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The Bank of England’s Governor Fears a Liquidity Trap

The Bank of England’s Governor Fears a Liquidity Trap

The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat a downturn:

If there were to be a deeper downturn, more than a conventional recession, then it’s not clear that monetary policy would have sufficient space.

He is of the view that aggressive monetary and fiscal policies will be required to lift the aggregate demand.

What Is a Liquidity Trap?

In the popular framework that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.

For instance, if for some reason people become less confident about the future, they will cut back their outlays and hoard more money. When an individual spends less, this will supposedly worsen the situation of some other individual, who in turn will cut their spending. A vicious cycle sets in. The decline in people’s confidence causes them to spend less and to hoard more money. This lowers economic activity further, causing people to hoard even more, etc.

Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of the money supply and aggressively lower interest rates. Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, reestablishing the circular flow of money, so it is held.

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

Central Bankers Are Quietly Freaking Out About How To Fight The Next Recession

Central Bankers Are Quietly Freaking Out About How To Fight The Next Recession 

Mark Carney warns about the limits of central bank policy.
Mark Carney, governor of the Bank of England (BOE), listens at the annual Mansion House dinner in … [+]2018 BLOOMBERG FINANCE LP

The world’s top central bank officials are rightly concerned that politicians in rich economies missed one key lesson of the last recession: Interest rate cuts can help to moderate a downturn, but aggressive fiscal policy is key to a healthy recovery. 

It was a pro-austerity stance both in the United States, and even more saliently in the euro zone, that arguably prolonged the period of high unemployment and low wage growth that plagued most of the decade-long recovery from the 2007-2009 U.S. Great Recession. 

Outgoing Bank of England Governor Mark Carney told the Financial Times this week that central banks are running low on fuel. “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space,” he said.Today In: Money

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time.”  

That echoed the sentiment of Christine Lagarde, who recently took over the European Central Bank. She’s telling budget-shy European politicians (especially in Germany) to get to work

Now, a new paper from Fed board economist Michael Kiley points to similar alarm among U.S. central bankers about their ability to fight future slumps. 

Drawing up two basic assumptions of what a downturn might look like, Kiley finds that “a recession may result in near-zero interest rates at long maturities, bringing U.S. experience closer to that seen in Europe and Japan.”

This, says Kiley, “could imply limits on the ability of monetary policy to support a recovery.”

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

New World Order in Meltdown, But Russia Stronger Than Ever

New World Order in Meltdown, But Russia Stronger Than Ever

Last week was full of portentous events. Only somebody who has not been awake for the last few years will fail to realize how these at first sight unconnected events are part of the same matrix. There was the ever louder talk in mainstream media about an approaching global recession, inverted yield curves and the negative yields, which tell us that the Western financial system is basically in coma and kept alive only by generous IV injections of central bank liquidity. By now it has dawned on people that the central bankers acting as central planners in a command economy and printing money (aka quantitative easing) to fuel asset bubbles are about to wipe off the last vestiges of what used to be a market economy.

Then we saw Trump taking new twitter swipes at China in his on-and-off “great trade deal” and the stock markets moving like a roller coaster in reaction to each new twitter salvo. Also, we had both Trump and Macron sweet talking about getting Russia back and again renaming their club G8. Last Tuesday at a G7 presser in Biarritz, the Rothschild groomed Macron took it one step further opening up about the reasons why they all of a sudden longed for friendship with Russia: “We are living the end of Western hegemony.” In the same series, Britain’s new government under Boris Johnson was telling his colleagues in Biarritz that he is now decisively going for a no-deal Brexit, after which he went back to London and staged a coup d’état by suspending parliament to ensure no elected opposition interfered with it.

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

In Ominous Warning, Dalio Says The Current Period Is Just Like 1935-1945

In Ominous Warning, Dalio Says The Current Period Is Just Like 1935-1945

Something has dramatically changed in the establishment’s view of central banking… and of the future.

As we reported earlier this week, recently we have observed a surprising spike in criticism of central banks by establishment figures, in some cases central bankers themselves, most notably Mark Carney who last Friday remarkably admitted that very low interest rates tend “to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime” when he also urged an end to the dollar’s status as world reserve currency. This continued when 7 months after it praised negative rates, the San Francisco Fed pulled a U-turn and warned that the “Japanese experience”, where negative rates dragged down inflation expectations even more, is ground for NIRP caution.


