Tag Archives: central bank policies

How to Tackle the Depression Head On, by MN Gordon

To tackle a depression head on, the first step is to admit its inevitability, and to pretend that government and central bank debt and spending will prevent one only makes the problem worse. From MN Gordon at economicprism.com:

I want to see people get money.” – Donald J. Trump, U.S. President, September 17, 2020

“Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet.” – Steven Mnuchin, U.S. Secretary of the Treasury, September 14, 2020

Money for the People

The real viral contagion that has infected the American populace is not an illness of the body.  It’s something far worse than COVID-19.  The American populace is suffering from an illness of the mind.

The general malady, as we diagnose it, is the unwavering belief that the government has an endless supply of free money, and the expectation that everyone, except the stinking rich, has claim to it.  Why pursue self-reliance and independence when a series of stimulus acts promises the more abundant life?  This viral contagion’s really ripped through the population in 2020.

For example, just a year ago, the American populace thought they could all live off the forced philanthropy of their neighbors.  That to pay Paul you had to first rob Peter.  The CARES Act proved to Boobus americanus that, without a shadow of a doubt, there’s free ‘money for the people’ in Washington.  Sí se puede!

This week the Congress did its part to further the greatest show on earth.  The people want stimulus.  Congress intends to get to them, in good time.

Of course, the need to sprinkle the Country with printing press money was already a foregone conclusion.  There was no discussion of the wisdom of not having a stimulus bill.  The debate at hand was centered on how much.

Crazy Nancy wants $3.4 trillion.  Senate Republicans want $500 billion.  Something called the House Problem Solvers Caucus wants $2 trillion.

President Trump wants Republicans to “go for the much higher numbers.”  His rationale: “it all comes back to the USA anyway (one way or another!).”

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The 21st Century Is Marked By Crisis and Political Division, by Bill Bonner

We’re twenty percent into the 21st century and it hasn’t been a great start. From Bill Bonner at rogueeconomics.com:

Week 26 of the Quarantine

In this bright future, you can’t forget your past.

– Bob Marley

SAN MARTIN, ARGENTINA – What a colossal flop!

We’re talking about the 21st century. A failure in almost every way.

We now have 30 million people on unemployment – nearly 20% of the labor force.

We have a budget deficit of nearly 20% of GDP.

And, despite already spending $2 for every $1 they collect in taxes, the feds are planning to spend more.

We have phony “conservatives” waving the flag… and real radicals trying to tear it down. On both sides are more and more loonies, locked and loaded…

Even many of our own dear readers are ready to go to war with each other. This is from yesterday’s mailbag:

Hey Dude, we are at WAR! Trump leads the Win-the-War Party! The Neo Repubs are the “What? Me, worry?” Party. And you are like the pet dog nipping at the heels of the soldiers marching past!

No matter the cost, we must win the war against socialism and the Ds. There is time enough to purify ourselves after we win! If we lose, it will be a “thousand years” before our experiment is tried again… Meanwhile it is your obligation to support those who are fighting, regardless of technique and strategy… TRUMP!

Nasty Themes

It is hard to figure out how an administration that declares a moratorium on rent collection, stifles free trade, and runs a deficit of 20% of GDP could save us from socialism… But in this great 21st-century future, wonders never cease.

This week, in this “new normal,” we’ve been trying to remember what the “old normal” was like. And was it really better? Or is it just us?

We recalled what it must have been like when we were born. Of course, it was a very different world back then.

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The Fed and the looming capital market meltdown, by Tuomas Malinen

Massive fiat debt issuance is just digging the hole deeper. From Tuomas Malinen at gnseconomics.com:

The Federal Reserve system made a future financial panic or currency panic impossible. It made stable for the first time in the history of the United States the credit system of the people of the United States. – Senate Documents, 64th Cong., 1st Sess., December 6, 1916

We have been watching the “shock-and-awe” bailout of the financial system by the Federal Reserve with astonishment.  Never before has a central bank tried single-handedly to rescue both the financial system and a large proportion of U.S. corporations. We were taken aback then by Fed actions and are now just as worried about what it has given birth to.

