Category Archives: Money

Markets Suddenly Hear Hawkish Fed: Stocks Sag, ARKK Plunges, Yields Jump, Cryptos (the New Hedge Against Inflation) Fail to Hedge, Plunge in Sync, by Wolf Richter

The air is coming out of the balloon. From Wolf Richter at wolfstreet.com:

Quantitative Tightening coming sooner, faster, and bigger, according to the Fed’s minutes today.

Markets were blissfully asleep late last year, and particularly in December, when the Fed became hawkish and made clear that it would move much faster than previously expected, and that there would be more rate hikes sooner, and that the balance sheet runoff – Quantitative Tightening – was already being discussed. And Powell came out after the FOMC meeting on December 15 and said that inflation was now a “big threat.”

And I came out and said at the time that this most reckless Fed ever – still repressing interest rates to near 0% and still printing money hand over fist, though at a slower rate – was “starting to get serious” about inflation. Upon which the markets laughed.

And today, we got the minutes from that meeting, and suddenly it sank in for the markets that the Fed, after brushing off inflation for a year, is getting serious about inflation.

The terms “elevated levels of inflation,” “elevated inflation,” and “elevated inflation pressures” were mentioned five times in the minutes.

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Gold and silver prospects for 2022, by Alasdair Macleod

The prospects for gold and silver next year resemble the metals themselves: bright and shiny. From Alasdair Macleod at goldmoney.com:

It has been a disappointing year for profit-seeking precious metal investors, but for those few of us looking to accumulate gold and silver as the ultimate insurance against runaway inflation it has been an unexpected bonus.

After reviewing the current year to gain a perspective for 2022, this article summarises the outlook for the dollar, the euro, and their financial systems. The key issue is the interest rate outlook, and how that will impact financial markets, which are wholly unprepared for the consequences of the massive expansions of currency and credit over the last two years.

We look briefly at geopolitical factors and conclude that Presidents Putin and Xi have assessed President Biden and his administration to be fundamentally weak. Putin is now driving a wedge between the US and the UK on one side and the pusillanimous, disorganised EU nations on the other, using energy supplies and the massing of troops on the Ukrainian border as levers to apply pressure. Either the situation escalates to an invasion of Ukraine (unlikely) or America backs off under pressure from the EU. Meanwhile, China will continue to build its presence in the South China Sea and its global influence through its silk roads. Less appreciated is that China and Russia continue to accumulate gold and are ditching the dollar.

And finally, we look at silver, which is set to become the star performer against fiat currencies, driven by a combination of poor liquidity, ESG-driven industrial demand and investor realisation that its price has much catching up to do compared with lithium, uranium, and copper. The potential for a fiat currency collapse is thrown in for nothing.

2021 — That was the year that was

This year has been disappointing for precious metals investors. Figure 1 shows how gold and silver have performed since 31 December 2020.

Having lost as much as 11.3%, gold is down 6.5%. And silver, which at one stage was down 19.3% is down 15%. Admittedly these returns followed strong gains in 2020, so 2021 could be described as a year of consolidation.

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IMF, World Bank & 10 Countries Held Alarming “Simulation” Of Global Financial System Collapse, by Tyler Durden

Any similarity to the pandemic simulation held a few months prior to the Covid outbreak is purely coincidental. From Tyler Durden at zerohedge.com:

Earlier this month Reuters produced a report which didn’t receive nearly enough attention among the American public – its contents would be sure to alarm most people concerned with the outbreak of yet more ‘global catastrophes’. At the very least it’s curious timing: amid the recent pandemic induced disruption in global supply chains, powerful nations and banking institutions decided to get together to run a global economic collapse scenario.

The report described that Israel led a “10-country simulation of a major cyber attack on the global financial system in an attempt to increase cooperation that could help to minimize any potential damage to financial markets and banks.” It was centered on a catastrophic scenario in which “hackers were 10 steps ahead of us,” according to one official who took part.

Collapse, illustrative image via Reuters

Dubbed “Collective Strength”, the exercise was held in Jerusalem (after being moved from the original proposed location of Dubai) and included the participation also of the United States, UK, United Arab Emirates, Austria, Switzerland, Germany, Italy, the Netherlands and Thailand. Officials from the International Monetary Fund (IMF), World Bank and Bank of International Settlements were also involved.

