed the United Nations agreement has a historic turning point that has the potential to stave off the worst expected effects of global warming.

And The UN reports a large round of mutual masturbation…

Follow

United Nations

✔@UN

A joyful atmosphere fills the plenary hall at #COP21. #ParisAgreement

1:36 PM – 12 Dec 2015

The Borg press is happy, clearly having no idea that absolutely nothing just took place:

Follow

T. Becket Adams @BecketAdams

Journo says she’s watching #ParisAgreement with press (https://twitter.com/MSLJeconomist/status/675732689102741504 …), tweets video of their reaction.

2:04 PM – 12 Dec 2015

Obama was delighted that “American leadership” was responsible for an agreement that is neither binding nor enforceable, in other words, something one would write on the back of a napkin:

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

Living a Lie

December 11, 2015

Living a Lie

“Above all, don’t lie to yourself. The man who lies to himself and listens to his own lie comes to a point that he cannot distinguish the truth within him, or around him, and so loses all respect for himself and for others. And having no respect he ceases to love.” – Fyodor Dostoyevsky, The Brothers Karamazov

The lies we tell ourselves are only exceeded by the lies perpetrated by those controlling the levers of our society. We’ve lost respect for ourselves and others, transforming from citizens with obligations to consumers with desires. The love of mammon has left our country a hollowed out, debt ridden shell of what it once was. When I see the data from surveys about the amount of debt being carried by people in this country and match it up with the totals reported by the Federal Reserve, I’m honestly flabbergasted that so many people choose to live a lie. By falling for the false materialistic narrative of having it all today, millions of Americans have enslaved themselves in trillions of debt. The totals are breathtaking to behold:

Total mortgage debt – $13.6 trillion ($9.9 trillion residential)

Total credit card debt – $924 billion

Total auto loan debt – $1.0 trillion

Total student loan debt – $1.3 trillion

Other consumer debt – $300 billion

With 118 million occupied households in the U.S., that comes to $145,000 per household. But, when you consider only 74 million of the households are owner occupied and approximately 26 million of those are free and clear of mortgage debt, that leaves millions of people with in excess of $200,000 in mortgage debt. Keeping up with the Joneses has taken on a new meaning as buying a 6,000 sq ft McMansion with 3% down became the standard operating procedure for a vast swath of image conscious Americans. When you are up to your eyeballs in debt, you don’t own anything. You are living a lie.

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

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