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St Louis Fed Discloses More Free Money: A Carry Trade in Liquidity

Not only do banks earn free money on excess reserves, they can borrow money and make guaranteed free money on that.

The Federal Reserve Bank of St. Louis discusses the Carry Trade in Liquidity.

The IOER [interest on excess reserves] has been the effective ceiling of other short-term interest rates. The figure above compares the IOER with overnight rates on deposits and repos.

As we can see, the IOER has mostly remained above these two rates, implying that (at least some) banks have been able to borrow funds overnight, deposit them at the Fed and earn a spread, in essence engaging in carry trade in liquidity markets.

Interest Rate on Excess Reserves

How Much Free Money?

Fed vs ECB

While the Fed has been busy giving banks free money by paying interest on excess reserves, banks in the EU have suffered with negative interest rates, essentially taking money from banks and making them more insolvent.

If the goal was to bail out the banks at public expense (and it was), it’s clear Bernanke had a far better plan than the ECB.

The Federal Reserve Is Destroying America

The Federal Reserve Is Destroying America

And wait until you hear what they’re getting away with now

Perhaps I should start with a disclaimer of sorts. Yes, I realize that the people working at the Federal Reserve, as well as the other central banks around the world, are just people.  Like the rest of us, they have egos, fears, worries, hopes, and dreams. I’m sure pretty much all of them go home each night believing they are basically good and caring individuals, doing important work.

But they’re destroying America.  They might have good intentions, but they are working with bad models. Ones that lead to truly horrible outcomes.

One of the chief failings of central banks is that they are slaves to an impossible idea; the notion that humans are free to pursue perpetual exponential economic growth on a finite planet.  To be more specific: central banks are actually in the business of promoting perpetual exponential growth of debt.

But since growth in credit drives growth in consumption, the two are concepts are so intimately linked as to be indistinguishable from each other.  They both rest upon an impossibility.  Central banks are in the business of sustaining the unsustainable which is, of course, an impossible job.

I can only guess at the amount of emotional energy required to maintain the integrity of the edifice of self-delusion necessary to go home from a central banking job feeling OK about oneself and one’s role in the world.  It must be immense.

I rather imagine it’s not unlike the key positions of leadership at Easter Island around the time the last trees were being felled and the last stone heads were being erected.  “This is what we do,” they probably said to each other and their followers.  “This is what we’ve always done.  Pay no attention to those few crackpot haters who warn that in pursuing our way of life we’re instead destroying it.”

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

Shuffling The Deckchairs On The USS Perpetual Growth

Shuffling The Deckchairs On The USS Perpetual Growth

The USS Perpetual Growth was picking up speed, steaming over calm seas despite a growing chorus of capital market Cassandras fearing trouble under the surface and further out at sea.

“Full speed ahead” Skipper Yellen barked to her economates, unperturbed by ominous radar images or the uselessness of econometric expertise at the zero bound, unmindful of passenger dysentery because 95.1% of the ship’s births were full.

“Look at all this liquidity!” she likely informed Captain Blithely, her commander in chief on shore, who had spent his presidency too disengaged of economic matters (or too politically astute) to have a cogent public thought on the matter, or perhaps smart enough to figure out everyone in Washington answers to the banks and that fixing their collateral damage social programs would be the best he could hope to do.

Indeed, the Fed Chair had gone rogue among her peers, charting her central bank’s shipping lane on a divergent path from her counterparts, Draghi and Kuroda, who were steering their monetary fleets to port. Captain Yellen seemed oblivious to the economic (and rhetorical) dangers of relying on consumption: an economy should not be beholden to eating its own productive cells.

We have argued there could be only one reason the Fed would want to hike rates: it is now responsible for US dollar policy and it wants a strong one to weaken other currencies, to prop up exporting economies, and to attract global capital and deposits to the US. Alas, the wind just died – not just for the US, but for all ships at sea.

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

Deutsche Bank: Negative Rates Confirm The Failure Of Globalization

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…

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

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…

HSBC Looks At “Life Below Zero,” Says “Helicopter Money” May Be The Only Savior

HSBC Looks At “Life Below Zero,” Says “Helicopter Money” May Be The Only Savior

In many ways, 2016 has been the year that the world woke up to how far down Krugman’s rabbit hole (trademark) DM central bankers have plunged in a largely futile effort to resuscitate global growth.

For whatever reason, Haruhiko Kuroda’s move into NIRP seemed to spark a heretofore unseen level of public debate about the drawbacks of negative rates. Indeed, NIRP became so prevalent in the public consciousness that celebrities began to discuss central bank policy on Twitter.

When we say “for whatever reason” we don’t mean that the public shouldn’t be concerned about NIRP. In fact, we mean the exact opposite. The ECB, the Nationalbank, the SNB, and the Riksbank have all been mired in ineffectual NIRP for quite sometime and the public seemed almost completely oblivious. Indeed, even the financial media treated this lunacy as though it were some kind of cute Keynesian experiment that could be safely confined to Europe which would serve as a testing ground for whether policies that fly in the face of the financial market equivalent of Newtonian physics could be implemented without the world suddenly imploding.