The financial-geopolitical gaming simulation was set amid a scenario where sensitive data was leaked on the Dark Web, which combined with “fake news” reports going viral across societies, resulting in the collapse of global markets and an ensuing run on banks. Further, the simulation envisioned a series of devastating hacks targeting global foreign exchange systems, which also disrupted transactions between importers and exporters, according to Reuters.

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The credit cycle and zombies’ downfall, by Alasdair Macleod

Once interest rates start moving up in earnest and credit begins to contract rather than expand, financial asset prices will fall and economies will contract. From Alasdair Macleod at goldmoney.com:

Leading central banks like to think that through careful interest rate management, they have tamed the economic cycles which lead to regular economic downturns. Instead, they have only managed to bury the evidence.

To appreciate the extent of their delusion one must understand the source of economic instability. In modern times it has always been driven by a cycle of bank credit. In this article the role of commercial banking in this regard is explained. The effect on non-financial economic sectors in the context of Hayek’s triangle under today’s currency regime is re-examined.

With cyclical variations in the economy buried under a tsunami of currency, market participants are oblivious to the dangers of a cyclical downturn in bank lending and the consequences that flow therefrom.

This article gives the problem its economic and monetary context. It concludes that the global banking system is horribly over-leveraged and, with empirical evidence as our guide, on the edge of a bank credit contraction of historic proportions, likely to undermine the entire fiat currency system.

Introduction

Readers of articles that dissent from the mainstream media’s complacency might be aware that there are many zombie corporations which only exist courtesy of low interest rates or government support. The story often goes further. These are businesses loaded to the gunwales with unproductive debt, vulnerable to being swamped and sunk by higher interest rates. The extent of the problem is undoubtedly greater than most people think.

We have arrived at this point with economies around the globe cluttered with unproductive businesses which would otherwise have been cleared out in an unsuppressed interest rate environment. Schumpeter’s process of creative destruction would have done its work. Without it, the current situation presents enormous dangers now that with price inflation rising, interest rates will almost certainly increase in the coming months. Central banks appear to be conscious of this danger, given their evident reluctance to permit rates to rise, even fractionally. Rising interest rates also blow holes in their narrative, that they have succeeded in managing economic cycles out of existence.

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House votes to put billions more in military spending on the credit card, by Andrew Lautz

What if they held a war and the U.S. government had maxed out its credit card? It’s certainly happened to other governments. From Andrew Lautz at responsiblestatecraft.org:

What would happen if we tied a tax to each budget hike? Don’t ask, it won’t happen

It’s nearing mid-December, which for many Americans means wrapping up their work for the year and figuring out when, where, and how they’re going to obtain holiday gifts for their loved ones. Unfortunately for those of us whose job it is to follow Congress, the potential flurry of activity for the month is just getting started.

This week on Capitol Hill features votes on two measures that are unrelated at face value but inextricably tied at the hip in practice: an increase in the federal government’s debt ceiling and a final, “compromise” version of the annual defense policy bill (also known as the National Defense Authorization Act or NDAA) negotiated between the House and the Senate. As of this writing, the House had passed both measures on Tuesday.

Neither Republicans nor Democrats in Congress really think of defense spending as contributing to the nation’s debt and deficits — even though they should. Unlike some so-called “mandatory” spending programs like Social Security, which are supposed to be self-funding through dedicated revenue streams like the payroll tax, there is no dedicated tax to fund our military budget. And even as federal revenues fall hundreds of billions of dollars short of meeting the government’s spending commitments and choices year after year, lawmakers rubber-stamp multi-billion dollar increases in the defense budget without batting an eye.

Would those big budget increases — which often go to military goodies like the failing F-35 program and an extra Navy destroyer — happen if Congress needed to raise taxes every time they increase the military budget, like they did in 1917 with the War Revenue Act? Maybe, and maybe not.

