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The Allure and Limits of Monetized Fiscal Deficits


The Allure and Limits of Monetized Fiscal Deficits

With the global economy experiencing a synchronized slowdown, any number of tail risks could bring on an outright recession. When that happens, policymakers will almost certainly pursue some form of central-bank-financed stimulus, regardless of whether the situation calls for it.

NEW YORK – A cloud of gloom hovered over the International Monetary Fund’s annual meeting this month. With the global economy experiencing a synchronized slowdown, any number of tail risks could bring on an outright recession. Among other things, investors and economic policymakers must worry about a renewed escalation in the Sino-American trade and technology war. A military conflict between the United States and Iran would be felt globally. The same could be true of “hard” Brexit by the United Kingdom or a collision between the IMF and Argentina’s incoming Peronist government.

Still, some of these risks could become less likely over time. The US and China have reached a tentative agreement on a “phase one” partial trade deal, and the US has suspended tariffs that were due to come into effect on October 15. If the negotiations continue, damaging tariffs on Chinese consumer goods scheduled for December 15 could also be postponed or suspended. The US has also so far refrained from responding directly to Iran’s alleged downing of a US drone and attack on Saudi oil facilities in recent months. US President Donald Trump doubtless is aware that a spike in oil prices stemming from a military conflict would seriously damage his re-election prospects next November.

The United Kingdom and the European Union have reached a tentative agreement for a “soft” Brexit, and the UK Parliament has taken steps at least to prevent a no-deal departure from the EU. But the saga will continue, most likely with another extension of the Brexit deadline and a general election at some point.

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

Depopulation and Monetization…Like Peas & Carrots

Depopulation and Monetization…Like Peas & Carrots

In contemporary, post world war II times, the process of depopulation is the declining number of births pitted against significantly longer life spans of the existing population.  Given this, depopulation starts from the declining quantity of young and slowly works its way up the population.  So, as depopulation is taking place, it is tracked by declining births, and eventually by declining 0 to 64yr/old populations vs. still expanding 65+yr/old populations.  Outright depopulation only takes over once the declines among the under 65yr/olds outweigh the ongoing growth among the 65+yr/olds.

In 2011, there was one state plus Puerto Rico that experienced outright depopulation.  However, by 2018, that number has increased to 9 states (Alaska, Connecticut, Hawaii, Illinois, Louisiana, Mississippi, New York, West  Virginia, Wyoming),plus Puerto Rico that are outright shrinking (chart below).

In 2018, an additional 16 states (Maine, New Jersey, Pennsylvania, Ohio, Michigan, Indiana, New Hampshire, Rhode Island, Vermont, Connecticut, Kentucky, New Mexico, Kansas, Missouri, Wisconsin, Alabama) are now experiencing the precursor to outright depopulation; declining 0 to 64yr/old populations versus ongoing growth among the 65+yr/old population.  Simply put, half the states plus Puerto Rico are experiencing either outright or the early onset version of depopulation (under 65yr/old depopulation).

Speaking of Puerto Rico, the flood to the exits appears to be on.  The chart below shows the annual net population declines that began in 2005 & hit warp speed in 2018.  Since 2005, the Puerto Rican population has fallen about 16%!!!

But the chart below shows the change in population among different segments of the Puerto Rican population.  While the 65+yr/old population continues to stay put and grow (+3%), the ramping exodus and collapse among all segments of the under 65yr/old population is of epic proportion. 

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

Monday Musings on Monetization and Markets (or Fundamentals Don’t Matter, Liquidity Does)

Monday Musings on Monetization and Markets (or Fundamentals Don’t Matter, Liquidity Does)

Being I’m not an economist nor associated with any financial or investment institutions nor do I have anything for you (dear reader) to buy or sell, I have total freedom to say what I please and freedom to share what I see.

In that spirit, I round back on the Federal Reserves balance sheet versus the curious case of excess reserves of the mega-banks.  Last week I detailed that every time the Fed has ceased adding to its balance sheet or outright reduced, the outcome has been decidedly negative for asset prices (HERE).  However, like everything, there is a little more to the story.

The chart below shows the rise in the Fed’s Treasury’s (blue line), Mortgage Backed Securities (red line), and rise plus fall of Bank Excess Reserves.  What is so interesting is that bank excess reserves didn’t begin declining when the Fed’s Quantitative Tightening began, but immediately upon the conclusion of QE in late 2014.  And excess reserves have already declined by $1.2 trillion while the Fed’s balance sheet has declined by “only” about $400 billion.

