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Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money

Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money

Lacy Hunt takes on the widespread belief that sustained inflation is on the way in his latest quarterly review.
Money Velocity and the Commercial Bank LD Ratio

Hoisington Quarterly Review and Outlook 2nd Quarter 2021

Here are some snips to the latest at Hoisington Management Quarterly Review (Emphasis Mine).

Too Much Debt

In highly indebted economies, additional debt triggers the law of diminishing returns. This fact is confirmed when the marginal revenue product of debt (MRP) falls, where MRP is the amount of GDP created by an additional dollar of debt. In microeconomics, when debt is already at extreme levels, a further increase in debt leads to an increase in the risk premium on which a borrower will default suggesting that the bank or other lender will not be repaid.

Combining both the falling MRP with a declining loan to deposit (LD) ratio, results in a reduction in the velocity of money. In terms of the impact on monetary activities, a drop in the LD ratio means that more of bank deposits are being directed to the purchase of Federal, Agency and state and local securities in lieu of private sector loans. The macroeconomic result is that funds are shifted to sectors that are the least productive engines of economic growth and away from the high multiplier ones.

More than thirty years ago, Stanford Ph.D. Rod McKnew demonstrated that the money multiplier, referred to as “m”, is higher for bank loans than bank investments in securities. The money multiplier, which is money stock (M2) divided by the monetary base should not be confused with the velocity of money. The latest trends strongly support McKnew’s analysis.

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

The Looming Stagflationary Debt Crisis

roubini153_OLIVIER DOULIERYAFP via Getty Images_USdebtOlivier Douliery/AFP via Getty Images

The Looming Stagflationary Debt Crisis

Years of ultra-loose fiscal and monetary policies have put the global economy on track for a slow-motion train wreck in the coming years. When the crash comes, the stagflation of the 1970s will be combined with the spiraling debt crises of the post-2008 era, leaving major central banks in an impossible position.

NEW YORK – In April, I  that today’s extremely loose monetary and fiscal policies, when combined with a number of negative supply shocks, could result in 1970s-style stagflation (high inflation alongside a recession). In fact, the risk today is even bigger than it was then.

After all, debt ratios in advanced economies and most emerging markets were much lower in the 1970s, which is why stagflation has not been associated with debt crises historically. If anything, unexpected inflation in the 1970s wiped out the real value of nominal debts at fixed rates, thus reducing many advanced economies’ public-debt burdens. 

Conversely, during the 2007-08 financial crisis, high debt ratios (private and public) caused a severe debt crisis – as housing bubbles burst – but the ensuing recession led to low inflation, if not outright deflation. Owing to the credit crunch, there was a macro shock to aggregate demand, whereas the risks today are on the supply side.

We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period. Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.

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

Translating Yellen-Speak into Golden-Speak

Translating Yellen-Speak into Golden-Speak

Given the increasingly politicized interplay (cancer) of central bank policy and so-called free market price discovery, it’s becoming increasingly more important to track the actions of central bankers rather than just traditional market signals alone.

Like it or not, the Fed is the market.

Toward this end, we’ve had some substantive fun deciphering the past, current and future implications of “forward guidance” from our openly mis-guided crop of central bankers, most notably Greenspan, Bernanke and Powell.

But let’s not forget Janet Yellen.

As we see below, translating Yellen-speak into blunt speak tells us a heck of a lot about the future.

The Open and Obvious Debt Crisis

Back in 2018, Janet Yellen (former Fed Chairwoman and current Treasury Secretary, eh hmmm) along with Jason Furman (current Biden economic advisor) observed in a Washington Post Op-Ed that, “a U.S. debt crisis is coming, but don’t blame entitlements.”

As I like to say, “that’s rich.”

As in all things economic, the motives and thinking coming out of DC are largely political, which means they are self-serving, partisan and predominantly disastrous.