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Interest rates, money supply, and GDP, Alasdair Macleod

Alasdair Macleod is one of the few economists out there who actually touts honest economics and is not just a political whore. From Macleod at goldmoney.com:

That the world is on the edge of a monetary and economic cliff is becoming increasingly obvious. And becoming more obviously permanent than transient, price inflation will almost certainly lead to rising interest rates. Rising bond yields, falling equity markets and debt-triggered insolvencies will naturally follow.

According to the economists prevalent in official circles, a prospective mix of so-called deflation and rising prices are contradictory, should not happen at the same time, and therefore cannot be explained. Yet that is the prospect they now face. The errors in their lack of economic judgement have evolved from the time when central banks began to manipulate their currencies to achieve economic objectives and then to subsequently dismiss the evidence of policy failure. It has been a cumulative process for the Federal Reserve and the Bank of England since the 1920s, which can only now end in a final catastrophic failure.

The denial of reasoned economic theory, embodied in a preference by state actors for state-driven outcomes over free markets, has led to this cliff-edge. This article explains some of the key errors in economic and monetary theory that have taken the world to this point — principally the relationships between interest rates, money supply, and GDP.

Introduction

Following the First World War, central banks have not only acted as lender of last resort, which was the role the Bank of England and its imitators took on for themselves in the preceding decades, but they have increasingly tried to manage economic outcomes. The trail-blazer was pre-war Germany which grasped Georg Knapp’s state theory of money as justification for Prussia’s socialism by currency, eventually ending with the collapse of the paper mark in the post-war years. But the genesis of today’s monetary policies has its foundation in the then newly constituted Federal Reserve Bank, chaired by Benjamin Strong, who in the 1920s collaborated with Norman Montague at the Bank of England who was struggling to contain Britain’s post-WW1 decline.

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Evil Is the Root of All (Fiat) Money, by Egon von Greyerz

The title is not hyperbole, because all fiat money is essentially fraudulent. From Egon von Greyerz at goldswitzerland.com:

“So you think that money is the root of all evil. Have you ever asked what is the root of all money?”
-Ayn Rand

Money used to be a stable medium of exchange and a store of value but that was in the days when there were sound monetary principles, mostly backed by gold or silver.

Since 1913 and especially 1971 there is no discipline and no morals when it comes to the issuing of money as unlimited amounts of fake fiat money is printed at will.

In today’s fiat money world, there is only one answer to Rand’s question “What is the root of all money?”, namely:

“Evil is the root of all fiat money.”

– Egon von Greyerz

On the IMF (International Monetary Fund) website there is an article stating that “Money is something that holds its value” – Hmmm…..

The meeting of bankers and politicians on Jekyll Island in November 1910 laid the foundations for the Federal Reserve Bank. Three years later in 1913 the Fed was founded.

From that moment on, private bankers were running the US monetary system including the printing of money. But the British pound, backed by gold until 1931, was the global currency of choice until then.

CURRENCY SYSTEMS ARE EPHEMERAL

The Bretton Woods Agreement in 1944 established a new currency system based on the dollar. From that time, all major currencies were pegged to the US dollar and the dollar itself was pegged to gold at $35 per ounce. The dollar thus became the world’s reserve currency bolstered by big gold reserves. These were accumulated gradually from the early 1900s to the late 1940s. The US received payment in gold during WWII from its sales of arms and other supplies.

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Returning to sound money, by Alasdair Macleod

Sound money is a currency freely convertible into gold and silver at set exchange rates. It’s a monetary straight jacket that keeps the government reasonably honest (at least compared to fiat money systems). From Alasdair Macleod at goldmoney.com:

With the threat of dollar hyperinflation now becoming a reality it is time to consider what will be required to stabilise the currency, and by extension the other fiat currencies which regard the dollar as their reserve.

This article takes its cue from Ludwig von Mises’s 1952 analysis of what was required to return to a proper and enduring gold standard —metallic money, particularly gold, having been sound money for thousands of years, to which everyone has always returned when government fiat currency fails.

When Mises wrote his 1952 article the dollar was nowhere near the state it is in today. But Mises had had practical experience of what was involved, having advised the Austrian government during and after its hyperinflation of the early 1920s, making his analysis doubly relevant.

