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A Pyrrhic End to 130 Years of Vicious Bad Money and Banking Crises

April 23, 2023

A Pyrrhic End to 130 Years of Vicious Bad Money and Banking Crises money printing The original vicious circle starts with inflationary interventions in an up-to-then well-anchored monetary regime. Consequent asset inflation spawns a banking crisis. That leads to the installation of anticrisis safety structures (one illustration is a novel or enhanced lender of last resort). Alongside a possible monetary regime shift, these damage the money’s anchoring system. A great asset inflation emerges and leads on to an eruption of another banking crisis, devastating in comparison with the first.

An array of additional safety structures is put in place which makes the now-bad money worse than before. After a long and variable lag, a long and violent monetary storm means the safety structures fail, a banking crisis again erupts but this time milder than the previous.

Then a further tinkering with the safety structures causes money to deteriorate even more in quality. Another shift in monetary regime coincidentally does much additional damage. Consequently, in time, a new crisis erupts much worse than the last one.

The safety engineers do more work, causing yet more damage to the mechanisms essential to sound money. But now the safety structures are so pervasive and strong across the banking industry that there is widespread belief that bank crisis eruptions will be smaller or, more likely, totally repressed.

Subsequent events demonstrate those beliefs to be hollow. There is a new round of safety structure elaboration leading to further monetary deterioration. Regime officials declare the end of bank crises.

The cumulative economic cost of this vaunted triumph over bank crisis is an advance of monopoly capitalism and monetary statism that throttles the essential dynamism of free market capitalism. Malinvestment becomes cumulatively larger. Living standards in general suffer. The severely ailing money which subsists is beyond any cure except the most radical.

…click on the above link to read the rest…

The Fed Cannot Fix Today’s Energy Inflation Problem

April 10, 2023

The Fed Cannot Fix Today’s Energy Inflation Problem

There is a reason for raising interest rates to try to fight inflation. This approach tends to squeeze out the most marginal players in the economy. Such businesses and governments tend to collapse, as interest rates rise, leaving less “demand” for oil and other energy products. The institutions that are squeezed out range from small businesses to financial institutions to governmental organizations. The lower demand tends to reduce inflationary pressure.

The amount of goods and services that the world’s economy can produce is largely determined by fossil fuel supplies, plus our ability to use “complexity” in many forms to produce the items that the world’s growing population requires. Adding debt helps add complexity of various types, such as more international trade, more advanced education, and more specialized tools. For a while, the combination of growing energy supplies and growing complexity have helped pull economies along.

Unfortunately, the world’s oil supply is no longer growing. Without an adequate oil supply, it becomes difficult to maintain complexity because complex solutions, such as international trade, require adequate oil supplies. Inasmuch as we seem to be reaching energy and complexity limits, nothing the regulators try to do to change the debt and money supplies–even reeling them back in–can fix the underlying oil (and total energy) problem.

I expect that the rich parts of the world, including the US, Europe, and Japan, are in line to be adversely affected by high interest rates this time. With their high levels of complexity, they are among the most vulnerable to disruption when there is not enough oil to go around.

Figure 1. World oil consumption divided into consuming areas, based on data of BP’s *2022 Statistical Review of World Energy*. Europe excludes Estonia, Latvia, Lithuania, and Ukraine.

…click on the above link to read the rest…

Role Reversal: The Collapse of the Dollar-Enforced Empire

April 10, 2023

Role Reversal: The Collapse of the Dollar-Enforced Empire

The Soviet empire started to crumble around 1989. The time period between the forming of the North Atlantic Treaty Organization (NATO) in the late 1940s and the retreat of Russia from Eastern Europe with the eventual collapse of communism in Russia is known as the Cold War. There was a great power confrontation in Europe that did not result in war.

Essentially, US-led NATO stood its ground to prevent further Soviet expansion from the territory it occupied at the end of World War II and waited for the inevitable collapse. Now, perhaps not everyone saw the collapse of the Soviet empire as inevitable. But all one had to do was view the Soviet empire for oneself, up close and personal, which is what I did in the early 1970s as a young Air Force officer.