As for translating Yellen’s political-speak into honest English, the motives for this 2018 warning were two-fold: 1) Yellen and Furman were making a partisan attack on Trump’s then $1T budget proposal, and 2) Yellen actually believed what she said and that the US was indeed careening toward “a debt crisis.”

In fact, we were already in a debt crisis in 2018, a crisis which has simply risen to much higher orders of magnitude in the three short years since Yellen’s “warning” was made.

Stated otherwise, Yellen will get her debt crisis. It’s ticking right in front of her.

Tracking the Debt Trail

Ironically, the most obvious metrics of the current and ever-expanding debt crisis began just months after Yellen’s infamous Op-Ed.

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

The G-7’s Reckless Commitment To Mounting Debt

The G-7’s Reckless Commitment To Mounting Debt

Historically, meetings of the largest economies in the world have been essential to reach essential agreements that would incentivise prosperity and growth. This was not the case this time. The G7 meeting agreements were light on detailed economic decisions, except on the most damaging of them all. A minimum global corporate tax. Why not an agreement on a maximum global public spending?

Imposing a minimum global corporate tax of 15% without addressing all other taxes that governments impose before a business reaches a net profit is dangerous. Why would there be a minimum global corporate tax when subsidies are different, some countries have different or no VAT rates (value added tax), and the endless list of indirect taxes is completely different?  The G7 “commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises”. This entire sentence makes no sense, opens the door to double taxation and penalizes the most competitive and profitable companies while it has no impact on the dinosaur loss-making or poor-margin conglomerates that most governments call “strategic sectors”.

The global minimum corporate tax is also a protectionist and extractive measure. The rich nations will see little negative impact from this, as they already have their governments surrounded by large multinationals that will not suffer a massive taxation blow because subsidies and tax incentives before net income are large and generous. According to PWC’s Paying Taxes 2020 (https://www.pwc.com/gx/en/paying-taxes/pdf/pwc-paying-taxes-2020.pdf), profit taxes in North America already stand at 18.5% but, more worryingly, total tax contributions including labour and other taxes reach 40% of revenues. In the EU & EFTA profit taxes may be somewhat smaller than in North America, but total taxation remains above 39% of revenues.

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

The Abuse of Public Debt–And How It Sets the Stage For Economic Disaster

The 2020–21 recession has been devastating for the global economy. It has been ninety years since the global economy last suffered through a recession of this magnitude (in the Great Depression). Nonetheless, it seems that the social effects of the current recession have not yet come about. The reason for this disparity between cold macroeconomic data and popular sentiment can be found in the enormous public spending by practically all of the countries in the world.1

This article argues that exorbitant increases in public debt, such as those seen in 2020, are not free. It examines the potential economic effects of accumulating vast quantities of public debt.

The First Problem: Less Economic Growth

The countries with the greatest amount of public debt saw per capita income grow the least, as seen in chart 1.

Chart 1: GDP Growth per Capita

df
Source: Kumar and Woo. Created with Datawrapper

The economic mechanism that explains this statistical relationship is relatively simple. An excessive public debt causes the so-called expulsion effect, in which credit is redirected from the private sector to the public sector. The growth of public debt deprives the private sector of loanable funds, reducing the generation of wealth. (It is the private sector that generates economic activity. The most the public sector can aspire to do is to establish a framework that favors private endeavors.)

The Second Problem: Disincentivizing Investment and Reducing Productivity

This second problem is an extension of the first. One of the best indicators of an economy’s future growth is its investment rate. When investment increases, so too does productivity, which is accompanied by economic growth.

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

What Will You Do When Inflation Forces U.S. Households To Spend 40 Percent Of Their Incomes On Food?

What Will You Do When Inflation Forces U.S. Households To Spend 40 Percent Of Their Incomes On Food?

Did you know that the price of corn has risen 142 percent in the last 12 months?  Of course corn is used in hundreds of different products we buy at the grocery store, and so everyone is going to feel the pain of this price increase.  But it isn’t just the price of corn that is going crazy.  We are seeing food prices shoot up dramatically all across the industry, and experts are warning that this is just the very beginning.  So if you think that food prices are bad now, just wait, because they are going to get a whole lot worse.

