Tag Archives: central bank policies

The Bubble Economy’s Credit-Asset Death Spiral, by Charles Hugh Smith

It was a lot more fun on the way up than it will be on the way down. From Charles Hugh Smith at oftwominds.com:

Who believed that central banks’ financial perpetual motion machine was anything more than trickery designed to generate phantom wealth?

Central banks seem to have perfected the ideal financial perpetual motion machine: as credit expands, money pours into risk assets, which shoot higher under the pressure of expanding demand for assets that yield either hefty returns (junk bonds) or hefty capital gains as the soaring assets suck in more capital chasing returns.

As assets soar in value, they serve as collateral for more credit. Higher valuations = more collateral to borrow against. This open spigot of additional credit sluices capital right back into the assets that are climbing in value, pushing them higher–which then creates even more collateral to support even more credit.

This self-reinforcing feedback of expanding credit feeding expanding valuations feeding expanding collateral which then feeds expanding credit has no apparent end. Modest houses once worth $100,000 are now worth $1,000,000, and nobody’s complaining except those priced out of the infinite spiral of prices and credit.

For those priced out of traditional assets, there’s NFTs, meme stocks and short-duration options. The credit-asset bubble-economy casino has a gaming table for everyone’s budget and desire to “make it big” via speculation, since the traditional ladders to middle-class security have all been splintered.

This financial perpetual motion machine distorts traditional incentives. Why bother renting a house bought for speculative gains? Renters are problematic, better to just let it sit empty and rack up huge capital gains.

Continue reading→

Without Easy Money from the Fed, Home Prices Will Keep Falling, by Ryan McMaken

Monetary inflation fuels asset price increases. Houses are an asset. From Ryan McMaken at mises.org:

Home price growth of the sort we’ve seen in recent years simply cannot be sustained without a continued commitment to easy money from the central bank, and it shows.

Home prices continued to slide in August as the economy cooled, and as the Fed hit the Pause button on quantitative easing while allowing interest rates to rise. Home prices in August were 13.0 percent higher nationally compared with August 2021, according to newly released data from the S&P CoreLogic Case-Shiller Home Price Index. That is down from a 15.6 percent annual gain in the previous month. This is a big shift downward, and as CNBC reported Tuesday, “The 2.6% difference in those monthly comparisons is the largest in the history of the index, which was launched in 1987, meaning price gains are decelerating at a record pace.” The new trend was further described by a Case-Shiller spokesman as “forceful deceleration in U.S. housing prices … [while] price gains decelerated in every one” of the twenty cities measured by the survey. Every city in the index saw a larger year-over-year decline in August than in July. (In the seasonally adjusted numbers, the month-over-month decline was the largest since 2009.)

cs

However, even with this rapid deceleration, the year-over-year growth is still similar to what was reported in the boom period of the last housing boom, in 2005. YOY growth peaked at 14.5 percent, year over year, in September 2005, but turned negative by March of 2007. Home price growth during the current cycle appears to have peaked during April of this year at 20.8 percent, but has rapidly moved downward in the four months since.

Continue reading→

Cycles are driven by credit, by Alasdair Macleod

We’re living through the final crack-up of central banking. From Alasdair Macleod at goldmoney.com:

Central bankers’ narratives are falling apart. And faced with unpopularity over rising prices politicians are beginning to question central bank independence. Driven by the groupthink coordinated in the regular meetings at the Bank for International Settlements, they became collectively blind to the policy errors of their own making.

On several occasions I have written about the fallacies behind interest rate policies. I have written about the lost link between the quantity of currency and credit in circulation and the general level of prices. I have written about the effect of changing preferences between money and goods and the effect on prices.

This article gets to the heart of why central banks’ monetary policy was originally flawed. The fundamental error is to regard economic cycles as originating in the private sector when they are the consequence of fluctuations in credit, to which we can add the supposed benefits of continual price inflation.

Continue reading→

Value destruction, by Alasdair Macleod

Destroying the value of a debt-based fiat currency destroys the value of a lot of other assets as well. From Alasdair Macleod at goldmoney.com:

In recent articles I have argued that the era of a financialised fiat dollar standard is ending. This article takes my hypothesis further and explains that it is not just the emergence of new commodity backed currencies in Asia that will threaten the dominance of Western currencies, but the Fed’s failing monetary policies and those of the other major central banks. An unstoppable rise in interest rates will in large part be responsible for their demise.

Financial markets in thrall to the state underestimate the forces collapsing the financial bubble. Even the existence of the bubble is disputed by those within its envelope. But financial assets represent most of the collateral securing the banking system, and their collapse triggered by higher interest rates will take out businesses, banks, even central banks and make financing of soaring government deficits impossible without accelerated currency debasement.

Will central banks try to preserve financial asset values to stop the West’s financial system from imploding? Keynesian theory demands increased deficit spending to counteract the contraction of bank credit.