Now, if I were cynical, I’d say it’s almost like the Fed’s plan with the excess reserves was to use them like a sponge to soak up liquidity during QE and then continue releasing liquidity long after QE ended…and even well after QT was underway (actually, I’m quite cynical).  The term for this is “monetization”, something the Fed said it would “never do”.

The chart below shows the massive rise in the Fed’s balance sheet (white line), bank excess reserves (black line), and the quantity of monetization (yellow line) floating in the system just waiting to be leveraged into 5x’s or 10x’s or perhaps even 20x’s that amount.

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

Fed President Sounds Panic Over Level Of US Debt

Nearly a decade after the US unleashed its biggest debt-issuance binge in history, made possible only thanks to the Fed’s monetization of nearly $4 trillion in deficits (and debt issuance), the Fed is starting to get nervous about the (un)sustainability of the US debt.

The Federal Reserve should continue to raise U.S. interest rates this year in response to faster economic growth fueled by recent tax cuts as well as a stronger global economy, Dallas Federal Reserve Bank President Robert Kaplan said on Wednesday.

“I believe the Federal Reserve should be gradually and patiently raising the federal funds rate during 2018,” Kaplan said in an essay updating his views on the economic and policy outlook.

“History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up.” The Fed is widely expected to raise rates three times this year, starting next month.

Kaplan, who does not vote on Fed policy this year but does participate in its regular rate-setting meetings, did not specify his preferred number of rate hikes for this year. But he warned Wednesday that falling behind the curve on rate hikes could make a recession more likely.

Echoing the recent Goldman analysis, warning that the recently implemented budget could lead to an “unsustainable” debt load, Kaplan – who previously worked for Goldman – also had some cautionary words about the Trump administration’s recent tax overhaul, which he said would help lift U.S. economic growth to 2.5% to 2.75% this year, pushing the U.S. unemployment rate, now at 4.1% down to 3.6% by the end of 2018.

On the all important issue of inflation, he projected it would firm this year on route to the Fed’s 2-percent goal.

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

Former IMF Chief Economist Admits Japan’s “Endgame” Scenario Is Now In Play

Former IMF Chief Economist Admits Japan’s “Endgame” Scenario Is Now In Play

Back in October 2014, just after the BOJ drastically expanded its QE operation, we warned that the biggest risk facing the BOJ (and the ECB, and the Fed, and all other central banks actively soaking up securities from the open market) was a lack of monetizable supply. We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.”

Which is why 17 months ago we predicted that, contrary to expectations of even more QE from Kuroda, we said “the BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existent and getting worse by the day.”

As part of our conclusion, we said we do not “expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016’s business.”

Since then, the forecast has panned out largely as expected: both the ECB and BOJ, finding themselves collateral constrained, were forced to expand into other, even more unconventional methods of easing, whether it be NIRP in the case of the BOJ, or the outright purchases of corporate bonds as the ECB did a month ago.

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

The Incredible Shrinking Benefits Of Massive Japanese Money Printing

The Incredible Shrinking Benefits Of Massive Japanese Money Printing

Excerpted from JPMorgan CIO Michael Cembalest 2016 Outlook,

Something is wrong with this picture.  In the US and Japan, corporate profits sank during the global financial crisis.  In the US, the profit recovery was accompanied by a recovery in household income.  In Japan, however, corporate profits and household income moved in opposite directions, as dynamics that helped profits recover did not help consumers.

How can we explain the outcome in Japan? The benefits of a weak Yen are mostly concentrated among large corporations, given translation gains on offshore non-Yen income relative to Yen-denominated costs.  For smaller companies and households, a weaker Yen simply resulted in imported inflation.  While consumer spending has stabilized after a decline caused by the imposition of a Value Added Tax in 2014, there are few signs of a rebound to pre-VAT levels.  Japanese GDP growth has been volatile and averaged 1.5% in 2015; we’re expecting a similar outcome in 2016.  

In October 2015, the Bank of Japan did not take further steps which markets were anticipating (e.g., an increase in equity ETF purchases from ¥3tn per year, an increase in REIT purchases from ¥90bn per year or an increase in government bond purchases from ¥80tn per year).  Perhaps concerns about the negative domestic impacts from a weaker Yen are affecting BoJ policy.

Our contacts in Japan believe that the BoJ is no longer being pre-emptive, and will wait until November 2016 to act.

