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The Neutral Interest Rate Myth

In his speech to the Economic Club of New York on November 28 2018, the Federal Reserve Board Chairman Jerome Powell said that the US central bank’s policy interest rate is just below the neutral rate. This prompted many commentators to suggest that a tighter interest rate stance of the Fed is likely coming to an end.  At the end of October the fed funds rate target stood at 2.25%.

It is widely held that by means of suitable monetary policies the US central bank can navigate the economy towards a growth path of economic stability and prosperity. The key ingredient in achieving this is price stability. Most experts are of the view that what prevents the attainment of price stability are the fluctuations of the federal funds rate around the neutral rate of interest.

The neutral rate, it is held, is one that is consistent with stable prices and a balanced economy. What is required is Fed policy makers successfully targeting the federal funds rate towards the neutral interest rate.

The Swedish economist Knut Wicksell articulated this framework of thinking in late 19th century, which has its origins in the 18th century writings of British economist Henry Thornton.

The Neutral Interest Rate Framework

According to Wicksell, there is a certain rate of interest on loans, which is neutral in respect to commodity prices, and tend neither to raise nor to lower them.

According to this view, the main source of economic instability is the variance between the money market interest rate and the neutral rate.

If the money market rate falls below the neutral rate, investment will exceed saving implying that aggregate demand will be greater than aggregate supply.

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

The Trade War Distraction: Huawei And Linchpin Theory

The Trade War Distraction: Huawei And Linchpin Theory

Since the beginning of this year, I have been warning that trade tariffs initiated by Donald Trump would develop into a full-blown trade war with China, and perhaps other nations, and that the timing of this trade war is rather suspicious. Suspicious how? Almost every instance of further escalation was made by Trump around the exact time that the Federal Reserve was also making a large cut to its balance sheet or raising interest rates. Instead of focusing on the fact that extreme volatility has returned to markets because central banks are pulling the plug on life support, the mainstream media is holding up the trade war as the ultimate culprit behind the accelerating crash.

In other words, Trump’s trade war is acting as a perfect distraction from the crisis which the banking establishment has now deliberately triggered.

The initial response to my suggestion by a minority of liberty movement activists and skeptics was outright denial. Some people argued that the trade war would be over before it even began and that China would immediately capitulate in fear of losing the U.S. consumer market. Others argued that the trade war “had been started by the Chinese years ago” and Trump was simply “fighting back.”

Clearly, the trade war is not fading away as many assumed. As I predicted, it is only continuing to grow. And the notion that a trade war is necessary at this time in defense of the U.S. economy ignores certain realities. For example, the trade deficit itself was never “theft” by the Chinese, but a BARTER between the Chinese and the U.S. government and U.S. corporations.

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

Historic Debt Is At The Core Of Our Economic Decline

debt at core of economic decline

From Brandon Smith

As I predicted just after the 2016 presidential election, a sordid theater of blame has exploded over the state of the U.S. economy, with fingers pointing everywhere except (in most cases) at the true culprits behind the crash. Some people point to the current administration and its pursuit of a trade war. Others point to the Federal Reserve, with its adverse interest rate hikes into economic weakness and its balance sheet cuts.

Some blame the Democrats for doubling the national debt under the Obama Administration and creating massive trade and budget deficits. And others look towards Republicans for not yet stemming the continually increasing national debt and deficits.

In today’s economic landscape, the debt issue is absolutely critical. While it is often brought up in regards to our fiscal uncertainty, it is rarely explored deeply enough.

I believe that economic crisis events are engineered deliberately by the financial elite in order to create advantageous conditions for themselves. To understand why, it is important to know the root of their power.

Without extreme debt conditions, economic downturns cannot be created (or at least sustained for long periods of time). According to the amount of debt weighing down a system, banking institutions can predict the outcomes of certain actions and also influence certain end results. For example, if the Fed were to seek out conjuring a debt based bubble, a classic strategy would be to set interest rates artificially low for far too long. Conversely, raising interest rates into economic weakness is a strategy that can be employed in order to collapse a bubble. I believe that it is what launched the Great Depression, it is what ignited the crash of 2008, and it is what’s going on today.

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

A Global Dearth of Liquidity

A Global Dearth of Liquidity

Worldwide Liquidity Drought – Money Supply Growth Slows Everywhere

This is a brief update on money supply growth trends in the most important currency areas outside the US (namely the euro area, Japan and China)  as announced in in our recent update on US money supply growth (see “Federal Punch Bowl Removal Agency” for the details).

