Tag Archives: central bank policies

Living Dangerously, by Alasdair Macleod

Suppressing interest rates, encouraging debt, and discouraging savings generally does not end well. From Alasdair Macleod at goldmoney.com:

Regular readers of Goldmoney’s Insights should be aware by now that the cycle of business activity is fuelled by monetary policy, and that the periodic booms and slumps experienced since monetary policy has been used in an attempt to manage economic outcomes are the result of monetary policy itself. The link between interest rate suppression in the early stages of the credit cycle, the creation of malinvestments and the subsequent debt dénouement was summed up in Hayek’s illustration of a triangle, which I covered in an earlier article.[i]

Since Hayek’s time, monetary policy, particularly in America, has evolved away from targeting production and discouraging savings by suppressing interest rates, towards encouraging consumption through expanding consumer finance. American consumers are living beyond their means and have commonly depleted all their liquid savings. But given the variations in the cost of consumer finance (between 0% car loans and 20% credit card and overdraft rates), consumers are generally insensitive to changes in interest rates.

Therefore, despite the rise of consumer finance, we can still regard Hayek’s triangle as illustrating the driving force behind the credit cycle, and the unsustainable excesses of unprofitable debt created by suppressing interest rates as the reason monetary policy always leads to an economic crisis. The chart below shows we could be living dangerously close to another tipping point, whereby the rises in the Fed Funds Rate (FFR) might be about to trigger a new credit and economic crisis.

 

living danger 1

Previous peaks in the FFR coincided with the onset of economic downturns, because they exposed unsustainable business models. On the basis of simple extrapolation, the area between the two dotted lines, which roughly join these peaks, is where the current FFR cycle can be expected to peak. It is currently standing at about 2% after yesterday’s increase, and the Fed expects the FFR to average 3.1% in 2019. The chart tells us the Fed is already living dangerously with yesterday’s hike, and further rises will all but guarantee a credit crisis.

The reason successive interest rate peaks have been on a declining trend is bound up in the rising level of outstanding debt and loans, shown by the red line on the chart. Besides a temporary slowdown during the last credit crisis, debt has been increasing over every cycle. Instead of sequential credit crises eliminating malinvestments, it is clear the Fed has prevented debt liquidation for at least the last forty years. The accumulation of debt since the 1980s is behind the reason for the decline in interest rate peaks over time.

To continue reading: Living Dangerously

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Here We Go Again: Our Double-Bubble Economy, by Charles Hugh Smith

Blowing bubbles has become the official economic policy. From Charles Hugh Smith at oftwominds.com:

The bubbles in assets are supported by the invisible bubble in greed, euphoria and credulity.
Well, folks, here we go again: we have a double-bubble economy in housing and stocks, and a third difficult-to-chart bubble in greed, euphoria and credulity.
Feast your eyes on Housing Bubble #2, a.k.a. the Echo Bubble:
Here’s the S&P 500 stock index (SPX): no bubble here, we’re told, just a typical 9-year long Bull Market that has soared from a low in 2009 of 666 to a recent high of 2802 in January of this year:
Here’s a view of the same bubble in the Dow Jones Industrial Average (DJIA):
Is anyone actually dumb enough not to recognize these are bubbles? Of course not. Those proclaiming that “these bubbles are not bubbles” know full well they’re bubbles, but their livelihoods depend on public denial of this reality.
And so we’re inundated with justifications of bubble valuations, neatly bound with statistical mumbo-jumbo: forward earnings (better every day in every way!), P-E expansion, and all the rest of the usual blather that’s spewed by status quo commentators and fund managers at the top of every bubble.
The problem with bubbles is they always pop. The market runs out of Greater Fools and/or creditworthy borrowers, and so sellers overwhelm the thinning ranks of buyers.
Those dancing euphorically, expecting the music will never stop, are caught off guard (despite their confidence that they are far too clever to be caught by surprise), and the panic-driven crowd clogs the narrow exit, leaving a ballroom of bag-holders to absorb the losses.
The other problem with bubbles is that we’ve become dependent on them as props holding up a rotten, corrupt status quo. Since the economy can no longer generate sufficient prosperity to go around via actual increases in productivity and efficiency, those skimming most of the gains rely on “the wealth effect” generated by expanding asset bubbles to create a dreamy illusion of prosperity.
Here’s the third consequence of bubbles: the gains flow to the very top of the wealth-power pyramid: there is no other possible output of the bubble, since roughly 80% of all assets are owned by the top tier of households, and the majority of financial assets are owned by the top .1% (one-tenth of one percent).

Critical Mass: When Will Investors Care About The Dollar Shortage Crisis? by Adem Tumerkan

Investors may not care about an impending dollar shortage until there aren’t enough dollars around to drive markets higher. From Adem Tumerkan at palisade-research.com:

Former Federal Reserve Chairman – Ben ‘Helicopter’ Bernanke – just threw cold water on the mainstream growth narrative. He said the economy by 2020 is going to go right over the cliff.

Although rarely – I do agree with Helicopter Ben about something. . .

President Trump’s $1.5 trillion in personal and corporate tax cuts – plus $300 billion in increased federal spending – was done at the “very wrong moment.”