There has never been so much hostility against central banks – even among other central bankers – – in the past decade as over the past month. Something is about to snap


Meanwhile, as the FT concluded in its summary of last week’s Wyoming outing, “there was a sense that things will never be the same again” and quoted St Louis Fed President James Bullard, who wrote that “the developed world had experienced a “regime shift” in economic conditions: “Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing,” Bullard admitted. “We just have to stop thinking that next year things are going to be normal.”

Tying it all together was Bank of America, which in anreport meant to recommend buying gold, lashed out at the Fed, warning that “ultra-easy monetary policies have led to distortions across various asset classes”; worse – and these are not our words, but of Bank of America…n:

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

BofA: Central Banks Are Creating Bubbles Instead Of Helping The Economy; The Result Will Be A Disaster

BofA: Central Banks Are Creating Bubbles Instead Of Helping The Economy; The Result Will Be A Disaster

In recent weeks we have seen a surprising spike in criticism of central banks by establishment figures, in some cases central bankers themselves, most notably Mark Carney who last Friday remarkably admitted that very low interest rates tend “to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime.” This continued yesterday when 7 months after it praised negative rates, the San Francisco Fed pulled a U-turn and warned that the “Japanese experience”, where negative rates dragged down inflation expectations even more, is ground for NIRP caution.

Then, in an even more bizarre interview with the FT, St Louis Fed president James Bullard made an even more stunning admission – that the Fed no longer has any idea what is going on. To wit:

“Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing… We just have to stop thinking that next year things are going to be normal.”

There was more. In a series of questions aimed at the Fed in this post-Jackson Hole powerless reality, we brought you some rhetorical fireworks from the head of FX at Deutsche Bank, Alan Ruskin, who lashed out at the central bank with 20 questions, technically statements, that 10 years ago would have branded him a tinfoil-wearing conspiracy theorist (we know, because we asked just these questions back in 2009), among which:

  • “Will the Fed/ECB buy equities/ETFs? How far are central banks willing to distort underlying value, or is distorting value intrinsic to Central Banking as per the Austrian critique?”
  • “How much are Central Banks going to be complicit in a collapse in fiscal standards, by buying public sector assets? Will a passive Central bank simply accommodate and facilitate fiscal actions related to MMT?”

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

“Things Will Never Be The Same Again”: Here Are 20 Questions As Central Banks Admit Defeat

“Things Will Never Be The Same Again”: Here Are 20 Questions As Central Banks Admit Defeat

Unlike prior years, there was a distinct sense of dread and powerless foreboding in this year’s Jackson Hole meeting, starting with Jerome Powell’s “boring” speech in which he blamed Trump’s trade war for the Fed’s inability to stimulate the economy, and culminating with Mark Carney unprecedented capitulation, effectively admitting that the fiat system has failed and the dollar can no longer be the world’s reserve currency (instead punting that obligation to ‘global central banker’ Mark Zuckerberg and his Libracoin).

Indeed, as even the FT concludes, “there was a sense that things will never be the same again.”

In its summary of this week’s Wyoming outing, the FT also wrote that “the developed world had experienced a “regime shift” in economic conditions, James Bullard, president of the St Louis Federal Reserve, told the Financial Times.

“Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing,” Bullard admitted. “We just have to stop thinking that next year things are going to be normal… They’ve priced in that there’s going to be uncertainty, there are going to be tweets, there are going to be threats and counter-threats,” said the St Louis Fed president. “And that’s the way it’s going to be.”

And as the FT further admits, “interest rates are not going back up anytime soon, the role of the dollar is under scrutiny both as a haven asset and as a medium of exchange, and trade uncertainty has become a permanent feature of policymaking.”

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

Bank Of England Boss: China’s Renminbi Will Rival The Dollar As Global Reserve Currency

The past year was full of events that inevitably split the global geopolitical space into two camps: those who still support using US currency as a universal financial tool, and those who are turning their back on the greenback.

Global tensions caused by economic sanctions and trade conflicts triggered by Washington have forced targeted countries to take a fresh look at alternative payment systems currently dominated by the US dollar.