Nobody likes a drought. This collage illustrates why.

The liquidity drought is not confined to the US – it is fair to say that it is a global phenomenon, even though money supply growth rates in the euro area and Japan superficially still look fairly brisk. However, they are in the process of slowing down quite rapidly from much higher levels – and this trend seems set to continue.

Euro Area – Money Supply Growth Still High, But Slowing Fast

The chart below shows the euro area’s narrow money supply aggregate M1 (stock) and its year-on-year growth rate. M1 in the euro area is almost equivalent to US TMS-2, which makes it a good enough stand-in (it includes savings deposits that are in practice payable on demand; however, it lacks euro deposits belonging to foreign residents and central government deposits).

It is worth noting that a slowdown to a 0% growth rate triggered crisis conditions in 2008. After a sharp, but short term spike in money supply growth after the ECB made emergency liquidity facilities available to European banks to mitigate the fallout from the US housing bubble implosion, crisis conditions promptly returned when these facilities expired and money supply growth fell to around 1% in 2011.

Euro area, M1 (~TMS-2): Total in millions of EUR (blue line) and y/y rate of change (orange line). We have highlighted the three most recent slowdowns in money supply growth associated with economic crises and declining asset prices.

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

Economic Downturn: Credit Cards Aren’t Being Paid, Accounts Are Being Closed

Economic Downturn: Credit Cards Aren’t Being Paid, Accounts Are Being Closed

A new report is shining some light on an indicator that the economy is about to take a major downturn. Credit card accounts are not being paid and some accounts are being closed in anticipation for an upcoming recession.

Credit-card delinquencies, application rejections, and involuntary account closures are all on the upswing, according to a report from the Federal Reserve Bank of New York. According to Business Insider, The Fed says these developments reported are “potentially concerning” given the strength of the economy and comparatively low interest rates. Does the Fed not remember that they themselves have been jacking up the interest rates for months now? Sure, they are still relatively low, but that’s little consolation for the person who lives paycheck to paycheck and just saw another rate hike.

The Fed released the results of this report this week. It’s called the “Credit Access Survey” which is a quarterly report on United States borrowers. It brought to the surface a couple of alarming trends that suggest credit-card issuers are getting skittish and paring back risk: Both credit-card rejection rates and involuntary account closures are on the rise.

A separate New York Fed report released last month, the “Quarterly Report on Household Debt and Credit,” produced a similar finding. The report, which mines Equifax consumer credit reports for data, showed an uptick in the past year and a half in account closures, again primarily from credit cards.

The reason credit card companies may be closing accounts and rejecting borrowing increases is that they may be spooked by the increasing number of people who already aren’t paying off their cards. Credit-card delinquency rates began to climb sharply toward the end of 2016, a trend that hasn’t reversed in 2018, according to Fed data.

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

 

Why buy gold now? Because I don’t know

Why buy gold now? Because I don’t know

From 2000 through 2012, the price of gold increased every year, rising from around $280 an ounce to nearly $1,700. It was an unprecedented run.

Then, in 2013, gold took a nose dive, losing over 27% of its value.

It was widely reported that the Swiss National Bank, the former bastion of monetary conservatism, lost $10 billion that year just on its gold holdings.

As you probably know, central banks hold a portion of their reserves in gold. The practice goes back to when central banks actually had to have gold on hand to trade in and out of paper money (or even trade for goods and services).

And central banks still hold reserves in gold today, even though they don’t need it to transact like they used to.

So that begs the question, did the Swiss National Bank actually lose $10 billion? It still had every ounce of gold in its vaults. And gold, after all, ismoney.

Plus, the SNB wasn’t holding gold to speculate…

Today, central banks hold gold as a hedge against fiat money. These are the guys with their fingers on the printing press… so they know exactly the effect they have on money.

And right now, banks are buying up gold hand over fist. Central banks currently hold 20% of all the gold ever mined—33,000 metric tons.

And JPMorgan Chase says they’ll buy another 650 tons this year and next.

Why?

Gold is for the I don’t knows.

And right now, there are a LOT of I don’t knows.

Markets have been going crazy over the past few months.

After a record bull run for stocks, we are now seeing massive volatility with the Dow regularly jumping 500+ points in a single day. Just yesterday, the Dow fell a whopping 800 points.

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

2019 Outlook: The State of Sound Money in the United States

2019 Outlook: The State of Sound Money in the United States

The Great Recession, coupled with the “Ron Paul Revolution,” prompted a renaissance of the sound money movement in the United States.