The State of the Communist Economy

The Russian economy at that time is painful to describe. Moscow and Leningrad (Saint Petersburg), the so-called jewels of the Soviet Union, were depressing. Everything was shoddily built. There were very few cars on the streets. There were no retail shops deserving of the name. Lines formed in the middle of the night awaiting the opening of the few bakeries. I saw this for myself from my hotel window on the Nevsky Prospekt in Leningrad. GUM, the “world’s largest department store” near Moscow’s Red Square, sold nothing that was equal to what could be found in any garage sale in the West.

Actually, that should not be a surprise since at one time all those garage-sale goods were marketable. I did not visit Berlin, but those who did say that crossing the Brandenburg Gate from West Berlin to East Berlin was shocking…

…click on the above link to read the rest…

Franklin D. Roosevelt’s Gold Heist

April 6, 2023

Franklin D. Roosevelt’s Gold Heist

Yesterday (April 5) marked the anniversary 0f the signing of Executive Order 6102 by President Franklin D. Roosevelt. It was touted as a measure to stop gold hoarding, but it was in reality, an attempt to remove gold from public hands.

Many people refer to EO-6102 as a gold confiscation order. But confiscation is probably not the best word for what happened in practice.

The order required private citizens, partnerships, associations and corporations to turn in all but small amounts of gold to the Federal Reserve in exchange for $20.67 per ounce.

The executive order was one of several steps Roosevelt took toward ending the gold standard in the US.

With the dollar tied to gold, the Federal Reserve found it difficult to increase the money supply during the Great Depression. It couldn’t simply fire up the printing press as it can today. The Federal Reserve Act required all notes to have 40% gold backing. But the Fed was low on gold and up against the limit. By enticing the public to give up its gold, the Fed was able to boost its own gold holdings and create more dollars.

EO 6102 followed on the heels of an order Roosevelt issued just weeks before prohibiting banks from paying out or exporting gold. Just two months after the enactment of EO 6102, the US effectively went off the gold standard when Congress enacted a joint resolution erasing the right of creditors to demand payment in gold. Then, in 1934, the government’s fixed price for gold was increased to $35 per ounce. This effectively increased the value of gold on the Federal Reserve’s balance sheet by 69%. By increasing its gold stores through the confiscation of private gold holdings, and declaring a higher exchange rate, the Fed could circulate more notes. In effect, the hoarding of gold by the government allowed it to inflate the money supply.

…click on the above link to read the rest…

“Dr. Doom” Nouriel Roubini Warns Of Stagflationary Megathreat

April 3, 2023

“Dr. Doom” Nouriel Roubini Warns Of Stagflationary Megathreat

Though the threat of an exponential liquidity crisis is a conversation that Bloomberg should have been seriously addressing two years ago, it’s good to see that reality is finally hitting the mainstream media. Nouriel Roubini, also known as “Dr. Doom” because he’s one of the few mainstream economists that’s not constantly touting the soft landing narrative, has been rather consistent in terms of covering the clash between credit liquidity, rising inflation and rising interest rates. Now, he’s talking about an incoming stagflationary “megathreat” that will crush credit while prices continue to rise, compelling central bankers to continue raising rates.

The Catch-22 scenario that central banks have triggered should have been obvious to every economist as soon as they began tightening into the financial weakness and instability created by the covid lockdowns. Instead, the narrative has been an ever escalating waiting game – Everyone was simply biding their time until the central bank pivot they assumed was coming. Except, it didn’t happen. As long as interest rates remain higher or continue to climb existing debt and new debt will continue to grow more expensive and less desirable. The lifeblood of markets for the past 14 years has been near-zero interest rates and easy fiat money circulating through banking conduits. Now, the dream is dead.

Roubini addresses the deeper problem in part when he notes the exposure of banks like SVB to bonds with declining value caused by rising rates. What he misses, and it’s surely something Bloomberg does not want to talk about, is the issue of ESG related programs and lending that made up a sizable portion of SVB’s portfolio…

…click on the above link to read the rest…

Peter Schiff: Bank Bailouts Will Devalue the Dollar

March 29, 2023

Peter Schiff: Bank Bailouts Will Devalue the Dollar

MARCH 28, 2023 BY SCHIFFGOLD 0 0

Peter Schiff appeared on NTD News to talk about the bank bailout and the March Federal Reserve meeting. During the conversation, Peter explained that everybody is going to pay for these bailouts because they will ultimately devalue the dollar as inflation skyrockets.