We imagine the fact that equity markets got off to such a volatile start to the year, combined with the fact that crude continued to plunge and at one point looked as though it might sink into the teens, led quite a few people to look towards the monetary Mount Olympus (where “gods” like Draghi, Yellen, and Kuroda intervene in human affairs when necessary to secure “desirable” economic outcomes) only to discover that not only has all the counter-cyclical maneuverability been exhausted, we’ve actually moved beyond the point where the ammo is gone into a realm where the negative rate mortgage is a reality.

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

Negative Interest Rates Show Desperation of Central Banks

Negative Interest Rates Show Desperation of Central Banks

Image: MarketWatch

Japan has joined the EU, Denmark, Switzerland and Sweden in imposing negative interest rates.

Indeed, more than a fifth of the world’s GDP is now covered by a central bank with negative interest rates.

The Wall Street Journal notes:

TOKYO—Japan’s central bank stunned the markets Friday by setting the country’s first negative interest rates, in a desperate attempt to keep the economy from sliding back into the stagnation that has dogged it for much of the last two decades.

BBC writes:

The country is desperate to increase spending and investment.


Japan has been desperate to boost consumer spending for years. At one point it even issued shopping vouchers to stimulate demand.

The New York Times writes:

Moving to negative rates reflects a measure of desperation on the part of central banks. Their traditional tools have been largely exhausted, as most countries’ interest rates have been pushed to almost nothing.

MarketWatch’s senior markets writer, William Watts, notes:

This might not be the sort of capitulation stock-market investors were anticipating.

The Bank of Japan’s surprise decision Friday to start charging depositors for parking excess reserves at the central bank triggered a global equity rally. But several monetary policy watchers and market strategists worried that the move was an acknowledgment that the world’s central banks are running out of ammunition in the battle against deflation.

“This is an interesting move that looks a lot more like desperation or novelty than it looks like a program meant to make a real difference,” said Robert Brusca, chief economist at FAO Economics.

Kit Juckes, global macro strategist at Société Générale, underlined the moment in a note to clients:

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


“Pandora’s Box Is Open”: Why Japan May Have Started A ‘Silent Bank Run’

“Pandora’s Box Is Open”: Why Japan May Have Started A ‘Silent Bank Run’

As extensively discussed yesterday in the aftermath of the BOJ’s stunning decision to cut rates to negative for the first time in history (a decision which it appears was taken due to Davos peer pressure, a desire to prop up stock markets and to punish Yen longs, and an inability to further boost QE), there will be consequences – some good, mostly bad.

As Goldman’s Naohiko Baba previously explained, NIRP in Japan will not actually boost the economy: “we do have concerns about the policy transmission channel. Policy Board Member Koji Ishida, who voted against the new measures, said that “a further decline in JGB yields would not have significantly positive effects on economy activity.” We concur with this sentiment, particularly for capex. The key determinants of capex in Japan are the expected growth rate and uncertainty about the future as seen by corporate management according to our analysis, while the impact of real long-term rates has weakened markedly in recent years.”

What the BOJ’s NIRP will do, is result in a one-time spike in risk assets, something global stock and bond markets have already experienced, and a brief decline in the Yen, one which traders can’t wait to fade as Citi FX’s Brent Donnelly explained yesterday.

NIRP will also have at most two other “positive” consequences, which according to Deutsche Bank include 1) reinforcing financial institutions’ decisions to grant new loans and invest in securities (if only in theory bnecause as explained further below in practice this may very well backfire); and 2) widening interest rate differentials to weaken JPY exchange rates, which in turn support companies’ JPY-based sales and profit, for whom a half of consolidated sales are from overseas.

That covers the positive. The NIRP negatives are far more troubling. The first one we already noted yesterday, when Goldman speculated that launching NIRP could mean that further QE is all tapped out:

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


“Fed Policy Is Toxic,” Michael Burry Warns “The Little Guy Will Pay” For The Next Crisis

“Fed Policy Is Toxic,” Michael Burry Warns “The Little Guy Will Pay” For The Next Crisis

As NYMag.com reports, in an email, which readers of the book will recognize as his preferred method of communication, the real-life head of Scion Asset Management answered some of questions about the state of the financial system, his ominous-sounding water trade, and what, if anything, we can feel hopeful about…

The movie portrays all of you as kind of swashbuckling heroes in some ways, but McKay suggested to me that you were very troubled by what happened. Is that the case? 

I felt I was watching a plane crash. I actually had that dream again and again. I knew what was happening, but there was nothing I, or anyone else, could do to stop it. The last day of 2007, I couldn’t come home. I was in the office till late at night, I couldn’t calm down. I wrote my wife an email and just said, “I can’t come home; it’s just too upsetting what’s happening, and I didn’t want to come home to my kids like this.” As for punishment of those responsible, borrowers were punished for their overindulgences — they lost homes and lives. Let’s not forget that. But the executives at the lenders simply got rich.

Were you surprised no one went to jail?

I am shocked that executives at some of the worst lenders were not punished for what they did. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either — all those VCs and dot-com executives still live in their mansions lining the 280 corridor on the San Francisco peninsula.

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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