As Germany, Russia, and China — to name a few — continue to increase their gold holdings, the hegemonic power of Federal Reserve Notes (referred to today as the dollar) is slowly slipping away.

Simultaneously, whispers—once relegated to fringe corners—of restoring sound money have become passionate, concerned, and loud.

The destruction of sound money over the past century stems from actions at the federal level, but there are steps which states can take —and even have already taken —to move toward real, sound, constitutional money.

As state legislatures reconvene in the next few weeks, let’s take a look at the current state of play…

Since 2016, sound money has made a splash on the state level. According to the 2018 Sound Money Index, a new ranking of all 50 states on the extent to which they have implemented the pro-sound money policies, there are currently 38 states with an exemption of sales and use tax on the purchase of gold and silver.

Since 2016, legislators in 10 different states have introduced bills, seven of which were signed into law, to restore sound money by eliminating taxes on gold and silver within their borders.

In 2017, a quarter of all states without a sales tax exemption on gold and silver introduced new measures to eliminate the tax against the monetary metals. As states continue to make inroads on the sales tax issue, Tennessee and West Virginia are expected to introduce bills to remove sales and use taxes on sound money in 2019.

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

Empty Words Are Failing. A Timeline For What Comes Next

Empty Words Are Failing. A Timeline For What Comes Next

A quick recap of the past couple of months: 

Stocks plunge.

The politicians, bureaucrats and bankers who depend on artificially-elevated financial asset prices start to panic.

The Fed announces that maybe it won’t have to raise interest rates any more, and the president announces a temporary cease-fire in the trade war with China.

The markets bounce, leading some to conclude that the worst is over and it’s time to go back to buying the dip.

A larger number of people conclude that the changes in policy were really just empty words. No actual actions had taken place.

Stocks start falling again. You are here — as this is written on Tuesday Dec 4, the Dow is down about 300 points.

What happens next?
Think of the past few months as the first act in a play that is performed in virtually every business cycle, with later acts following a predictable script. Here’s how it’s likely to go this time:

Words give way to modest action (early 2019). When the markets figure out that empty promises don’t change the underlying reality of slowing growth, falling corporate profits and rising loan defaults, they return to panic mode. Governments are then forced to actually do things to try to stop the bleeding. In the current US case, that means the Fed will announce that it’s done raising rates and will soon start cutting. Trump, meanwhile, will cut a trade deal with China that accomplishes little but removes the future uncertainty.

This will be greeted with another few days of market euphoria, followed by the realization that, again, nothing substantive has changed. Stocks will resume their decline. Let’s call this “2008 revisited.”

DJIA 2008 empty words fail

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

Blain: “Are We Backing The Wrong Country In The Saudi-Iran Race”

As excerpted from Blain’s Morning Porridge, submitted by Bill Blain

Where do we go from here?  

I’ve said it a few times already – 2019 is likely to see the start of the New Market Reality. Although some pundits claim yesterday’s sell-off was due to automated algo’s triggering a crash because they misread the US yield curve inversion – bad programming they claim – the reality is markets are extremely nervous: of the recessionary signals the inversion shows, slowing economic numbers, the prospects for trade war accelerating recession, etc. The US economy may be a full employment and growing, but where does it go from here as the rest of the globe falters, housing collapses, Auto sales plummet and everyone worries just how they are going to pay off student loans, mortgages and credit cards?

Markets have reversed polarity on Trump.

Peak Trump Bullshit means we just switched from positive to negative. Don’t think about what can go right as Trump forces through trade deals, tax cuts, a compliant Fed, etc. Think about Trump negatives – forget the FED put. Forget overly-optimistic valuations based on rosy global growth projections, and the belief very smart people will make bright shinny things brighter and shinier. Next year is going to be about real stuff, like how you going to sell this commodity (be it an electric car, swanky mobile phone with a fruit logo, or avacados. Why avocados…? because.. just because.) Consumption vs recession. Ouch.

Markets are being roiled by politics, soiling themselves on trade war panics, scared witless by mounting populism and its pay-off:

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

The Art of Defaulting

… the debt-financed overspending of the 1960s had continued into the early 1970s. The Fed had funded this spending with easy-credit policies, but by paying back its debts with depreciated paper money instead of gold-backed dollars, the U.S. effectively defaulted.