During his press conference after the March FOMC meeting, Jerome Powell said the banking system is “sound and resilient.” Peter said it’s not sound at all.

It’s a house of cards that is starting to collapse.”

Peter explained how the banking system became so unsound.

First, the Federal Reserve kept interest rates at zero for over a decade. During that time, banks loaded up on low-yielding, long-term Treasuries and mortgage-backed securities. With interest rates so low, they had to go out further on the yield curve. And the reason they were able to take so much risk is because the government guarantees bank accounts. That created a moral hazard. Customers didn’t care what the banks did with their money because they knew the government would bail them out.

Thanks to the mistakes the Fed has made since the 2008 crisis, we have a much bigger bubble now. The Fed caused the bubble that led to the financial crisis of 2008, and then they inflated a bigger bubble to try to paper over those mistakes and kick the can down the road so that we wouldn’t have to deal with the full consequences of resolving all those mistakes. And of course, we just compounded the problem with bigger mistakes and now the US economy is poised on the biggest economic disaster in its history.”

…click on the above link to read the rest…

The Fed Proposes a 4th Function of Money: Means of Social Control

March 23, 2023

The Fed Proposes a 4th Function of Money: Means of Social Control

A Federal Reserve white paper has come up with a new function for money. Let’s tune in.

Docket No. OP – 1670

Please consider Docket No. OP – 1670 on Interbank Settlement of Faster Payments.

The Federal Reserve Board announced that the Federal Reserve Banks will develop a new round-the-clock real-time payment and settlement service, called the FedNow^sm Service, to support faster payments in the United States.

This is a direct response to the threat posed by digital currencies and blockchain. According to one Fed official, “Last summer, the U.S. Treasury recommended that ‘the Federal Reserve move quickly to facilitate a faster retail payments system, such as through the development of a real-time settlement service, that would also allow for more efficient and ubiquitous access to innovative payment capabilities.”‘ We believe this effort requires a proof-of-authority quantum computing based blockchain system.

As we noted in our paper “Blockchain, Cryptocurrency and the Future of Monetary Policy,” confidential, not-for-distribution research sent to select members of the House Financial Services Committee, it is critical to understand that bitcoin was created in direct response to the failure of global regulators to protect the public in the years leading up to the financial crisis of 2007/2008. Thus, the ethical and monetary functionality of cryptocurrency is superior to that of paper money. Eventually, cryptocurrency is going to dominate.

As also noted in our paper, “The main economic attributes of a technically effective currency rests on three functions: as a unit of account, a store of value and as a medium of exchange.”

But there is a fourth function of money: as a means of social control. The centralized monopoly over the functions of money held by sovereign governments and central banks has generated great income and wealth imbalances…

…click on the above link to read the rest…

Fed, Central Banks Created the Current Crisis and Are on Course to Making Matters Worse

March 22, 2023

Fed, Central Banks Created the Current Crisis and Are on Course to Making Matters Worse

The incompetence of our financial regulators, most of all the Fed, is breathtaking. The great unwashed public and even wrongly-positioned members of the capitalist classes are suffering the consequences of Fed and other central banks being too fast out of the gate in unwinding years of asset-price goosing policies, namely QE and super low interest rates. The dislocations are proving to be worse than investors anticipated, apparently due to some banks having long-standing risk management and other weaknesses further stressed, and other banks that should have been able to navigate interest rate increases revealing themselves to be managed by monkeys.