Typically, Americans spend approximately 10 percent of their disposable personal incomes on food.  The following comes directly from the USDA website

In 2019, Americans spent an average of 9.5 percent of their disposable personal incomes on food—divided between food at home (4.9 percent) and food away from home (4.6 percent). Between 1960 and 1998, the average share of disposable personal income spent on total food by Americans, on average, fell from 17.0 to 10.1 percent, driven by a declining share of income spent on food at home.

Needless to say, the poorest Americans spend more of their incomes on food than the richest Americans.

According to the USDA, the poorest households spent an average of 36 percent of their disposable personal incomes on food in 2019…

As their incomes rise, households spend more money on food, but it represents a smaller overall budget share. In 2019, households in the lowest income quintile spent an average of $4,400 on food (representing 36.0 percent of income), while households in the highest income quintile spent an average of $13,987 on food (representing 8.0 percent of income).

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

It’s time to start thinking about inflation

In the year 215 AD, the young Roman Emperor Caracalla, then just 27 years of age, decided to ‘fix’ Rome’s perennial inflation problem by minting a brand new coin.

Caracalla’s predecessors over the previous several decades had ordered an astonishing debasement of Roman currency; the silver content in Rome’s ‘denarius’ coin, for example, was reduced from roughly 85% in the early 150s AD, to less than 50% by the early 200s.

And with the silver content in their currency greatly reduced, government mints cranked out unprecedented quantities of coins.

They spent the money as quickly as they minted it, using the flood of debased coins, for example, to finance endless wars and buy up food supplies for their soldiers.

Needless to say this caused rampant inflation across the empire.

Egypt was a province of Rome at the time, and the one of the Empire’s major agricultural producers. Its local provincial coin, the drachma, had also been heavily debased.

A measure of Egyptian wheat in the early 1st century AD, for example, cost only 8 drachmas. In the third century that same amount of Egyptian wheat cost more than 100,000 drachmas.

Caracalla tried to fix this by simply creating a new coin– the antoniniamis.

It was originally minted with 50% silver content. But the antoniniamis was debased down to just 5% silver within a few decades.

Caracalla’s undisciplined attempt at controlling inflation was about as effective as Venezuela trying to ‘fix’ its hyperinflation by chopping five zeros off its currency.

In fact this same story has been told over and over again throughout history:

Governments who spend too much money almost invariably resort to debasing the currency.

In ancient times, ‘debasement’ meant reducing the gold and silver content in their coins.

In early modern times, it meant printing vast quantities of paper money.

Today, it means creating ‘electronic’ money in the banking system.

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

What Gives Value to a Currency?

QUESTION: Hello Martin, can you explain to me how a currency would sustain value for international trade if a country, like Canada (where I live), did what you suggested and stopped issuing debt and just printed money to level that was 5% – 10% of national GDP? would it depend on the attractiveness of what a country exports eg: Canada exports oil, lumber, crops like wheat/soy/canola, minerals – both precious and functional? What would happen to a country that didn’t have exports as a significant portion of it’s GDP? I am curious about how currencies would react to your restructuring plan that eliminated the need for a country to issue debt. Thanks for all your insights and theories. Very helpful.

Trapped in Canada with an egoistic misguided Prime Minister who doesn’t appear to like Canada (he keeps telling us how awful we are) or Canadians, he prefers spending time with global elites and is following their plan even though it damages Canada pretty significantly.
MB

ANSWER: Right now, every country spends more than it takes in. The deficits are funded by selling debt, which then competes against the private sector. The interest rates rise and fall on sovereign debt based upon the confidence from one week to the next. If they stopped borrowing, then the capital investment would turn to the private sector, creating more economic growth. If income taxes were eliminated, the economy would grow based upon innovation which is what it should be driven by.