The huge tax cuts and government spending requires a significant amount of new debt to be issued, all while the Fed’s tightening and unwinding their balance sheet via Quantitative Tightening (QT). 

This is going to cause an evaporation of dollar liquidity – making the markets extremely fragile.

Putting it simply – the soaring U.S. deficit requires an even greater amount dollars from foreigners to fund the U.S. Treasury. But if the Fed is shrinking their balance sheet, that means the bonds they’re selling to banks are sucking dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into the economy). This is creating a shortage of U.S. dollars – the world’s reserve currency – therefore affecting every global economy.

This illiquidity is going to cause the oil that greases the wheels of markets to dry up – fast.

So, with the dollar shortage making matters worse – we also have that there’s never been a time when the Fed began tightening and it didn’t lead to negative economic growth or a market crisis.

The historic evidence of the Fed’s rate hikes – and the inverting yield curve – right before a recession is irrefutable.

Take a look at over the last 40 years. . .

As the Fed continues their rate hikes and QT, the over-indebted system becomes illiquid and more fragile. Things will eventually crack.

The protégé of Austrian Economist Ludwig Von Mises – Murray Rothbard – once asked a series of questions that stumped many economists defending the Fed.

From his book America’s Great Depression, he called these ‘The Sudden Cluster of Errors’, which were. . .

1. Most businesses in the economy generate steady profits and can service their debts fine. Then suddenly, without warning, conditions change, and the bulk of businesses begin posting huge losses and can’t pay their creditors.

2. How did all these astute business men, MBA graduates, and ‘professional’ forecasters make such huge errors together. And – most importantly – why did it all suddenly happen at this particular time?

3. Why do the capital goods industries – raw materials, construction, etc – fluctuate much more wildly than the consumer goods industries? During recessions you see home construction firms belly up, but places like GAP and Hollister survive.

The explanation is the Fed’s artificial moving of rates up after keeping them down for years triggers the harsh bust.

To continue reading: Critical Mass: When Will Investors Care About The Dollar Shortage Crisis?

Beware Former Central Bankers Telling You to Work More, by Michael Krieger

Our progeny will have to work harder than we did to pay off the promises we made to ourselves. From Michael Krieger at libertyblitzkrieg.com:

I’m not the only one of course. The financial crisis of 2008/09 similarly shattered the worldview of tens, if not hundreds of millions of people across the globe. I believe that the old manner of doing things as far as organizing an economy and society died for good during that crisis and its aftermath. Sure it’s been shadily and undemocratically propped up ever since, and we haven’t yet transitioned to what’s next, but for all intents and purposes it’s dead. It’s dead because it has no credibility.

– From last year’s post: The Generational Wheels Are Turning

Hard work is fundamental to our continued existence and advancement as a species. I would never devalue the importance of hard work, particularly when combined with intense passion and drive, which leads to extraordinary technological progress and soaring artistic creations. Nevertheless, my ears perk up whenever I hear an older person lecture millennials about how they need to work more just to have a reasonable chance at a retirement compared to generations that came became before.

Yet that’s exactly what happened when I read an article published at Politico by 75-year old Alicia Munnell, and academic who also worked for the Federal Reserve Bank of Boston and the U.S. Treasury Department under Bill Clinton.

She seems to understand the problem. She notes:

A comparison of millennials (adults currently ages 25 to 35) with earlier cohorts (Gen-Xers and late baby boomers) when they were the same age shows that even though a higher percentage of both millennial men and women have college degrees, they are behind in almost every economic dimension.

One reason is that millennials entered the labor market during tough times. Most turned 21 between 2002 and 2012, which meant that they were graduating from college during a period that included both the bursting of the dot.com bubble and the Great Recession. This experience appears to have been particularly hard on millennial men, who have labor-force participation rates below earlier cohorts.

That’s all true, it’s her unimaginative, and quite frankly, offensive conclusion about what’s to be done that I take issue with. She writes:

My research suggests that those concerns are real, and millennials really are building wealth more slowly than the other working generations. But they are not insurmountable—as long as millennials are willing and able to work longer than their parents and grandparents did.

To continue reading: Beware Former Central Bankers Telling You to Work More

The Myth that Central Banks Assure Economic Stability, by Richard M. Ebeling

Central banks promote economic instability; just check their record. From Richard M. Ebeling at fff.org:

The world has been plagued with periodic bouts of the economic rollercoaster of booms and busts, inflations and recessions, especially during the last one hundred years. The main culprits responsible for these destabilizing and disruptive episodes have been governments and their central banks. They have monopolized the control of their respective nation’s monetary and banking systems, and mismanaged them. There is really nowhere else to point other than in their direction.

Yet, to listen to some prominent and respected writers on these matters, government has been the stabilizer and free markets have been the disturber of economic order. A recent instance of this line of reasoning is a short article by Robert Skidelsky on “Why Reinvent the Monetary Wheel?” Dr. Skidelsky is the noted author of a three-volume biography of John Maynard Keynes and a leading voice on public policy issues in Great Britain.