What is happening now is the worst sort of policy meets supervisory failure, of not anticipating that the rapid rate increases would break some banks.¹ Here we are, in less than two weeks, at close to the same level of bank failures as in the 2007-2008 financial crisis. From CNN:

And even mainstream media outlets are fingering the Fed:

As we’ll explain in due course, the regulators’ habitual “bailout now, think about what if anything to do about taxpayer/systemic protection later” is the worst imaginable response to this mess. For instance, US authorities have put in place what is very close to a full backstop of uninsured deposits (with ironically a first failer, First Republic, with its deviant muni-bond-heavy balance sheet falling between the cracks). But they are not willing to say that. So many uninsured depositors remained in freakout mode, not understanding how the facilities work. Yet the close-to-complete backstop of uninsured deposits amounted to another massive extension of the bank safety net.²

The ultimate reason the Fed did something so dopey as to put through aggressive rate hikes despite obvious bank and financial system exposure was central bank mission creep, of taking up the mantle of economy-minder-in-chief.

…click on the above link to read the rest…

For Fed, What Happens Today More Important Than Monday’s Mayhem

March 14, 2023

For Fed, What Happens Today More Important Than Monday’s Mayhem

It was clear from the get-go that Monday would be mayhem for the markets – and as it turned out, it proved a lot more than that, with two-year Treasury yields collapsing the most in decades.

At stake was not just the integrity of the financial system, but also the availability of liquidity.

Bloomberg cross-asset strategist, Ven Ram, notes that as of the start of the European morning, the markets appear a lot calmer, with Treasury yields having barely moved, the dollar attempting to claw some way back and stock futures a lot less jittery.

Shortly, we get the readout on inflation for February, with the median estimates for on-month and on-year numbers forecast to show a deceleration.

There are two ways this could play out from the Fed’s perspective.

Scenario I:

The tumult in the markets continues, centered on concerns about the soundness of other regional US banks, liquidity ebbs – as it always does when the markets need it the most!

In such a scenario, what happens with the February inflation prints becomes a sideshow.

In other words, even a surprise, higher-than-forecast print won’t bother the Fed much.

After all, inflation is a pre-existing problem – and the Fed has time to battle this

Scenario II:

If the market jitters calm down, the inflation numbers – together with last week’s payroll data and upcoming retail-sales data – will take regain their predominance.

Even so, the chance of the Fed raising rates by 50 basis points is pretty much zilch.

Calming the markets about the prospect of a systemic crisis towers head and shoulders over inflation fighting from the Fed’s perspective.

After all, when a patient suffering a chronic condition meets with an accident, you treat the patient for life-threatening injuries first.

The long-stay illness isn’t the priority of the hour, as every good doctor knows.

…click on the above link to read the rest…

Silicon Valley Bank Crisis: The Liquidity Crunch We Predicted Has Now Begun

March 13, 2023

Silicon Valley Bank Crisis: The Liquidity Crunch We Predicted Has Now Begun

There has been an avalanche of information and numerous theories circulating the past few days about the fate of a bank in California know as SVB (Silicon Valley Bank). SVB was the 16^th largest bank in the US until it abruptly failed and went into insolvency on March 10^th. The impetus for the collapse of the bank is tied to a $2 billion liquidity loss on bond sales which caused the institution’s stock value to plummet over 60%, triggering a bank run by customers fearful of losing some or most of their deposits.

There are many fine articles out there covering the details of the SVB situation, but what I want to talk about more is the root of it all. The bank’s shortfalls are not really the cause of the crisis, they are a symptom of a wider liquidity drought that I predicted here at Alt-Market months ago, including the timing of the event.

First, though, let’s discuss the core issue, which is fiscal tightening and the Federal Reserve. In my article ‘The Fed’s Catch-22 Taper Is A Weapon, Not A Policy Error’, published in December of 2021, I noted that the Fed was on a clear path towards tightening into economic weakness, very similar to what they did in the early 1980s during the stagflation era and also somewhat similar to what they did at the onset of the Great Depression. Former Fed Chairman Ben Bernanke even openly admitted that the Fed caused the depression to spiral out of control due to their tightening policies.

In that same article I discussed the “yield curve” being a red flag for an incoming crisis:

…click on the above link to read the rest…

“Worst Since Lehman”: Banks Break The World Again

March 10, 2023

“Worst Since Lehman”: Banks Break The World Again

Last week we detailed BofA’s Michael Hartnett’s warning that “The Fed will tighten until something breaks”.