The confidence in the currency would simply depend upon the strength of the economy, as was the case for Athens and Rome in ancient times. Their coinage was imitated because they were the dominant economies of their time. The value of a currency is the strength of its economy…

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

currency, currency value, money, martin armstrong, armstrong economics, money printing, debt,

US Dollar’s Status as Dominant “Global Reserve Currency” Drops to 25-Year Low

US Dollar’s Status as Dominant “Global Reserve Currency” Drops to 25-Year Low

Central banks getting nervous about the Fed’s drunken Money Printing and the US Government’s gigantic debt? But still leery of the Chinese renminbi.

The global share of US-dollar-denominated exchange reserves dropped to 59.0% in the fourth quarter, according to the IMF’s COFER data released today. This matched the 25-year low of 1995. These foreign exchange reserves are Treasury securities, US corporate bonds, US mortgage-backed securities, US Commercial Mortgage Backed Securities, etc. held by foreign central banks.

Since 2014, the dollar’s share has dropped by 7 full percentage points, from 66% to 59%, on average 1 percentage point per year. At this rate, the dollar’s share would fall below 50% over the next decade:

Not included in global foreign exchange reserves are the Fed’s own holdings of dollar-denominated assets, its $4.9 trillion in Treasury securities and $2.2 trillion in mortgage-backed securities, that it amassed as part of its QE.

The US dollar’s status as the dominant global reserve currency is a crucial enabler for the US government to keep ballooning its public debt, and for Corporate America’s relentless efforts to create the vast trade deficits by offshoring production to cheap countries, most prominently China and Mexico. They’re all counting on the willingness of other central banks to hold large amounts of dollar-denominated debt.

But it seems, central banks have been getting just a tad nervous and want to diversify their holdings – but ever so slowly, and not all of a sudden, given the magnitude of this thing, which, if mishandled, could blow over everyone’s house of cards.

20 years of decline.

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

wolfstreet, wolf richter, us dollar, world reserve currency, central banks, money printing, fed, us federal reserve, money, us debt, debt, united states

Do You Believe in Magic?


The people pretending to run the world’s financial affairs do. The more layers of abstract game-playing they add to the existing armatures of unreality they’ve already constructed, the more certain it becomes that they will blow up all the support systems of a sunsetting hyper-tech economy that now has no safe lane to continue running in.

Virtually all the big nations are doing this now in desperation because they don’t understand that the hyper-tech economy is hostage to the deteriorating economics of energy, basically fossil fuels, and oil especially. The macro mega-system can’t grow anymore. We’re now in the de-growth phase of a dynamic that pulsates through history, as everything in the universe pulsates. We attempted to compensate for de-growth with debt, borrowing from the future.

But debt only works in the youthful growth phases of economic pulsation, when the prospect of being paid back is statistically favorable. Now in the elder de-growth phase, the prospect of paying back debts, or even servicing the interest, is statistically dismal. The amount of racked-up debt worldwide has entered the realm of the laughable. So, the roughly twenty-year experiment in Central Bank credit magic, as a replacement for true capital formation, has come to its grievous end.

Hence, America under the pretend leadership of Joe Biden ventures into the final act of this melodrama, which will end badly and probably pretty quickly. They are about to call in the financial four horsemen of apocalypse: 1) Modern Monetary Theory (MMT), 2) a command economy, 3) Universal Basic Income (UBI, “helicopter” money for the people), and 4) the “Build Back Better” infrastructure scheme.