The Japanese experiment.

There are few precedents for the kind of experiment Japan is conducting.  At the current pace of BoJ purchases, private sector banks might actually run out of JGBs by the end of 2016, at which point the BoJ would have to buy them directly from the non-bank private sector; I think it’s fair to say that no one really knows what would happen then. 

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

S&P Downgrades Japan From AA- To A+ On Doubts Abenomics Will Work – Full Text

S&P Downgrades Japan From AA- To A+ On Doubts Abenomics Will Work – Full Text

Who would have thought that decades of ZIRP, an aborted attempt to hike rates over a decade ago, and the annual monetization of well over 10% of sovereign debt would lead to a toxic debt spiral, regardless of how many “Abenomics” arrows one throws at it? Apparently Standard and Poors just had its a-ha subprime flashbulb moment and moments ago, a little over 4 years after it downgraded the US from its legendary AAA-rating which led to angry phone calls from Tim Geithner and a painful US government lawsuit, downgraded Japan from AA- to A+.  The reason: rising doubt Abenomics is working.

Apparently S&P has never heard of the Magic Money Tree theory concocted by economists who have never traded an asset in their lives, in which “countries that print their own currency” have nothing to fear about a 250% debt/GDP ratio. In fact, the only fear is that it is not big enough.

Expect the market’s reaction to be that since Abenomics has not worked yet, some nearly three years after it was launched then Japan will be forced to do even more of it, simply because it has no choice – it is now all in, the problem of course being that the BOJ is simply running out of stuff to monetize as even the IMF warned two weeks ago…

Here is the S&P’s full downgrade.

Japan Ratings Lowered To ‘A+/A-1’; Outlook Is Stable


  • Economic support for Japan’s sovereign creditworthiness has continued to  weaken in the past three to four years. Despite showing initial promise,  the government’s strategy to revive economic growth and end deflation appears unlikely to reverse this deterioration in the next two to three  years.
  • We are lowering our sovereign credit ratings on Japan to ‘A+/A-1’ from  ‘AA-/A-1+’.
  • The outlook on the long-term rating is stable.


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

Buiter: Only “Helicopter Money” Can Save The World From The Next Recession

Buiter: Only “Helicopter Money” Can Save The World From The Next Recession


It is to be expected that economists – even economists working for the same team – have different views about the likelihood of different future outcomes. Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air.

That rather hilarious characterization of the pseudoscience that is economics comes from the desk of Citi’s Chief Economist Willem Buiter and it’s apparently evidence that even if you don’t think too much of his views on “pet rocks” (gold is a 6,000 year-old bubble) or on the efficacy and/or utility of physical banknotes (ban cash), you’d be hard pressed to disagree with him when it comes to critiquing his profession. Of course we don’t want to give Buiter too much credit here because the quote shown above could simply be an attempt to stamp a caveat emptor on his latest prediction in case, like his predictions on when Greece would ultimately leave the euro, it turns out to be wrong.

As tipped by comments made at the Council of Foreign Relations in New York late last month, Buiter is out with a damning look at the global economy which he says will be drug kicking and screaming into a recession by the turmoil in China and the unfolding chaos in EM. Here’s the call:

In the Global Economics team, however, we believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so. To clarify further, the most likely scenario, in our view, for the next few years is that global real GDP growth at market exchange rates will decline steadily from here on and reach or fall below 2%.

More specifically, Buiter says the odds of some kind of recession (either mild or terrifying) are 55%. Not 54%, or 56% mind you, but exactly 55%, because as indicated by the introductory excerpt above, economic outcomes are very amenable to precise forecasting:

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

The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play

The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play

The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.

Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”

So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail“, was correct. Namely this:

… the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.

… while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.

Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.

(Actually, we said all of the above first all the way back in 2012, but that’s irrelevant.)

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



Abenomics End Game: Thousands Protest In Downtown Tokyo, Demand Abe’s Resignation As PM Disapproval Soars

Abenomics End Game: Thousands Protest In Downtown Tokyo, Demand Abe’s Resignation As PM Disapproval Soars

Considering that Shinzo Abe’s first reign as prime minister of Japan lasted precisely one year from September 26, 2006 until September 26 of the following year, when he voluntarily resigned due to diarrhea, the fact that he has managed to stay in power for nearly 3 years since ascending to power for the second time in December 2012 and unleashing the currency-crushing and market-surging policy of unprecedented debt and deficit monetization known as “Abenomics” is quite impressive.