Ray Dalio

Principles for navigating big debt crises

Ray Dalio of Bridgewater Associates is one of my role models in life and, when he writes a new book, I would normally visit Amazon.co.uk more quickly than you can count to ten, but not this time!

What? Have I fallen out of love with Ray’s way of thinking? Not at all, but I found out that his new book – Principles for Navigating Big Debt Crises – can actually be downloaded for free. Ray, being the class act he is, has decided that everybody should know how to navigate a debt crisis; hence he has chosen to make it freely available (as a PDF copy).

Much (but not all) of the content below is inspired by Ray’s thinking. He is not as explicit in his new book as I am below (and as he has been before) in terms of the timing of the next debt crisis, but it’s pretty clear that he also thinks the writing is on the wall.

If you want to read the wise words of a very smart man, I suggest you give yourself one for Christmas, which you can do here. Christmas presents rarely come cheaper than this.

Debt crises of different sorts

In the following, I will focus on what Ray calls major debt crises – crises that have caused a slump in GDP of at least 3% but, in reality, there are different types of major debt crises.

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

The Fed Explains the Rate Hikes: To Prevent Financial Crisis 2

The Fed Explains the Rate Hikes: To Prevent Financial Crisis 2

Instead of “bubble” or “collapse,” it uses “valuation pressures” and “broad adjustment in prices.” Business debt, not consumer debt, is the bogeyman this time.

Preventing another financial crisis – or “promoting financial stability,” as the Federal Reserve Board of Governors calls it – isn’t the new third mandate of the Fed, but a “key element” in meeting its dual mandate of full employment and price stability, according to the Fed’s first Financial Stability Report.

“As we saw in the 2007–09 financial crisis, in an unstable financial system, adverse events are more likely to result in severe financial stress and disrupt the flow of credit, leading to high unemployment and great financial hardship.”

Financial firms are OK-ish, except for hedge funds.

The largest banks are “strongly capitalized” and are better able to withstand “shocks” than they were before the Financial Crisis; and “credit quality of bank loans appears strong, although there are some signs of more aggressive risk-taking by banks,” the Financial Stability Report says.

Also, leverage at broker-dealers is “substantially below pre-crisis levels.” And “insurance companies have also strengthened their financial position since the crisis.”

A greater worry are hedge funds that are now being leveraged up to the hilt. “A comprehensive measure that incorporates margin loans, repurchase agreements (repos), and derivatives – but is only available with a significant time lag – suggests that average hedge fund leverage has risen by about one-third over the course of 2016 and 2017.”

“The increased use of leverage by hedge funds exposes their counterparties to risks [that would include banks and broker-dealers] and raises the possibility that adverse shocks would result in forced asset sales by hedge funds that could exacerbate price declines.”

But here is why they won’t get bailed out: “That said, hedge funds do not play the same central role in the financial system as banks or other institutions.”

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

Chairman Powell Talks Out of Both Sides of His Mouth

Chairman Powell Talks Out of Both Sides of His Mouth

jerome powell talks rates

In a speech on Wednesday, Federal Reserve Chairman Jerome Powell stated that he had a “neutral” outlook on rates. According to a CNBC article, he was quoted:

Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.

But CNBC notes that, as recently as October, Powell’s was indicating that rates were “a long way from neutral.” Could the change in tone simply be public relations damage control?

It’s important to note that rates may still be “low” by historical standards, but only if you include 35+ years of interest rate history. However, if you look at just this century, rates are headed towards the highest levels since 2007 (see chart below). And keep in mind there’s a good chance that we’ll see one more rate hike in December, as the Fed has alluded to in their November meeting statement.

rates on a rise

In response to Powell’s “neutral” language, the Dow Jones jumped 617 points. This represents its biggest one-day gain since this March, according to CNBC. Of course, the Dow has rebounded two other times since October 3, only to lose those gains each time.

Another strange part of Powell’s statement was the indication that the Fed’s “neutral” rates were “neither speeding up nor slowing down growth.” His analysis is odd, because CPI inflation has been on the rise for the last several years (see red arrow):

FRED cpi

And yet, the Dow jump and Powell’s “neutral rate” statement oddities somehow aren’t the strangest items from Wednesday’s speech.

Seems the Fed Want to “Have It Both Ways”

The Fed issued a stark warning about a potential trifecta that could impact the economy. Their warning reads:

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

Truth Is What We Hide, Self-Serving Cover Stories Are What We Sell

Truth Is What We Hide, Self-Serving Cover Stories Are What We Sell

The fact that lies and cover stories are now the official norm only makes us love our servitude with greater devotion.