We are unfortunately now in a situation where we cannot speak of “markets” anymore. The Fed has nurtured a dangerous, centrally controlled financial system, á la the Soviet Union. Like its ‘role model’, monolithic systems always fail, as the complexity of financial interactions and the economy will eventually overwhelm the central planners.

Alas, we fear that we are approaching the breaking point of the modern financial order.

The Federal Reserve

After the collapse of banks of the families Peruzzi and Bardi in 1343 and 1346 (the first financial crisis of the Middle Ages), a discussion about a ‘liquidity back-stop’ of the banking system began. The idea of the modern central bank emerged.

For the same reasons, the ‘Panic of 1907’ was a game-changer in an attempt to create a central bank in the US. To put a stop to the bank runs, a coalition led by the illustrious banker J.P. Morgan repeatedly intervened to restore the solvency of several New York banks, which in turn gave more impetus to demands that the U.S. banking system required a permanent institutional source of liquidity.

However, the creation of the Federal Reserve system, in 1913, was beset by worries that it would lead to the “socialization” of the economy. To calm these fears, the authority of the Fed to issue legal tender (or “currency”) was restricted by both the ‘real bills doctrine’ and the distribution of financial power.

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The Quiet American Reset, by Alastair Crooke

Why not just have the Fed stick its fiat debt instruments directly into people’s bank accounts or bank cards? From Alastair Crooke at strategic-culture.org:

The great de-coupling is here. The U.S. now has plan a to purge Chinese tech companies fully from America’s internet, creating what the Trump administration has dubbed the Clean Network. It mirrors the White House’s existing 5G Clean Path initiative to remove all Chinese components from systems ‘everywhere’, and which now extends it to everything tech on the ‘net.

China fears a financial ‘Iron Curtain’ is about to fall – a complete expulsion from the dollar sphere. In fact, soft capital control is already birthing, with Bloomberg reporting that the U.S. is now asking colleges and universities to divest from Chinese holdings in their endowments, “warning schools in a letter this last week, to get ahead of potentially more onerous measures [coming] on those holding the shares”.

Reportedly, the Chinese leadership annual August Beidaihe retreat, agreed (should the recommendations be subsequently endorsed at the Central Committee plenum in October) that China should prepare for war; build food and energy reserves; establish the Eurasian continental economic system, recover its overseas gold and broaden the global RMB settlement system (including its digital Yuan) – and prepare for the complete interruption of relations with the U.S.

Yet, whilst the media focus is all on this ‘tech’ and ‘sphere’ de-coupling, something profound – and quite separate – is already shaping the global monetary order (quite apart from likely Chinese exclusion). It is set, in the longer term, to be more revolutionary – and contentious – than even ‘de-coupling’. It is getting sparse attention.

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Doubling down on failed policies with central bank digital currencies, by Alasdair Macleod

Whether it’s a piece of paper backed by nothing or a digital currency backed by nothing, phony-baloney money is still phony-baloney money. From Alasdair Macleod at goldmoney.com:

Many central banks are researching retail digital currencies, which if implemented, would allow them to issue a new currency directly to the public, managed on a centralised ledger bypassing commercial banks. While there is an element of feeling the need to address new private sector currency developments which threaten central bank monopolies, specific objectives are beginning to emerge.

This article does not consider technology issues, confining its comments to the policy objectives identified in an IMF survey of central banks.[i] It points out the dangers to individual freedom and why the application of a monetary policy extended to include central bank digital currencies are bound to fail.

Introduction

Fiat currencies are failing — let’s try something different. This seems to be the logic partly behind the feverish research by central banks into digital currencies (CBDCs). The central banks of the Bahamas, Ecuador, Ukraine and Uruguay have conducted limited scale pilot projects, and China is also reported to have planned trials through Meituan-Dianping, an on-line food retailer and two further Tencent backed companies, though the status of these projects is at the moment unclear.