As a remedy for the developing collapse of the dollar, this article can do little more than address the major issues. But it shows how an economic and monetary collapse of the dollar can be turned to advantage — the opportunity it creates through the destruction of Keynesian and other inflationist fallacies to secure long-term economic and monetary stability under which economic progress can be maximised.

Introduction

There are two charts which sum up why the dollar and fiat currencies tied to it will collapse if current monetary policies persist, shown in Figure 1.


The growth in the M1 quantity since February 2020 has been without precedent exploding from $4 trillion, already an historically high level, to nearly $20 trillion this September. That is an average annualised M1 inflation of 230%. It is simply currency debasement and has yet to impact on prices fully. Much of the increase has gone into the financial sector through quantitative easing, so its progress into the non-financial economy and the effects on consumer prices are delayed — but only delayed — as it will increasingly undermine the dollar’s purchasing power.

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The futility of central bank policy, by Alasdair Macleod

Central banks are between a rock and a hard place like they haven’t been since the 1970s. From Alasdair Macleod at goldmoney.com:

t is only now becoming clear to the investing public that the purchasing power of their currencies is declining at an accelerating rate. There is no doubt that yesterday’s announcement that the US CPI rose by 6.2%, compared with the longstanding 2% target, came as a wake-up call to markets.

Along with the other major central banks, the Fed’s reaction is likely to be to double down on interest rate suppression to keep bond yields low and stock valuations intact. The alternative will lead to a major financial, economic and currency shock sooner rather than later.

This article introduces the reader to some of the basic fallacies behind state currencies. It explains the misconceptions policy planners have over interest rates, and how central banks have become contracyclical lenders, replacing commercial banking’s credit creation for non-financial activities.

In effect, narrow money is being used by the major central banks in a vain attempt to shore up government finances and economic activity. The consequences for currency debasement are likely to be more immediate and profound than cyclical bank credit expansion.

Introduction

It is becoming clear that there has been an unofficial agreement between the US Fed, Bank of England, the ECB and probably the Bank of Japan not to raise interest rates. It is confirmed by remarkably similar statements from the former three in recent days. When, as the cliché has it, they are all singing off the same hymn sheet, those of us not party to agreements between our monetary policy planners are right to suspect they are doubling down on a market rigging exercise encompassing all financial markets.

That these policy planners are clueless about money and economics escapes nearly everyone affected. It is assumed the so-called experts know what they are doing. But for nearly a century, universities have promoted statist beliefs on their economics courses to the exclusion of reasoned theory leading to the current situation. In modern times it started with Georg Knapp’s Chartalist movement in Germany before the First World War. And it really took off with Keynes’s General Theory published in 1936. The essence of it has been state attempts to dehumanise economics; to turn economic actors, that is you and me, into predictable components in a mathematical economy.

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Did Glasgow Deliver ‘Blah, Blah, Blah’? By Patrick J. Buchanan

When you cut through the copious crap surrounding confabs like the recent one in Glasgow, it boils down to demands for money. From Patrick J. Buchanan at buchanan.org:

At the end of the first week of the Glasgow climate summit, 100,000 protesters marched to denounce the attendees as phonies who will never honor their commitments to curb carbon emissions.

Despite pledges by 100 nations to reduce methane emissions by 30% by 2030, and by 20 nations, including the U.S., to end financing of new international fossil-fuel power plants, teenage climate superstar activist Greta Thunberg says the COP26 summit is a con:

“Two weeks of business as usual, blah, blah, blah!”

Thunberg has a point.

Commitments made in Scotland are not binding upon governments that, be they autocratic or democratic, do not subordinate their national interests to pledges ostentatiously made in global forums.

This Glasgow summit calls to mind the Kellogg-Briand Pact, which won a Nobel Peace Prize for Secretary of State Frank Kellogg,

On Aug. 27, 1928, 15 High Contracting Parties signed on to renounce war as an instrument of national policy. The signatories that day were the United States, Britain, Germany, Italy, Japan, France, Poland, Belgium, Czechoslovakia, Canada, South Africa, Australia, New Zealand, Ireland and India. Within 15 years, all 15 nations, Ireland alone excepted, were ensnared in the greatest war in history.

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