Continue reading→

Why Markets Always Beat Central Bankers and Presidents, by David Stockman

Economies have never, cannot be, and never will be controlled from above, buy either governments or central banks. From David Stockman at internationalman.com:

Beat Central Bankers
Goodness me, even the Wall Street Journal is catching on. In a piece about the inflationary rebound theory of a former UK central banker named Charles Goodhart, it actually tees-up the possibility of high inflation for a decade or longer due to an adverse, epochal shift in the global labor supply.

He argued that the low inflation since the 1990s wasn’t so much the result of astute central-bank policies, but rather the addition of hundreds of millions of inexpensive Chinese and Eastern European workers to the globalized economy, a demographic dividend that pushed down wages and the prices of products they exported to rich countries. Together with new female workers and the large baby-boomer generation, the labor force supplying advanced economies more than doubled between 1991 and 2018.

He got that right. Now, however, the working-age population has started shrinking for the first time since World War II in developed economies, compounded by an ever more generous banquet of Welfare State free stuff that is shrinking the available labor pool even further. At the same time, China’s working force is expected to contract by a staggering 20% over the next three decades.

Needless to say, as global labor becomes more scarce, developed world workers will finally have bargaining leverage to push up their own previously stagnant wages. In the US leisure and hospitality sector, for instance, where worker shortages are most acute, Y/Y wage gains have averaged 15% for the last three months running.

Continue reading→

Serf-Expression, by Charles Hugh Smith

What happens when we serfs get uppity? From Charles Hugh Smith at oftwominds.com:

Eventually the “flock of timid and industrious animals” changes their minds about how much exploitation by the few is acceptable.

You may have noticed the news flow beyond the hot war in Ukraine is largely focused on capital: financial capital (markets, liquidity, interest rates, commodities, central bank tightening, etc.) and political capital (geopolitical maneuvering, sanctions, revising energy and defense policies, etc.)

Notice who’s left out, unnoticed and invisible? The serfs, the bottom 90% who have been decapitalized in the developed world and exploited in the developing world for the past 45 years.

With capital ascendant, the vast majority of financial and political gains flowed to the top tier of speculative capital (banks and billionaires) while the purchasing power of labor (i.e. wages) has been in a 45-year descent. (See chart below)

This disemboweling of labor transferred $50 trillion from labor to capital in the U.S. alone. Financialization and globalization devalued labor and working-class assets such as savings and boosted leveraged speculative bets only available to financiers and corporations, for example, stock buybacks funded by the tsunami of free money for financiers unleashed by the Federal Reserve and other central banks. (See chart below)

Even though the corporate media gives it no notice, serf-expression will become increasingly consequential. No, serf-expression is not a typo for self-expression, the core doctrine of modernism. By serf-expression I mean the serf’s expression of what is no longer acceptable. Another term for this is cultural revolution. I address social and cultural revolutions in my new book, Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States.

Continue reading→

Our Leaders Made a Pact with the Devil, and Now the Devil Wants His Due, by Charles Hugh Smith

Faustian bargains always have a way of making those who made them deeply regret it. From Charles Hugh Smith at oftwominds.com:

The unprecedented credit-fueled bubbles in stocks, bonds and real estate are popping, and America’s corrupt leaders can only stammer and spew excuses and empty promises.

Unbeknownst to most people, America’s leadership made a pact with the Devil: rather than face the constraints and injustices of our economic-financial system directly, a reckoning that would require difficult choices and some sacrifice by the ruling financial-political elites, our leaders chose the Devil’s Pact: substitute the creation of asset-bubble “wealth” in the hands of the few for widespread prosperity.

The Devil’s promise: that some thin trickle of the trillions of dollars bestowed on the few would magically trickle down to the many. This was as visibly foolish as the promise of immortality on Planet Earth, but our craven, greedy leadership quickly sealed the deal with the Devil and promptly inflated the greatest credit-asset bubble in human history.

Rather than trade away one’s soul, America’s leaders traded away the future security and stability of the nation. By refusing to deal with the real problems exposed by the collapsing financial scams in 2008-09, our leaders–both the unelected Federal Reserve and the elected “best government money can buy”–chose to bail out the scammers who had greased their palms so generously and sacrificed the prosperity of the many to do so.

Continue reading→

The Double Helix of Entwined Pandemic and Economic Strategy, by Alastair Crooke

When your economy runs on credit, you need a never ending stream of crises to justify never ending government and central bank injections of fiat debt. The Covid outbreak is the latest excuse for fiat debt creation. From Alastair Crooke at strategic-culture.org:

The corollary to the collapse of the technocratic initiative to liquify the over-leveraged economy might well be recession, Alastair Crooke writes.