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

money, monetary theory, modern monetary theory, debt, money printing, james howard kunstler, clusterfuck nation, magic, degrowth, growth

Japan’s Economy Is Again Struggling

Japan’s Economy Is Again Struggling

Japan. the world’s third-largest economy is highly dependent on exports and the reality it is still struggling even after a great deal of America’s stimulus money leaked into buying imported goods speaks volumes. While it feels a bit like ancient history, Japan’s GDP contracted at an annualized rate of 28.8 percent in Q2 of 2020, the biggest decline on record. Even after bouncing back 21.4 percent quarter-on-quarter in Q3 and 12.7 percent in Q4 Japanese national accounts are still lagging behind mid-2019 levels. For all of 2020, spending by households with at least two people fell 5.3% due to the hit from the pandemic. It was down 6.5% for all households, the worst drop since comparable data became available in 2001.

https://cdn.statcdn.com/Infographic/images/normal/22583.jpeg

All in all, this means the country is still playing catch up, partly because Japan also experienced two additional quarters of negative growth in Q1 of 2020 and Q4 of 2019. Adding to the problem is Japan’s household spending fell for the first time in three months in December, in a sign consumer sentiment was weakening even before the government called a state of emergency to control a new wave of the coronavirus. Lower demand for services such as travel tours also weighed, as the pandemic forced the cancellation of domestic tourism promotions. Last year, spending on accommodations fell 43.7%, while overseas and domestic tour travel expenditure slumped 85.8% and 61.9%, respectively.Not only is Japan again struggling to stay out of recession, but it also faces a wall of debt that can only be addressed by printing more money and debasing its currency. This means they will be paying off their debt with worthless yen where possible and in many cases defaulting on the promises they have made. Japan currently has a debt/GDP ratio of about  240% which is the highest in the industrialized world. With the government financing almost 40 percent of its annual budget through debt it becomes easy to draw comparisons between Greece and Japan.

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

japan, bruce wilds, advancing time blog, exports, recession, currency debasement, debt,

The Losses are Hidden – Bill Holter

The Losses are Hidden – Bill Holter

Precious metals expert and financial writer Bill Holter has been predicting the financial system is going to go down sooner than later.  He says the signs are the lies being told to the public to try to hold the system together.  Holter explains, “If you look at everything, nothing is natural.  Everything is contrived.  We are lied to about pretty much everything 24/7. . . . They lied about everything regarding Covid.  They have lied about the election.  They are lying about the unemployment rate.  They are lying about inflation.  They are lying about the true amount of total debt outstanding.  They are lying about everything. And one other tidbit, 36% of all dollars outstanding have been created now, were created in the last 12 months.  Oh, and the Fed is no longer going to publish M2. . . . How can you make a business decision if you don’t know how much money is outstanding?”

This leads us to all the digital dollars sloshing around and Crypto currencies.  Holter says, “Crypto currencies are a perceived exit from the system.  They are perceived as a safe haven.  If Bitcoin, which is nothing but digital air, can become $65,000 per unit, what can something real become worth?  What these crypto currencies are doing is illustrating a debasement of all the fiat currencies.”

Bill Holter says big loses in the financial world are being hidden from the public.  Take real estate, for example.  Holter points out, “The average mall in the United States is appraised 60% lower than it was a year ago.  That’s a 60% drop.  It’s now worth 40%.  There is debt on these things they owe.  These malls were not bought, built and created out of cash…

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

greg hunter, usa watchdog, financial system, financial system collapse, bill holter, debt, fed, us federal reserve, money printing, credit expansion

Do We Really Think a Band-Aid Will Heal a Tumor?

Do We Really Think a Band-Aid Will Heal a Tumor?

Borrowing a quarter of the nation’s entire economic output every year to prop up an ineffective, corrupt status quo is putting a Band-Aid over a tumor.

If we misdiagnose the disease, our treatment won’t work. We’re all familiar with medical misdiagnoses, which lead to procedures and prescriptions that can’t possibly fix the patient’s illness because the source has been missed or misinterpreted.

Medical diagnoses are often tricky, as many general symptoms can arise from a variety of sources.

Social and economic ills can also be tricky to diagnose, and the diagnosis is hindered by political polarization and sacrosanct orthodoxies which make it difficult to have a rational discussion in public about many difficult issues.

If we can’t even discuss a problem, then that creates another problem, because problems that can’t be discussed openly cannot be solved.

