Tag Archives: central bank policies

Quantitative easing: how the world got hooked on magicked-up money, by Ann Pettifor

Central banking is a gateway drug to quantitative easing and then, perpetual debt monetization. From Ann Pettifor at prospectmagazine.co.uk:

Going cold turkey would finish off a dysfunctional global financial system that’s now hopelessly addicted to emergency infusions. The only solution is surgery on the system itself

The world economy is a mess. The system, notionally governed by the invisible hand of the market, is no longer governed in any meaningful way: private excess puffs up bubbles that government indulgence ensures can never burst. We seem condemned to volatile commodity prices, wild capital flows, worsening imbalances in trade, taxation and income, and—before long—the next sovereign debt crisis. And then there’s inequality. During lockdown, the total wealth of billionaires rose by $5 trillion to $13 trillion in 12 months, the most dramatic surge ever registered on the annual Forbes billionaire list.

Where do such riches come from? Compared to before the pandemic, there’s less real economic activity: we are collectively poorer. And yet within a year of the great panic of March 2020, many asset prices were surging. Wall Street and the City of London are again awash with liquidity—and in a speculative mood. One vogue is for something called SPACs, or “special purpose acquisition companies.” That sounds so vague as to bring to mind the South Sea Bubble companies of 1720, whose pitch is remembered as “carrying on an undertaking of great advantage but nobody to know what it is.”

How is this mismatch between financial markets and underlying reality possible? Because just like in the aftermath of the Great Recession, the civil servants in our central banks spotted the dreadful potential of unchecked panic, and rode to the rescue of private speculators by flushing the system with made-up money through a process we’ve come to know as quantitative easing.

Commentators on both the right and the left are increasingly fixated on the role of QE. In a way, that’s understandable. The policy—deployed on and off ever since the financial crash—has been pursued to an extraordinary degree in the face of Covid-19. By this June, the US Federal Reserve’s balance sheet had doubled in size since the pandemic began, and has now swelled by 800 per cent since 2007.

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The Blind Leading the Clueless, by Jeff Thomas

Our rulers aren’t that smart, and a case can be made that they’re getting stupider all the time. From Jeff Thomas at internationalman.com:

Blind leading the clueless

Most of us watch television. In part, we seek to be entertained, but, additionally, we often seek to be enlightened as to “what’s going on.” In a difficult era like the present one, in which some of the most prominent countries are experiencing the onset of an economic crisis, virtual cartoon characters are competing as choices in political contests, governments are becoming increasingly rapacious and a police state is developing rapidly, it’s not surprising if the average person questions, “What on earth are they thinking?”

Well, there’s no shortage of media exposure to answer that question. Today, there are a multitude of channels offering 24/7 “news,” from which we may hope to glean some insight as to what the leaders of the world are thinking. Yet, in spite of the endless folderol being offered, the leadership vision remains about as clear as mud.

They don’t want war, but are invading more countries than ever before in history. Political hopefuls are vague at best regarding their proposed platforms for action, yet they attack each other as though they’re reporters for the tabloids. Governments continually speak of their wish to lighten the load on the common man, whilst heaping laws, regulations, fines and taxes on him like never before, and whilst heaping billions in tax dollars on their cronies in the financial industry. They claim to seek greater security for all, but instead, create an endless stream of agencies that have the authority to ignore basic rights and behave more like Mafia shakedown operators than law enforcers. Governments claim to be pursuing a sounder economy, but have created an unprecedented level of debt, that promises to crush the economies of several of the world’s most prominent countries in the very near future.

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The Bubble Epoch Gets Worse, by Bill Bonner

The problem with serial bubble blowing by central banks is that each bubble has to be bigger than the previous ones to keep them all from popping. From Bill Bonner at rogueeconomics.com:

YOUGHAL IRELAND – Yes, it’s the age of miracles. The Bubble Epoch. The silly season.

And it just gets sillier and sillier.