Three years ago, I said to an American Professor from the US Army War College in Washington, in respect to the campaign to return American lost Blue Collar jobs to Asia, that these jobs would never return.  They were gone for good.

He retorted that that was precisely so, but I was missing the point, he said. America did not expect, or want, the majority of those humdrum manufacturing jobs back. They should stay in Asia. The Élites, he said, wanted only the commanding heights of Tech. They wanted the intellectual property, the protocols, the metrics, the regulatory framework that would allow America to define and expand across the next two decades of global technological evolution.

The real dilemma however, he said was, “What is to be done with the 20% of the American workforce that would be no longer needed: that was no longer necessary to the functioning of a tech-led US economy?”

In fact, what the Professor said was but one facet of a fundamental economic dilemma. From the seventies and eighties onwards, US corporations were busy offshoring their labour costs to Asia. Partly, this was to cut costs and increase profitability (which it did) — but it also represented something deeper. 

From the outset, the US has been an expansionary empire ever digesting new lands, new peoples, and their human and material resources. Forward motion, the continuous military, commercial, and cultural expansion became the lifeblood of Wall Street and of its foreign polity. For, absent this relentless expansion, the civic bonds of American unity fall into question.  An America not in motion is not America.  This forms the very essence of US leitkultur.

Continue reading→

Red Friday: A Little Dip and Already the Crybabies on Wall Street are Clamoring for the Fed to Soothe their Pain, by Wolf Richter

There’s nothing like a strong down day on the stock markets to get the easy money crowd to start clamoring for a bailout. From Wolf Richter at wolfstreet.com:

But raging inflation is a political bitch, and the White House got the Fed to acknowledge it, and that changes the equation.

Stock markets closed at 1 p.m. today, and there wasn’t enough time to rectify this evil situation that has emerged on Black Friday, when stocks were supposed to be meandering higher on very low volume, driven by a few algos that would make sure stocks meandered higher to easily book another winning day and a new record high for the S&P 500 to keep the hype going.

But the sellers had arrived overnight while the buyers suddenly weren’t super-interested at buying at these ridiculously inflated record prices after the largest and fastest money printing scheme ever. And voilà. What everyone knew would happen someday, happened on this Red Friday, and stocks swooned.

And already the crybabies on Wall Street have come out in force, clamoring for the Fed to end the tapering of its asset purchases, and to push out the expected interest rate hikes into distant infinity, and to maybe even re-start QE all over again before they even ended it, because, you know, stocks aren’t ever allowed to drop, not even a little bit off their ridiculously inflated highs.

But the Fed, unlike before, has bigger worries for the first time in four decades – and Powell and Brainard, along with just about every other Fed governor have acknowledged it: Raging consumer price inflation that has now spread broadly across and deeply into the economy, filtering into services such as rents that are unrelated to transportation mayhem and production shortfalls in Asia. Rents, accounting for about one-third of CPI, are just now getting started to flex their muscles in the inflation indices. And the mood of consumers has soured.

Continue reading→

Pre-2020 Prices are Gone Forever, by MN Gordon

You can’t keep monetary inflation hidden forever. Every day thousands of Americans are realizing their dollars are being debased. From MN Gordon at economicprism.com:

Price inflation is completely out of hand.  You know this.  Your dog knows it too.

Still, President Joe Biden wants you to believe he’s got it all under control.  Last month, for example, White House Press Secretary Jen Psaki insisted inflation is decreasing.  What a crock!

That was about the time White House chief of staff Ron Klain – an absolute goober – endorsed Jason Furman’s claim that America’s inflation and supply chain problems only affect a small part of the U.S. population.  Furman, a former Obama administration economist and economics professor at Harvard University, also tweeted that “most of the economic problems we’re facing … are high class problems.”

Ivory tower thinking like this has turned Washington into a land of idiots.  The elites are completely detached from reality.  And their policies are wreaking havoc on working class and middle class Americans.  We can’t change this.  But we can revel in what it represents…

You see, one of the unspoken delights of the 21st century American experience is zeroing in on the precise moments when reality can no longer be covered up with lies.  Like when America invaded Iraq and didn’t find weapons of mass destruction.  Or when Fed Chair Ben S. Bernanke said impacts from problems in the subprime market were likely to be contained and then Lehman Brothers went belly-up.

This week price inflation attained this special status.  Reports fabricated by government bean counters could no longer bury the truth.

On Tuesday, the Labor Department reported the producer price index (PPI), which measures wholesale prices, increased in October at an annual rate of 8.6 percent.  Then, on Wednesday, the Labor Department reported the consumer price index (CPI) increased 6.2 percent in the last 12 months.

In truth, the CPI is rising at more than double the rate of what’s officially reported.  Nonetheless, the fact that the official CPI was reported at 6.2 percent documents a moment when reality could no longer be covered up with lies.  Mark it on your calendar.

And what’s this…

Continue reading→