These are retail CBDCs. With a retail CBDC, the central bank issues the new CBDC to the public, either through agents, such as commercial banks, or directly to the public, bypassing the current financial system entirely. An advantage claimed over existing fiat is that it is capable of providing access through mobile technology to everyone, including the unbanked. But these advantages are already available through credit and debit cards and e-money, stored in apps such as M-Pesa and AliPay. They work perfectly well, replacing the need for cash where cash is not necessarily available or desired by transacting individuals. Perhaps further development of these facilities could be seen to pose a threat to the fiat monopoly.

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The Tyranny of Groupthink, by David Stockman

As SLL recently said, “Your first duty is to think for yourself.” A lot of people are about to find out why. From David Stockman at lewrockwell.com:

The broad market (S&P 500) is trading at the highest forward PE multiples since November 1999, but the financial press is rife with mendacious piffle claiming there is no bubble. For example, in celebration of Tuesday’s all-time high on the S&P 500, one James Mackintosh of the Wall Street Journal minced no words:

Except, the Everything Bubble is in the imagination of the many investors complaining about it. First, it isn’t everything. Second, it isn’t a bubble….

Right. Supposedly, the above statement is true because energy sector stock prices are in the tank, but the market is being rationally led by the tech giants where allegedly solid prospects for earnings growth are being rewarded with higher PE multiples owing to ultra-low interest rates.

…. Lower rates mean profits further in the future matter more to the share price, so companies with steady earnings no matter what the economy does are worth more. Those that are sensitive to the economy are worth less, because future earnings are expected to be hit. Growth stocks do incredibly well, because their future earnings are expected to be higher and, at least for those thought immune to economic weakness, worth more as well thanks to lower rates.

Apply this framework and there’s no bubble. U.S. stocks are more highly valued than in the past because they are dominated by big growth stocks, themselves justifiably more highly valued thanks to low rates.

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As the Bubble Slowly Pops, the Economic Chain Reaction Is Now in Progress, by Max Rangely

Not even microscopic or negative interest rates can keep a debt bubble inflated forever. From Max Rangely at mises.org:

Much has been written about the economic consequences of covid-19, yet, just as in many of the analyses of the Great Depression and the 2008 crisis, the years of accumulating debt preceding the event do not attract the attention they deserve. Covid-19—or to be more precise, the lockdown—has initiated a cascading liquidation of the debt bubble that has been building for a generation. From the early 1980s, each recession has been responded to with iteratively lower interest rates. Following the bursting of the late 1980s credit bubble, Greenspan inaugurated the loosest monetary policy for a generation, creating the dotcom bubble. When this burst in 2000, it was responded to with even lower interest rates, reaching 1 percent from 2003–04, generating the housing bubble. When this burst in 2007/8, the response was 0 percent interest rates, turning a $150 trillion global debt bubble as it was then—already the largest In history—into a $250 trillion global debt bubble.

When central banks set interest rates it fundamentally distorts the pricing mechanisms of credit markets, just like price setting in other parts of the economy. Friedrich von Hayek won the Nobel Prize in 1974 for articulating that interest rates, like other prices, should be set by the market rather than central planning committees. We are not surprised when the government setting the price of food in Venezuela leads to food shortages, so we should not be surprised that 0 percent interest rates leads to a shortage in yield for investors, leading to a $250 trillion global debt bubble.

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Massive Stimulus Does Not Prevent Eurozone Slowdown, by Daniel Lacalle

Debt reaches a point of diminishing, and then negative, returns, especially when it’s used to fund government and its crony corporations. From Daniel Lacalle at dlacalle.com:

The ECB balance sheet has risen to 53.9% of GDP in July 2020. This compares to a 32% of the Federal Reserve and 33% of the Bank of England. This means a 1.78 trillion euro increase year-to-date. Furthermore, excess liquidity has soared to 2.9 trillion euro, a 1.2 trillion increase since January.

Added to this unprecedented monetary stimulus, the Eurozone has included a record-high 10% of GDP in various fiscal stimulus programmes. None of it has prevented the economy from showing signs of slowing down in August.