Christine Lagarde, who holds the top spot at the European Central Bank (ECB), announced that she’s going to continue pumping up the money supply by 17 billion euros per week.

She says it is going to add 1.8% to Europe’s growth over the next two years. That is, somehow the fake money will be magically transformed into real wealth.

How does she know that?

Strange Voodoo

Oh, Dear Reader, is that a serious question? Of course, she has no idea…

And by the way, if her €17 billion per week would add precisely 1.8% to the economy, why not print €18 billion and get 1.9%, we wonder? Or €100 billion?

Apparently, none of the journalists who cover the ECB thought to ask… So we’ll just have to go on wondering.

What strange voodoo is this… that 17 billion per week is the exact number of euros needed to raise GDP by 1.8%?

A Good Deal

Meanwhile, her co-delusional over in the U.S., Federal Reserve chief Jerome Powell, says he’s going to continue the money-printing, too – at the rate of $30 billion per week.

His aim is to hit 2% inflation – not 2.1%, not 1.9% – which he’s convinced is some sort of sacred number guaranteeing uninterrupted growth and full employment.

What it actually guarantees is higher prices, as we see in the asset markets. The S&P 500 just hit another new all-time high. As did house prices.

The Fed is buying $40 billion worth of mortgage bonds each month, driving down mortgage rates to the point where you can get a 15-year mortgage at a negative rate.

That is, your mortgage interest will be less than the going rate of consumer price inflation.

A good deal? Apparently.

And it’s likely to be a better deal if tomorrow’s inflation makes today’s mortgage rates even more negative.

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Big Government and Big Inflation, by Ron Paul

There’s not much hope monetary inflation will recede. Congress keeps spending and the government keeps borrowing. From Ron Paul at ronpaulinstitute.org:

April’s 4.2 percent past year increase in the Consumer Price Index is not likely to dissuade the Federal Reserve from continuing its policy of near-zero interest rates. Fed Chairman Jerome Powell believes the rising prices are just a temporary phenomenon caused by the ending of lockdowns releasing pent-up consumer demand.

Powell may be right that the ending of lockdowns would inevitably be accompanied by a rise in prices. However, this is just the latest reason the Fed has given for putting off increasing interest rates. Powell does not want to admit that the real reason the Fed will continue to keep rates low is that increasing rates will cause the federal government’s interest payments to rise to unsustainable levels.

One way the Fed increases the money supply — and thus lowers interest rates — is by purchasing US Treasury securities. These purchases increase demand for US government debt, keeping government’s borrowing costs low. An expansionary monetary policy thus enables increased federal spending and deficits. Since the lockdowns, the Fed has worked overtime to monetize federal debt, doubling its holdings of Treasury securities.

A Truth in Accounting report from April concluded the real federal debt is 123 trillion dollars — over four times larger than the 28 trillion dollars “official” debt. The higher debt calculation includes the federal government’s unfunded liabilities. The biggest unfunded liabilities are the 55 trillion dollars in promised but unfunded Medicare benefits and the 41 trillion dollars in promised but unfunded Social Security benefits.

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Three reasons why inflation is rising. Two of them aren’t going away, by Simon Black

Massive debt monetization, the font of inflation, will continue far into the future. From Simon Black at sovereignman.com:

A remarkable thing happened yesterday that tells you everything you need to know about inflation.

In the morning, US Treasury Secretary Janet Yellen stated bluntly that “interest rates will have to rise somewhat to make sure that our economy doesn’t overheat. . .”

For economists, an ‘overheating economy’ means inflation. So she was essentially saying that rates would have to rise to prevent inflation.

Yet hours later, she completely reversed herself, saying that interest rates would NOT have to rise because “I don’t think there’s going to be an inflationary problem.”

You don’t need a PhD in economics to smell the BS.

Inflation is not some potential issue down the road. Inflation is already here.

As Warren Buffett told investors only days ago, “We’re seeing very substantial inflation.”

Plenty of companies have already announced price increases to their consumers–

Proctor & Gamble, for instance, announced price hikes across the board on just about everything from diapers to beauty creams.