Well, something just broke…

SVB’s collapse – the second biggest US bank failure in history – dominated any reaction to this morning’s mixed bag from the BLS (hotter than expected earnings growth, rising unemployment (especially for Latinos), better than expected payrolls gains).

Things started off badly as SVB crashed 65% in the pre-market before being halted. SVB bonds were puking hard and when the FDIC headline hit, the bonds collapsed further…

Source: Bloomberg

A number of small/medium sized banks were clubbed like a baby seal…

Source: Bloomberg

And the KBW regional bank index crashed (down 9 of the last 10 days and 20% in that period). The 18% drop this week was the index’s worst drop since Lehman (Sept 2008)…

Source: Bloomberg

And as you’ll see below, that started to have some notable impacts on the most arcane of global systemic risk red flag signals…

TED Spread at YTD highs (systemic risk rising)
Global USD Liquidity tightest in 2023 (foreigners paying up for USDollars)
Global Bank Credit Risk rising

The worst week for stocks in 2023… On the week, all the US majors were down hard with Small Caps crashing 9%, S&P, Dow, and Nasdaq over 4% lower…

The Dow has been underwater on the year for over a week and is now down 4% in 2023. Today’s ugliness smashed the S&P 500 and Russell 2000 down to unchanged on the year…

Source: Bloomberg

All the US Majors are now back below their 200DMAs…

Unsurprisingly, financials were the week’s biggest sector laggards but all were red on the week…

VIX exploded higher on the day, back above 28 and recoupling with equity weakness…

Source: Bloomberg

…click on the above link to read the rest…

Central Bank Digital Currency Prison – Catherine Austin Fitts

March 7, 2023

Central Bank Digital Currency Prison – Catherine Austin Fitts

Catherine Austin Fitts (CAF), Publisher of The Solari Report, financial expert and former Assistant Secretary of Housing (Bush 41 Admin.), says the Central Bank Digital Currency (CBDC) is much easier said than done. There is a monster fight behind the scenes between commercial banks and central banks. CAF explains, “You have bubbled an entire economy, and now you are bringing out something (CBDC) that could shrink the bubble dramatically, and it can put a lot of banks out of the game and out of the business. If the central banks are going to compete directly for retail accounts, it’s going to shrink the fees and business for a lot of banks. You are talking about cutting their income or putting them out of business. So, CBDC is highly controversial. One reason is people are beginning to wake up and realize, oh, I am no longer an insider. CBDC is going to turn me into a slave, and they are going to be able to take all my assets. You think they could lock you down during the pandemic? The CBDC is the ultimate lockdown tool, and they can lock anyone down whenever they feel like it.”

The Fed’s biggest fear is losing control of the financial system. CAF says, “The Fed is scared to death of the global debt growth model, and they kept this model going by growing the debt more and more and more. Now, interest rates are accelerating in a way . . . it shrinks your productivity. So, the pie that is supporting the debt, is shrinking. . . . This is a coup model just like in Ukraine. You push all the people out or you kill them. You have war conditions so you can pick everything up cheap. You can do this with government money to ‘help’ Ukraine….

…click on the above link to read the rest…

Fed Fears Complete Economic Collapse – Peter Schiff

February 27, 2023

Fed Fears Complete Economic Collapse – Peter Schiff

Money manager and economist Peter Schiff said in October the Federal Reserve “could NOT win the fight on inflation by raising interest rates.” As inflation just turned up anew, it looks like he was right—again. Schiff explains, “Based on the recent data we got . . . the inflation curve has bent back up. The months of declining inflation are in the rearview mirror. Now, we are going to see accelerating inflation . . . and I think before the year is over, we are going to take out that 9% inflation high last year in year over year CPI (Consumer price Index) . . . and what that is going to show is what the Fed has done thus far in its inflation fight is completely ineffective. If the Fed is serious about fighting inflation, and I do not believe it is, it’s going to have to fight a lot harder than it has. Interest rates need to go up much higher than anybody thinks, but that alone is not going to do the trick. We also have to see a big contraction in consumer credit and lending standards rising so consumers can’t keep spending. . . . Consumers are running up credit card debt. That is inflationary. That is an expansion of the supply of credit.”