After a strong bounce in May and June, coming from the re-opening of most economies and the base effect, high frequency data compiled by Bloomberg Economics shows an evident slowdown in July and August. All economists that follow the eurozone economy are warning about the worrying weakening of leading indicators. The OECD has also published its July 2020 Leading Indicator Index which shows that economies like Spain are not just showing signs of weaker growth, but contraction. Italy continues to improve but at a slow pace, while France and Germany post declining growth levels.

The reason is evident. All the Eurozone monster stimulus is focused on perpetuating bloated government budgets and incentivising non-economic return or subsidized spending. The entire European Recovery Fund is clearly aimed at promoting white elephants disguised as green projects, but what is more concerning is that the Eurozone green deal includes more taxes and measures to prevent demand growth than productivity-enhancing plans.

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What You Will Find When You Follow the Money, by MN Gordon

Funny money delays but will not prevent a grand reckoning of the debt that’s been piling up for decades. From MN Gordon at economicprism.com:

It has been a rough go for California Governor Gavin Newsom.  Late last week it was revealed that the state Department of Public Health had tickled the poodle on its COVID-19 record keeping.  Somehow the bureaucrats in Sacramento undercounted new coronavirus cases by as many as 300,000.

Perhaps this oversight prompted Newsom to imbibe in a little meditation and reflection.  At his Wednesday coronavirus news conference, shortly after quoting Voltaire, Newsom offered the following epiphany:

“Businesses can’t thrive in a world that’s failing.”

Often the simplest insights into reality are the most essential.  We’ll give Newsom that.  Yet, this is hardly an insight.  Rather, it’s readily obvious…even to a numskull.

The world that’s failing, where businesses can’t thrive, is a direct consequence of government lockdown orders.  And Newsom, more than any other public official, has his fingerprints all over the offense.  If you recall, California, under Newsom’s command, was the first state to order lockdowns.  It’s a shame he didn’t pause for meditation before committing the state to ruin.

The dynamics of what would follow Newsom’s lockdown orders were predictable.  When government decrees froze the economy, bills were still due.  Yet many people’s incomes, in the form of paychecks, disappeared.

For businesses, outstanding accounts payable were still due.  Though accounts receivable quickly became overdue.  In short, the flow of cash, as delivered by an open economy of give and take, broke down.

Certainly, Newsom thought he was doing the right thing.  He had to keep everyone in the Golden State safe by locking them down.  Many governors followed Newsom’s lead, having the same disastrous results.

But that was just the beginning.  Soon the uplifters in Washington swung into action…

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An unexpected systemic crisis is for sure, by Alasdair Macleod

If you don’t think a financial crisis is on the way, check the stock market valuations and the balance sheets of the global systemically important banks. From Alasdair Macleod at goldmoney.com:

Downturns in bank credit expansion always lead to systemic problems. We are on the edge of such a downturn, which thanks to everyone’s focus on the coronavirus, is unexpected.

We can now identify 23 March as the date when markets stopped worrying about deflation and realised that monetary inflation is the certain outlook. That day, the Fed promised unlimited monetary stimulus for both consumers and businesses, and the dollar began to fall.

The commercial banks everywhere are massively leveraged and their exposure to bad debts and a cyclical banking crisis is now certain to wipe many of them out. In this article we look at the global systemically important banks — the G-SIBs — as proxy for all commercial banks and identify the ones most at risk on a market-based analysis.

Introduction

In these bizarre markets, the elephant in the room is systemic risk — visible to all but simply ignored. This is partly due to everyone in government and central banks, as well as their epigones in the investment industry and mainstream media, believing our economic problems are only a matter of Covid-19. In other words, when the pandemic is over normality will return. But Covid-19 has acted like a conjurer’s distraction: it has deflected us from the consequences of Trump’s trade wars with China and the liquidity strains that surfaced in New York last September when the repo rate soared to 10%.

The liquidity strains and the severe downturn in the stock markets that followed earlier this year before mid-March have been buried for the moment in a tsunami of central bank money. Liquidity problems following last September’s repo crisis and the S&P 500 index collapsing by one third between 19 February and 23 March were a clear signal that the multiyear cycle of bank credit expansion had already peaked. Ever since the last credit crisis in 2008, the banks had recovered their lending confidence and expanded bank credit, a classic expansionary phase.

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