So far, China, India, Turkey, Iran, and Russia have all taken steps towards eliminating their reliance on the greenback, and the reasons behind their decision.

But while those nations could be conceived by many as “enemies” that could be forgiven for daring to question the hegemon, we must admit we were a little surprised at just how frank Bank of England Governor Mark Carney was during a lengthy Q&A this morning

One of the first questions asked was:

“Does he envisage one of the types of IMF SDRs to become a global currency in his lifetime? If so, will it be crypto/blockchain/gold ‘backed’?”

Carney’s response was oddly honest and open…

“The IMF’s SDRs are designed for a specific purpose – to supplement IMF member countries’ official reserves and so help them to address balance of payments problems. So they are not intended to become a widely accepted means of exchange – what most people understand ‘currency’ to mean.

OK, so definitely got the message – Don’t look over here at the SDRs

What about other currencies?

“That said, I think it is likely that we will ultimately have reserve currencies other than the USD. The evolution of the global financial system is currently lagging behind that of the global economy, and there are asymmetric concentrations of financial assets in advanced economies relative to economic activity.

Ann Pettifor: If I governed the Bank of England, here’s what I do

Ann Pettifor: If I governed the Bank of England, here’s what I do

The radical economist outlines how she’d overhaul the UK’s broken economy.

If such an implausible appointment were ever to be made by a Labour chancellor, I would regard it as a great honour. The Bank of England stands at the pinnacle of Britain’s monetary system, which I regard as one of Britain’s great public goods. It is as vital to our economic health as the sanitation system is to public health. The development of the monetary system and the founding of the Bank of England in 1694 represented – despite all its flaws – a great civilisational advance. As the £1,000 billion bailout of the banking sector in 2007-9 proved, thanks to our monetary system, there need never be a shortage of money. We need never lack the money for all that society regards as vital to economic, social, political and ecological stability. I write that with feeling, having worked in countries that lack a developed monetary system, and therefore have no money.

The Bank of England, explained the governor Mark Carney recently, is ‘the only game in town’. The bank’s power – or at least the power of its civil servants and monetary policy committee members – was greatly enhanced during the Blair government. Under Gordon Brown’s watch one of the most important economic tools available to any government – the power to determine the rate of interest (bank rate) – was delegated to a committee of unelected men (and the occasional woman) at the Bank of England. Brown made clear in 1997 that the monetary policy committee was expected to wield this great power independently of parliament’s scrutiny.

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

Central Banking: It’s Alive!!

In his recent posting on Linked In, entitled, ‘The death of macro-prudential’, Stuart Trow of the EBRD delivered a well-aimed broadside at the pitiable conduct of the Bank of England and elaborated on some of the malign consequences of its catalogue of errors. Without wishing to single him out unduly for criticism for a piece with whose broad outlines I concur,  I see it as a prime example of where even those who are not wholly in thrall to the cult of ‘Whatever it Takes’ often miss the critical features of that cult’s essential evil. Left unaddressed, therefore, I fear this lack can only leave the intellectual soil fertile for a continued harvest of malign outcomes on the part of our clay-footed idols in the central banks.

Where better to start than with the following bold assertion of the author, viz., that ‘…if only policymakers had been allowed to exercise their judgement, crises could have been anticipated and avoided…’?

In my eyes, that heroic presumption of policymakers’ qualities of ‘judgement’ almost vitiates the argument from the off. Irrespective of whether one can be persuaded that Mario Draghi, Jerome Powell, Divus Marcus Carney and the like are the most intelligent, most far-sighted – most impartially Olympian – beings on the planet, the reality is that neither their fervid number-crunching of rows of abstracted, statistical time-series nor the GIGO output of their horribly over-specified macroeconomic ‘models’ can possibly substitute for the particular judgement and uniquely individual preferences of untold millions of men and women interacting, every minute of every day, every where in the market.

No, the best the central bankers can hope to achieve – in finest Hippocratic fashion – is that their own meddling does not send too any wrong signals, conjure up too many wrong incentives, or encourage too many, ultimately self-defeating behaviours among the innocent millions over whom they have been almost divinely-appointed to hold sway and over whom they hold seemingly limitless power.