Skidelsky: Central Banking Equals Stable Prices and Markets

He argues against those who wish to denationalize and privatize money and the monetary system. That is, he criticizes those who want to take control of money and monetary affairs out of the hands of the government, and, instead, put money and the monetary order back into the competitive, private market. He opposes those who wish to separate money from the State.

Skidelsky sees the proponents of Bitcoin and other “cryptocurrences” as “quacks and cranks.” He says that behind any privatization of the monetary system reflected in these potential forms of electronic money may be seen “the more sordid motives” of “Friedrich Hayek’s dream of a free market in money.” The famous Austrian economist had published a monograph in 1976 on theDenationalization of Money, in which Hayek insisted that governments have been the primary cause behind currency debasements and paper money inflations through the centuries up to our own times. And this could not be brought to an end without getting government out of the money controlling and the money-creating business.

In Skidelsky’s view, any such institutional change would be a disaster. As far as he is concerned, “human societies have discovered no better way to keep the value of money roughly constant than by relying on central banks to exercise control of its issue and to act directly or indirectly on the volume of credit created by the commercial banking system.”

To continue reading: The Myth that Central Banks Assure Economic Stability

How the Government Became a Deep State Puppet, by Bill Bonner

Somebody once said if voting meant anything they wouldn’t let us do it. The “they” must have been referring to the true powers in the US government, the Deep State. From Bill Bonner at bonnerandpartners.com:

When you’ve got a chainsaw, you cut down a tree.

And when you’ve got control of monetary and fiscal policy… you go to work on an economy.

In both cases, you leave them in pieces.

Knuckleheaded Experiment

The difference between the next crash and the last two is that this time, the feds have less room to maneuver. At the end of an expansion cycle, like the one America has had for almost ten years, the federal government should be running a surplus.

That’s the whole idea of countercyclical fiscal policy. When the economy is hot, you’re supposed to be cool, with budget surpluses. When the economy cools off, you then heat it up with more spending.

But currently, the U.S. government is conducting a pro-cyclical fiscal experiment.

It’s late in the expansion cycle, but it’s already borrowing heavily, with annual deficits already programmed to reach $2 trillion by 2028. And that’s without a crash or a recession.

Good luck with that.

Meanwhile, over at the Fed, another knuckleheaded experiment is going on. It has left real rates (adjusted for inflation) below zero for nearly a decade, even though a recovery, such as it was, began in 2009.

This, too, is unprecedented… and almost surely disastrous.

That, of course, is what we’re waiting to find out.

But what we’ve been looking at lately is how the dots connect, in a straight line – from Bad Guy Theory… to the Deep State… to the Empire… thence to bankruptcy, chaos, and catastrophe.

Deep State Puppets

As we pointed out on Tuesday, an empire is not just a bigger government. It is a different animal, as different from a small, local democracy as a pussy cat from a sabre-toothed tiger.

In a small government, citizens can run the show. They know what is going on, and have a say in what happens next.

In a global Deep State Empire, on the other hand, citizens play largely symbolic roles. They vote, but their votes don’t really matter. They voice their opinions, but no one really cares what they think.

They have their representatives in Washington, but these officials, too, are largely ornamental. They talk, but they don’t say anything. They vote on laws, but only after they’re told which laws to pass.

To continue reading: How the Government Became a Deep State Puppet

A Summer Of Disappointments Will Lead To An Extended Economic Crash, by Brandon Smith

SLL doesn’t always agree with Brandon Smith’s methodology, but this is a forecast worth paying attention to. From Smith at alt-market.com:

The summer season is often about renewed hope and revelry in comfort, and this goes for economic comfort as much as anything else. In parallel to the old tale of The Ant And The Grasshopper, we are all tempted to act like the grasshopper, forget about the trials and tribulations of the world and take a vacation from awareness.

I am seeing quite a lot of this in the past month as mounting global tensions appear to have subsided. But appearances can be deceiving…

I am reminded of the summer of 2008 when those of us in alternative economic analysis were warning of the overwhelming evidence of a debt based deflationary disaster. There seemed to be widespread complacency back then as well. September finally struck and reality began to sink in, and the rest is a history we are still dealing with to this day. Right now, economic optimism is desperately clinging to news headlines rather than data fundamentals, but this can just as easily sink markets as it can keep them artificially afloat.

Consider the numerous powder keg events coming our way over the next few months and what they will mean for economic sentiment if they go the wrong way.

Federal Reserve Meeting June 12-13

The next week will be packed with public statements from various Fed officials which may hint at how aggressive the central bank will be for the rest of the year in its tightening program. However, I think I can guess rather easily what they will do. The Fed has been sticking to its policy of interest rate hikes and balance sheet cuts as I predicted they would for the past couple years. Nothing has changed under new Fed chairman Jerome Powell.

I believe the June meeting will mark an important mid-year shift for the Fed into even more aggressive fiscal tightening. The mainstream media has been heavily pushing the idea that stagflation is now a true threat to the U.S. economy. This is a notion I actually agree with and have been warning about for quite some time.

To continue reading: A Summer Of Disappointments Will Lead To An Extended Economic Crash