We can summarize the current era in one sentence: truth is what we hide, self-serving cover stories are what we sell. Jean-Claude Juncker’s famous quote captures the essence of the era: “When it becomes serious, you have to lie.”

And when does it become serious? When the hidden facts of the matter might be revealed to the general public. Given the regularity of vast troves of well-hidden data being made public by whistleblowers and white-hat hackers, it’s basically serious all the time now, and hence the official default everywhere is: truth is what we hide, self-serving cover stories are what we sell.

The self-serving cover stories always tout the nobility of the elite issuing the PR: we in the Federal Reserve saved civilization by saving the Too Big To Fail Banks (barf); we in the corporate media do investigative reporting without bias (barf); we in central government only lie to protect you from unpleasant realities–it’s for your own good (barf); we in the NSA, CIA and FBI only lie because it’s our job to lie, and so on.

Three recent essays speak to the degradation of data and factual records in favor of self-serving cover stories and corrosive political correctness.

Why we stopped trusting elites (The Guardian)

“It’s not just that isolated individuals are unmasked as corrupt or self-interested (something that is as old as politics), but that the establishment itself starts to appear deceitful and dubious. The distinctive scandals of the 21st century are a combination of some very basic and timeless moral failings (greed and dishonesty) with technologies of exposure that expose malpractice on an unprecedented scale, and with far more dramatic results.

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

DiMartino Booth: The Fraying Of The Fed’s Fragile Narrative

Former Dallas Fed official Danielle DiMartino Booth joins the show just as Chairman Jay Powell faces his first major challenge: will he keep raising rates as promised now that autos, housing, employment, and even tech stocks look soft? And if not, will he effectively signal that the US economy is in big trouble?

“I’m most concerned about the bottom line evaluations in the corporate debt market…these bring back memories of the sub-prime credit crisis…”

“The corporate bond market has doubled since 2007. It is over 9 $trillion. Subprime loans were 3 trillion… The Fed should be calling out potential financial stability risks. That is the unspoken third mandate.


It looks like the US credit market is about to hit the wall. US wall of maturity is around 2020 to 2022, acc to calculations by SRP.


“Apparently in six weeks we have come “worlds apart from neutral” to “Just under” and that is when markets really, really took off.”

“The Fed could engineer a soft landing, but it is a rare occurrence and as Powell is learning, there is a lagged effect in terms of when those interest rate hikes are put in and when they show up in the economy.”

Powell is trying to broadcast that he is truly data dependent…‘if the data change, I’m going to change with the data.'”

“…look across energy, manufacturing, real estate & construction, leisure & hospitality states…jobless claims across all of these sectors have turned up. It is a weakening economy…”

“If the economy is truly slowing, then top line growth will slow, earnings expectations will be ratcheted down going into 2019.  Those are things that the stock market will not like.”

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

Weekly Commentary: Framework for Monitoring Financial Stability

Weekly Commentary: Framework for Monitoring Financial Stability

Upon the public release of Jerome Powell’s Wednesday speech came the Bloomberg headline: “Powell: No Preset Policy Path, Rates ‘Just Below’ Neutral Range.” When the Fed Chairman began his presentation to the New York Economic Club just minutes later, the Dow had already surged 460 points. From Powell’s prepared comments: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth.” When he read his speech, he used “range,” as opposed to “broad range” of estimates.
Equities responded to the Chairman’s seeming dovish transformation with jubilation (and quite a short squeeze). It certainly appeared a far cry from, “We may go past neutral, but we’re a long way from neutral at this point, probably,” back on the third of October. Powell’s choice of language was viewed consistent with the ‘much closer’ to the neutral level, as headlines ascribed to vice chair Richard Clarida. What he actually said in Tuesday’s speech: “Although the real federal funds rate today is just below the range of longer-run estimates presented in the September [Summary of Economic Projections], it is much closer to the vicinity of r* than it was when the FOMC started to remove accommodation in December 2015. How close is a matter of judgment, and there is a range of views on the FOMC.”

The “neutral rate” framework is problematic. Back in early October, the Fed was almost three years into its “tightening” cycle (first rate increase in December 2015). Yet the Atlanta Fed GDP Forecast was signaling 4% growth; consumer confidence was near decade highs; manufacturing indices were near multi-year highs; corporate Credit conditions remained quite loose; and WTI crude had just surpassed $75 a barrel.
…click on the above link to read the rest of the article…

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