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

Latest Wealth Data Shows Disproportionate Gains to the Rich During Era of QE

LATEST WEALTH DATA SHOWS DISPROPORTIONATE GAINS TO THE RICH DURING ERA OF QE

The latest ONS Wealth and Assets Survey, released last Thursday, once again showed the sheer extent of wealth inequality in the UK. A comparison of percentile figures with those from the previous wave suggests households in the wealthiest 10% gained on average nearly 700 times as much as the poorest 10% between 2012-2014 and 2014-2016.

The average total wealth of the of the bottom 10 percentile households rose by £330 between 2012-2014 and 2014-2016 (from £5,293 to £5623). The average total wealth of the top 10 percentile households increased by £229,541 over the same period (from £1,663,912 to £1,893,453).

The distribution of total wealth across UK households is extremely unequal. Naturally, so too are the gains in wealth in recent years.

The figures are significant because they are the latest to contradict the position taken by Bank of England governor Mark Carney in a 2016 speech, when he used the ONS data to claim that the “poorest have gained the most” from the Bank’s quantitative easing programme. As Positive Money showed in an analysis from October last year, the Bank painted a misleading picture by using relative rather than absolute figures. Data from the the 2006-08 to 2012-14 waves of the Wealth and Assets Survey showed an absolute gain for the wealthiest 10% almost 200 times greater than that for the poorest.

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

Mark Carney Forced To Explain Surge In UK Inflation To Highest In Almost 6 Years

Mark Carney Forced To Explain Surge In UK Inflation To Highest In Almost 6 Years

The market expected Mark Carney to avoid it but it was just not meant to be.

The BoE Governor will suffer the ignominy of a bizarre tradition of having to write a letter to the Chancellor of the Exchequer explaining why UK inflation is more than 1.0% above the target of 2.0%. The market had expected the UK CPI to rise by a modest 0.2% month-on-month, taking the year-on-year rate up to 3.0%. Instead the month-on-month rate hit 0.3% pushing the annual rate to 3.1%, its highest rate since March 2012.

As Bloomberg writes, “U.K. inflation unexpectedly accelerated to the fastest in more than 5 1/2 years in November, forcing Bank of England Governor Mark Carney to explain why price growth is so far above target. Consumer prices rose 3.1 percent from a year earlier, driven by the cost of air fares and computer games, the Office for National Statistics said on Tuesday. That’s up from 3 percent in October and the highest since March 2012.”

The latest reading means Carney is now compelled to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.

Rising costs of airfares along with petrol and energy prices were expected to have been offset by an easing in food and clothing price pressures, the latter helped by seasonal promotions. However, the price of computer games rose more than expected and higher chocolate prices saw food and non-alcoholic drink prices rise 4.1% versus November 2016, the highest level since 2013.

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

The Upcoming Increase in Interest Rates

Last week, both Janet Yellen of the Fed and Mark Carney of the Bank of England prepared financial markets for interest rate increases. The working assumption should be that this was coordinated, and that both the ECB and the Bank of Japan must be considering similar moves.

Central banks coordinate their monetary policies as much as possible, which is why we can take the view we are about to embark on a new policy phase of higher interest rates. The intention of this new phase must be to normalise rates in the belief they are too stimulative for current economic conditions. Doubtless, investors will be reassessing their portfolio allocations in this light.

It should become clear to them that bond yields will rise from the short end of the yield curve, producing headwinds for equities. The effects will vary between jurisdictions, depending on multiple factors, not least of which is the extent to which interest rates and bond yields will have to rise to reflect developing economic conditions. The two markets where the change in interest rate policy are likely to have the greatest effect are in the Eurozone countries and Japan, where financial stimulus and negative rates have yet to be reversed.

Investors who do not understand these changing dynamics could lose a lot of money. Based on price theory and historical experience, this article concludes that bond yields are likely to rise more than currently expected, and equities will have to weather credit outflows from financial assets. Therefore, equities are likely to enter a bear market soon. Commercial and industrial property should benefit from capital flows redirected from financial assets, giving them one last spurt before the inevitable financial crisis. Sound money, physical gold, should become the safest asset of all, and should see increasing investment demand.