It also confirms that as long as the stock market keeps going higher politicians have nothing to fear even if it means a total collapse in living standards for the rest of the population.

Yet even with the Nikkei pushing on 18 years highs, it appears that Abe may have reached his rigged market rating benefit cap, because even as the Nikkei was soaring, Abe’s approval rating was plunging.

As we reported a month ago, “Abe Cabinet’s approval rating plunged to 39%, matching a record low, as more than half of voters oppose the new US-sanctioned military/security legislation being debated in the Diet…. As his popularity has waned, Abe has become more and more desperate to keep support and has, for the first time in 70- years, lower the minimum voting age from 21 to 18.”

The overall decline in support was apparently attributable to the fact that 53 percent of the respondents oppose the security bills being deliberated in the Lower House. Only 29 percent support the legislation, the survey showed.

Three constitutional law scholars said in the Lower House Commission on the Constitution on June 4 that the security legislation is unconstitutional. The Abe Cabinet countered their stance by releasing an opinion paper that said the bills do not violate the Constitution.

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

Goldman “Conspiracy Theory” Validated As ECB Expands QE Program

Goldman “Conspiracy Theory” Validated As ECB Expands QE Program

The ECB has expanded the list of SSA securities eligible for purchase under PSPP. The updated list includes:

  • Tyoettoemyysvakuutusrahasto
  • OeBB-Infrastruktur
  • Asfinag
  • Infraestruturas de Portugal
  • Entidade Nacional para o Mercado de Combustiveis
  • Ferrovie dello Stato Italiane
  • Terna Spa – Rete Elettrica Nazionale
  • ENEL
  • SNAM
  • Administrador de Infraestructuras Ferroviarias – Alta
  • Velocidad
  • SNCF Reseau
  • Caisse Nationale des Autoroutes
  •  DARS

Since the program’s inception, we and others have said the central bank will likely need to add more names to the list of QE-eligible SSA bonds or move into corporate credit in order to ensure that NCBs can meet their purchase targets under the capital key (especially in core markets where scarcity is a problem) and in order to allay concerns about liquidity in the secondary market for some core EGBs.

That said, the decision to expand the list this week is obviously no coincidence and reflects the fact that the ECB is keen to ensure there are no lasting “spillover” effects from the meltdown in Greece on periphery yields which the central bank has worked so hard to keep unrealistically low.

The move also, as RBS noted this morning, shows the ECB is “ready to intervene closer to the real economy.” RBS also says the bank could move into IG corporate credit next, something we predicted months ago when we discussed the lower limit problem.

So that’s the surface-level analysis.

Beyond that, today’s announcement by the ECB seems to prove what we said in “Goldman’s Conspiracy Theory Stunner“; namely that Mario Draghi wants to push Greece over the edge in order to give himself an excuse to expand QE. Here’s how we explained the situation earlier this week:


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

The Global Problem: Monetary Policy Can’t Fix an Economy’s Structural Problems

The Global Problem: Monetary Policy Can’t Fix an Economy’s Structural Problems

When we look back from 2025, it will be painfully obvious that central bank policies exacerbated the systemic crises that brought down the global financialization machine.

What with all the praise being heaped on central banks for “saving” the world from economic doomsday in 2008, it’s only natural to ask which structural problems their unprecedented policies solved in the past 6 years. After all, “saving” the world from financial collapse was relatively quick work; so what problems beyond imminent implosion did the central banks policies solve in the past 6 years?

Answer: none. zip, zero, nada. The truth is central bank policies of zero-interest rates andfree money for financiers have made many structural problems worse.

Did central bank policies resolve the structural problem of unfunded pension and retiree healthcare liabilities? No, they made it worse, as zero-interest rates have reduced the yields on pension funds, 401Ks and IRAs to mere pittances. This destruction of safe yields has driven pension funds into risky investments in junk bonds and stocks, leaving them vulnerable to devastating losses when the current credit bubble bursts.

Did central bank policies resolve the structural problem of corporate wealth buying political influence? No, they made it worse, by encouraging corporations to borrow vast sums to use on whatever they fancied–for example, lobbying and share buybacks.

Did central bank policies resolve the structural problem of rising dependence on credit for weak “growth”? No, they made it worse, as cheap money enabled the re-emergence of subprime loans to marginal borrowers. The deterioration of credit quality guarantees a credit crisis and bubble pop as marginal borrowers default.


…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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