Hershey’s announced in February that it would be raising prices.

Food giant General Mills complained in February about a “higher inflationary environment” and “input cost pressures” due to rising commodity prices.

Clorox, Shake Shack, Kimberly-Clark, Whirlpool, Hormel, and Woka Kola Coca Cola are among the many companies that have also announced price increases.

And according to Bank of America Global Research, the number of mentions of “inflation” on corporate earnings calls has increased 800% compared to last year.

Inflation is clearly a concern of the largest companies in the world. Investors are worried. Consumers can see it.

And in a rare moment of truth yesterday morning, a politician almost admitted that she was concerned about inflation too.

This is not some wild conspiracy. Inflation is real. It’s happening. Let’s look at three key drivers:

1) Capacity Constraints

Last year the entire world shut down. Businesses and factories everywhere closed, and plenty of companies went out of business.

Many companies who survived took radical steps to conserve cash– laying off workers, liquidating inventory, and selling equipment.

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Rising bond yields threaten financial markets, by Alasdair Macleod

There is no worse investment on the planet right now than longer-term bonds. If something else doesn’t upset the apple cart first, rising interest rates will raze the financial house of cards, to mix metaphors. From Alasdair Macleod at goldmoney.com:

There is a growing recognition in financial circles that price inflation will increase significantly in the near future, and official estimates that it will be a temporary phenomenon limited to an average of 2% are overly optimistic. There is, therefore, increasing speculation about the need for interest rates to rise.

The bond yield on 10-year US Treasuries has already more than doubled over the last year. It is in the nature of market cycles for equity and other financial assets to continue to rise in value during an initial increase in bond yields. It is the second increase that can be expected to turn bullish optimism about the economic outlook into the beginning of a bear market. Financial markets, already dislocated from fundamental realities, appear to be acutely vulnerable to such a change in sentiment.

This article points out that equity markets are driven more by money flows rather than perceived economic prospects. Bank credit for industry is contracting, commodity prices are soaring, and supply chains remain disrupted. Fuelled by earlier expansions of money supply and further expansions to come, the world faces a far larger increase in price inflation than currently contemplated, and therefore far higher interest rates, threatening to destabilise both financial markets and fiat currencies.

Introduction

There is a rustling in the undergrowth, disturbing the sylvan setting where we complacently enjoy the dappled sunlight, innocently unaware of the prowling bear. The bear heralds another rise in bond yields as we grapple with the inflationary consequences of recent and current events.

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Journey To The End Of San Pedro Bay, by MN Gordon

If you want to see what a monetary-fueled trade imbalance looks like, check out the ports in the Los Angeles area. From MN Gordon at economicprism.com:

Have you recently bought furniture, auto parts, clothes, electronics, plastic wares, doofers, doodads, or other doohickeys?  Chances are, they were made overseas.

The U.S. monthly trade deficit in February scored a new record.  According to the Commerce Department, the U.S. imported $71.1 billion more goods and services than it exported.  Of this, $30.3 billion was from China alone.

What’s more, the month of February only had 28 days.  At a daily gap of $2.54 billion, had it been a full 31-day month, the monthly trade deficit would have been over $78 billion.  What to make of it…

A trade deficit is not inherently bad.  Remember, countries as a whole do not trade with each other.  Individuals and businesses trade with other individuals and businesses between countries.  Presumably they do so because it’s advantageous for both sides.

Sound money, of limited supply and market determined interest rates, would provide natural limits to how wide a trade deficit could expand.  But we don’t live in a world of sound money and market determined interest rates.  We live in a world of fake money where interest rates are set by central planners.

The gargantuan trade deficit is a byproduct of the insanity of central economic planning.  Let’s follow the fake money and see where it leads…

The Federal Reserve creates credit from thin air and loans it to the U.S. Treasury in the form of Treasury bond purchases.  At the same time, commercial banks extend credit via fractional reserve banking.  The Federal Reserve encourages the over issuance of credit by artificially suppressing interest rates for extended time periods – often a decade or more.