It gets worse when the Fed has to save the economy again. Schiff predicts, “I think the Fed is going to have to throw in the towel on the inflation fight because it will be fighting something it fears more, which is a complete economic collapse. . . .The federal government may be legitimately forced to cut Medicare and Social Security instead of illegitimately cutting it through inflation. . . .We have this collapsing standard of living, but think about it as a tax. This is what Americans are paying…

…click on the above link to read the rest…

Monetary Policy. Is The Fed Trying To Wean Markets Off Of It?

January 20, 2023

Monetary Policy. Is The Fed Trying To Wean Markets Off Of It?

Is the Fed trying to wean the markets off monetary policy? Such was an interesting premise from Alastair Crooke via the Strategic Culture Foundation. To wit:

“The Fed however, may be attempting to implement a contrarian, controlled demolition of the U.S. bubble-economy through interest rate increases. The rate rises will not slay the inflation ‘dragon’ (they would need to be much higher to do that). The purpose is to break a generalised ‘dependency habit’ on free money.”

That is a powerful assessment. If true, there is an overarching impact on the economic and financial markets over the next decade. Such is critical when considering the impact on financial market returns over the previous decade.

“The chart below shows the average annual inflation-adjusted total returns (dividends included) since 1928. I used the total return data from Aswath Damodaran, a Stern School of Business professor at New York University. The chart shows that from 1928 to 2021, the market returned 8.48% after inflation. However, notice that after the financial crisis in 2008, returns jumped by an average of four percentage points for the various periods.“

Monetary, Monetary Policy. Is The Fed Trying To Wean Markets Off Of It?

We can trace those outsized returns back to the Fed’s and the Government’s fiscal policy interventions during that period. Following the financial crisis, the Federal Reserve intervened when the market stumbled or threatened the “wealth effect.”

Many suggest the Federal Reserve’s monetary interventions do not affect financial markets. However, the correlation between the two is extremely high.

The result of more than a decade of unbridled monetary experiments led to a massive wealth gap in the U.S. Such has become front and center of the political landscape.

It isn’t just the massive expansion in household net worth since the Financial Crisis that is troublesome. The problem is nearly 70% of that household net worth became concentrated in the top 10% of income earners.

…click on the above link to read the rest…

Want to Know Where the Economy Is Going? Watch The Top 10%

January 19, 2023

Want to Know Where the Economy Is Going? Watch The Top 10%

Should the wealth effect reverse as assets fall, capital gains evaporate and investment income declines, the top 10% will no longer have the means or appetite to spend so freely.

Soaring wealth-income inequality has all sorts of consequences. As many (including me) have noted, the concentration of wealth and income in the top 0.1% has enabled the few to buy political influence to protect their interests at the expense of the many and the common good.

In other words, extreme wealth-income inequality dismantles democracy. There is no way to sugarcoat this reality.

But the concentration of wealth and income isn’t limited to the top 0.1% or top 1%. The top 5% and top 10% have increased their share of household wealth and income, too, and this has far-reaching consequences for the economy, as the top 10% accounts for the bulk not just of income but of spending.

According to the Federal Reserve, ( Distribution of Household Wealth in the U.S. since 1989), the top 1% owned 22.7% of all household wealth in 1989. Their share increased to 30.6% in 2022. The share of the 9% below the top 1% (90% to 99%) remained virtually unchanged at 37.4%. The top 10% own 68% of all household wealth.

But this doesn’t reflect the real concentration of income-producing assets, i.e. investments. Total household wealth includes the family home, the F-150 truck, the snowmobile, etc. What separates the economic classes isn’t their household possessions, it’s their ownership of assets that generate income and capital gains.

As the chart below shows, the top 10% own the vast majority of business equity, stocks/bonds and income-producing real estate, between 80% and 90% of each category.

This means the tremendous increases in asset valuations of the past two decades have flowed almost exclusively to the top 10%, with the important caveat that the vast majority of the gains in income and wealth have flowed to the top 0.1%, top 1% and top 5%.

…click on the above link to read the rest…

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