There’s also a human tendency to choose the diagnosis with the easiest-at-hand solution. This allows us to quickly apply an approved solution and then declare the problem solved.

The current flood of financial stimulus is an example of this misdiagnosis and application of an easy solution which fails to address the underlying disorder.

The conventional diagnosis of the post-pandemic economy is that the only problem is people don’t have enough money, and so giving them money to spend will cure the financial damage the pandemic inflicted. (Never mind that the economy was rolling over in 2019 long before the pandemic, which served as a catalyst in a sick, unstable status quo.)

Creating $1.9 trillion out of thin air and distributing it is painless: who doesn’t like free money? But is a scarcity of cash the source of America’s economic malaise?

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

 

What Interest Rate Triggers The Next Crisis?

What Interest Rate Triggers The Next Crisis?

  • The Ten-year U.S. Treasury note yields 1.61%.
  • 10-year high-quality corporate bonds yield 2.09%.
  • The rate on a 30-year mortgage is 3.05%.

Despite recent increases, interest rates are hovering near historic lows.  We do not use the word “historic” lightly. By “historic,” we refer to the lowest levels since the nation’s birth in 1776.

The graph below, courtesy of the Visual Capitalist, highlights our point.

interest, What Interest Rate Triggers The Next Crisis?

Despite 300-year lows in interest rates, investors are becoming anxious because they are rising. Recent history shows they should worry. A review of the past 40 years reveals sudden spikes in interest rates and financial problems go hand in hand.

The question for all investors is how big a spike before the proverbial hits the fan again?

Debt-Driven Economy

Over the past 40 years, debt has increasingly driven economic growth.

That statement on its own tells us nothing about the health of the economy. To better quantify the benefits or consequences of debt, we need to understand how it was used.

When debt is used productively, the interest and principal are covered with higher profits and sustained economic activity. Even better, income beyond the cost of the debt makes the nation more prosperous.

Conversely, unproductive debt may provide a one-time spark of economic activity, but it yields little to no residual income to service it going forward. Ultimately it creates an economic headwind as servicing the debt in the future replaces productive investment and or consumption.

The graph below shows the steadily rising ratio of total outstanding debt to GDP. If debt, in aggregate, were productive, the ratio would be declining regardless of the amount of debt.

interest, What Interest Rate Triggers The Next Crisis?

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

 

Too Busy Frontrunning Inflation, Nobody Sees the Deflationary Tsunami

Too Busy Frontrunning Inflation, Nobody Sees the Deflationary Tsunami

Those looking up from their “free fish!” frolicking will see the tsunami too late to save themselves.

It’s an amazing sight to see the water recede from the bay, and watch the crowd frolic in the shallows, scooping up the flopping fish. In this case, the crowd doing the “so easy to catch, why not grab as much as we can?” scooping is frontrunning inflation, the universally expected result of the Great Reflation Trade.

You know the Great Reflation Trade: the world has saved up trillions, governments are spending trillions, it’s going to be the greatest boom since the stone masons partied at the Great Pyramid in Giza. It’s so obvious that everyone has jumped in the water to scoop up all the free fish (i.e. stock market gains). Only an idiot would hesitate to frontrun the Great Reflation’s guaranteed inflation.

Unless, of course, what we really have is a tale of reflation, told by an idiot, full of sound and fury, signifying nothing. Everyone frolicking in the shallows scooping up the obvious, easy, guaranteed gains is so busy frontrunning inflation that nobody sees the tsunami rushing in to extinguish the short-sighted frolickers. ( When Does This Travesty of a Mockery of a Sham Finally Implode? 3/3/21)

Gordon Long and I discuss The Deflationary Tsunami racing toward the frolickers in a new video program. It’s not that there aren’t inflationary dynamics in play; there are. The issue is that not all the dynamics in play are inflationary, and the deflationary dynamics have been building for the past two decades.

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

 

Olduvai IV: Courage
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Olduvai II: Exodus
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