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

Jackson Hole and the Appalachians


Henri Cartier-Bresson Trafalgar Square on the Day of the Coronation of George VI 1937
 

The Jackson Hole gathering of central bankers and other economics big shots is on again. They all still like themselves very much. Apart from a pesky inflation problem that none of them can get a grip on, they publicly maintain that they’re doing great, and they’re saving the planet (doing God’s work is already taken).

But the inflation problem lies in the fact that they don’t know what inflation is, and they’re just as knowledgeable when it comes to all other issues. They get sent tons of numbers and stats, and then compare these to their economic models. They don’t understand economics, and they’re not interested in trying to understand it. All they want is for the numbers to fit the models, and if they don’t, get different numbers.

Meanwhile they continue to make the most outrageous claims. Bank of England Governor Mark Carney said in early July that “We have fixed the issues that caused the last crisis.” What do you say to that? Do you take him on a tour of Britain? Or do you just let him rot?

Fed head Janet Yellen a few days earlier had proclaimed that “[US] Banks are ‘very much stronger’, and another financial crisis is not likely ‘in our lifetime’. “ While we wish her a long and healthy life for many years to come, we must realize that we have to pick one: it has to be either a long life, or no crisis in her lifetime.

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

The Floodgates Begin To Open

The Floodgates Begin To Open

Now “anemic” is becoming “non-existent.” In the US, mini-credit-bubbles like auto loans, home mortgages and student loans are sputtering, leading economists to dial back their rosy scenarios for 2016. The Atlanta Fed’s GDPNow forecast for Q3 growth, for instance, was a robust 3.8% in August but is now less than 2% — and still falling.

gdp-now-oct-16

Not surprisingly, everyone is starting to panic. In the UK, where admittedly Brexit has created a unique situation:

Mark Carney: Bank of England will tolerate higher inflation for the sake of growth

(Telegraph) – Official data on Friday showed house building, infrastructure and public construction all slumped in August, indicating that the UK’s building industry is slowing sharply and could even enter a recession. Construction output dropped by 1.5pc in the month, an unexpected drop after growth of 0.6pc in July, according to the Office for National Statistics. Separate Bank of England figures showed banks suffered a big drop in demand in the months following the Brexit vote as fewer Britons were prepared to take major financial decisions. Demand for mortgages dipped strongly, with a net balance of 44pc of banks reporting a fall in customer interest – the biggest negative score in almost two years.

Bank of England Governor Mark Carney told an audience in Nottingham that the current environment of low inflation was “going to change”, with the drop in the value of the pound likely to push up prices across the economy.

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

 

First Post-Brexit Bailout Looms As Bank Of England Mulls UK Property Fund ‘Measures’

First Post-Brexit Bailout Looms As Bank Of England Mulls UK Property Fund ‘Measures’

Who could have seen that coming? While many have questioned the “suitability of daily-traded, open-ended property funds that are giving investors access to an illiquid asset,” all the time the price is rising, no one wants to rock the boat. However, now that Brexit has rocked the boat, spoiling the party for UK property investors and asset managers alike, it’s time for Carney to ride to the tax-payer-funded bailout rescue to ensure Bear Stearns 2.0 does not become Lehman 2.0…

Following the gating – or forced haircuts – of eight large UK property investment funds this week, fears have grown rapildy of the risk of contagion, which, as The FT reports, is much greater than first feared, with detailed analysis showing that a wide pool of funds have been caught up in the gates imposed on investors withdrawing cash.

The worry is that this will trigger systemic problems for the marketplace, which is already reeling from the UK’s decision last month to end its membership of the EU.

A prominent UK fund manager, speaking on condition of anonymity, said: “When you start getting daily trading funds-of-funds investing in daily trading funds that are invested in illiquid assets, that seems to be layering up potential liquidity risks. “[Investors need to] consider the impact on funds that are caught with material investments in the gated property funds.”

Three multi-asset funds run by Henderson also have around 3.5 per cent of their assets in the company’s own suspended property fund, while Aviva Investors’ multi-asset product has a 4 per cent stake in its gated property fund.

Many other multi-asset funds — one of the fastest-selling investment strategies of the past 12 months — run by rival investment managers have also been caught out by the property fund suspensions.

…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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