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Into the Swarm #1: Archegos in the Coal Mine, by Romain Bocher

Investors herd, driving prices up and then scattering, taking their liquidity with them, when the market heads the other way. From Romain Bocher at theswarmblog.com:

Down the Market Hole

 

While the S&P 500 keeps rallying and hitting new records, the spectacular collapse of Archegos family office brought a sharp reminder of the consequences of excessive leverage in the financial system.

As always, Warren Buffet had already warned us: “Having a large amount of leverage is like driving a car with a dagger on the steering wheel pointed at your heart. If you do that, you will be a better driver. There will be fewer accidents but when they happen, they will be fatal.”

I do not know what the worst part of that story is. Whether it is the fact that Bill Hwang had criminal record. Or that Archegos used the same collateral to enter contracts with up to seven banks boosting leverage as high as 500%. Or if it is Nomura’s reaction, saying basically that whatever happens central banks will rescue banks if needed. Nothing seems to matter anymore for a system accustomed to perpetual bailouts since the LTCM failure.

But beyond those ethical considerations, the Archegos collapse has taught a few interesting things about US capital markets.

The first lesson for investors is the fact that years of lose monetary policy have laid the ground for moral hazard and very risky bets, as evidenced by the  record of margin debt. And the higher the leverage ratio, the bigger the vulnerability to unexpected moves.

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Yield Curve Control: Bubbles And Stagnation, by Daniel Lacalle

Efforts by central banks to control the overall yield curve are doomed to failure. From Daniel Lacalle at dlacalle.com:

Central banks do not manage risk, they disguise it. You know you live in a bubble when a small bounce in sovereign bond yields generates an immediate panic reaction from central banks trying to prevent those yields from rising further. It is particularly more evident when the alleged soar in yields comes after years of artificially depressing them with negative rates and asset purchases.

It is scary to read that the European Central Bank will implement more asset purchases to control a small love in yields that still left sovereign issuers bonds with negative nominal and real interest rates. It is even scarier to see that market participants hail the decision of disguising risk with even more liquidity. No one seemed to complain about the fact that sovereign issuers with alarming solvency problems were issuing bonds with negative yields. No one seemed to be concerned about the fact that the European Central Bank bought more than 100% of net issuances from Eurozone states. What shows what a bubble we live in is that market participants find logical to see a central bank taking aggressive action to prevent bond yields from rising… to 0.3% in Spain or 0.6% in Italy.

This is the evidence of a massive bubble.

If the European Central Bank was not there to repurchase all Eurozone sovereign issuances, what yield would investors demand for Spain, Italy or Portugal? Three, four, five times the current level on the 10-year? Probably. That is why developed central banks are trapped in their own policy. They cannot hint at normalizing even when the economy is recovering strongly, and inflation is rising.

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How A Small Rise In Bond Yields May Create A Financial Crisis, by Daniel Lacalle

With the world up to its eyeballs in debt, any rise in interest rates is both painful and capable of causing a chain reaction of financial failure. From Daniel Lacalle at dlacalle.com:

How can a a small rise in bond yields scare policymakers so much?

Ned Davis Research estimates that a 2% yield in the US 10-year bond could lead the Nasdaq to fall 20%, and with it the entire stock market globally. A 2% yield can cause such disruption? How did we get to such a situation?

Central banks have artificially depressed sovereign bond yields for years. Now, a small rise in yields can cause a massive market slump that evolves into a financial crisis.

Quantitative easing was designed as a tool to provide liquidity to a scared market and benefit from exceptionally attractive valuations of the lowest-risk assets, sovereign bonds. Central banks would cut rates and purchase these high-quality, low-risk assets from banks, thus allowing financial entities to lend more to the businesses and families and strengthen confidence in the economy. Once financial conditions improved, central banks would reduce their balance sheet and normalize policy. This never happened.

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