Tag Archives: central bank policy

$21 Trillion And Counting: Why Deficits Didn’t Matter During The Age Of Monetization, 1987-2017 (Part 2), by David Stockman

The age of deficits not mattering to either politicians or financial markets is passing. From David Stockman at davidstockmanscontracorner.com:

For the past 30 years fiscal deficits have been a big financial nothingburger because the Fed and other central banks gutted their sting. So doing, they drastically and dangerously falsified the market for government finance by weaning politicians of the one element that kept modern Big Government fiscally contained.

We are referring to the historical fear among politicians that fiscal deficits cause “crowding out” of private investment and rising interest rates. Indeed, that  proposition was universally understood during your editor’s sojourn in the Imperial City between 1970 and 1985 as a staffer, Congressman and budget director.

As it has turned out, however, there was implicitly a crucial qualifier. To wit, it was naturally assumed that fiscal deficits would be financed in honest capital markets, and that yields in the bond pits were free market prices which cleared the balance between the supply of private long-term savings and the demand for term debt.

The very notion that it could be otherwise—-that the central banking branch of governments could swoop into capital markets to scoop up and sequester in their trillions the debt emissions of the fiscal branches— was scarcely imaginable among anyone reasonably educated and minimally informed.

After all, had Lyndon Johnson, Tricky Dick, Jimmy Carter or even Ronald Reagan suggested that the Federal Reserve buy government debt at rates which exceeded annual issuance by the US Treasury, as was the case during the peak years of QE, they would have been severely attacked—if not subjected to impeachment—-for advocating rank financial fraud.

Nor is that mere conjecture. For instance, after his “guns and butter” deficits had breached an unheard of 3% of GDP (outside of world war), LBJ essentially concluded he had no choice except to commit political hara-kiri by forcing a 10% surtax through the Congress in the 1968 election year.

Likewise, upon inheriting the Oval Office in August 1974, Jerry Ford  famously attempted to curtail excessive fiscal stimulus with a “WIN” tax, and Jimmy Carter never let his deficits get above 2.5% of  GDP—-even though he had a big spending domestic agenda.

But the most dispositive case of all was that of Ronald Reagan. Notwithstanding his reputation as the scourge of taxes, the Gipper signed three consecutive tax increase bills in 1982, 1983 and 1984 after the deficit exploded to 6% of GDP owing to the original Reagan tax cut and huge defense build-up.

To continue reading: $21 Trillion And Counting: Why Deficits Didn’t Matter During The Age Of Monetization, 1987-2017 (Part 2)

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New Fed Chairman Will Trigger A Historic Stock Market Crash In 2018, by Brandon Smith

Brandon Smith further elucidates his hypothesis that the Federal Reserve will deliberately make the stock market crash. From Smith at alt-market.com:

Ever since the credit and equities crash of 2008, Americans have been bombarded relentlessly with the narrative that our economy is “in recovery”. For some people, simply hearing this ad nauseam is enough to stave off any concerns they may have for the economy. For some of us, however, it’s just not satisfactory. We need concrete data that actually supports the notion, and for years, we have seen none.

In fact, we have heard from officials at the Federal Reserve that the exact opposite is true. They have admitted that the so-called recovery has been fiat driven, and that there is a danger that when the Fed finally stops artificially propping up the economy with constant stimulus and near zero interest rates, the whole farce might come tumbling down.

For example, Richard Fisher, former head of the Dallas Federal Reserve, admitted a few years ago that the U.S. central bank has made its business the manipulation of the stock market to the upside:

What the Fed did — and I was part of that group — is we front-loaded a tremendous market rally, starting in 2009.It’s sort of what I call the “reverse Whimpy factor” — give me two hamburgers today for one tomorrow.

I’m not surprised that almost every index you can look at … was down significantly.

Fisher went on to hint at the impending danger (though his predicted drop is overly conservative in my view), saying: “I was warning my colleagues, don’t go wobbly if we have a 10-20% correction at some point…. Everybody you talk to … has been warning that these markets are heavily priced.”

One might claim that this is simply one Fed member’s point of view. But it was recently revealed that in 2012, Jerome Powell made the same point in a Fed meeting, the minutes of which have only just now been released:

“I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.

 

To continue reading: New Fed Chairman Will Trigger A Historic Stock Market Crash In 2018

Party While You Can – Central Bank Ready To Pop The ‘Everything’ Bubble, by Brandon Smith

A new chairperson of the Federal Reserve sets the state for a thunderous financial market crash. From Brandon Smith at alt-market.com:

Many people do not realize that America is not only entering a new year, but within the next month we will also be entering a new economic era. In early February, Janet Yellen is set to leave the Federal Reserve and be replaced by the new Fed chair nominee, Jerome Powell. Now, to be clear, the Fed chair along with the bank governors do not set central bank policy. Policy for most central banks around the world is dictated in Switzerland by the Bank for International Settlements. Fed chairmen like Janet Yellen are mere mascots implementing policy initiatives as ordered.  This is why we are now seeing supposedly separate central banking institutions around the world acting in unison, first with stimulus, then with fiscal tightening.

However, it is important to note that each new Fed chair does tend to signal a new shift in action for the central bank. For example, Alan Greenspan oversaw the low interest rate easy money phase of the Fed, which created the conditions for the derivatives and credit bubble and subsequent crash in 2008. Ben Bernanke oversaw the stimulus and bailout phase, flooding the markets with massive amounts of fiat and engineering an even larger bubble in stocks, bonds and just about every other asset except perhaps some select commodities. Janet Yellen managed the tapering phase, in which stimulus has been carefully and systematically diminished while still maintaining delusional stock market euphoria.

Now comes the era of Jerome Powell, who will oversee the last stages of fiscal tightening, the reduction of the Fed balance sheet, faster rate increases and the final implosion of the ‘everything’ bubble.

As I warned before Trump won the election in 2016, a Trump presidency would inevitably be followed by economic crisis, and this would be facilitated by the Federal Reserve pulling the plug on fiat life support measures which kept the illusion of recovery going for the past several years. It is important to note that the mainstream media is consistently referring to Jerome Powell as “Trump’s candidate” for the Fed, or “Trump’s pick” (as if the president really has much of a choice in the roster of candidates for the Fed chair). The public is being subtly conditioned to view Powell as if he is an extension of the Trump administration.

 

To continue reading: Party While You Can – Central Bank Ready To Pop The ‘Everything’ Bubble

The Greatest Bubble Ever: Why You Better Believe It, by David Stockman

Here is David Stockman’s analysis of the US government’s spending, receipts, and the overall economy. From Stockman at davidstockmanscontracorner.com:

Part Two:

As we explained in Part 1, the most dangerous place on the planet financially is now the Wall Street casino. In the months ahead, it will become ground zero of the greatest monetary/fiscal collision in recorded history.

For the first time ever both the Fed and the US treasury will be dumping massive amounts of public debt on the bond market—upwards of $1.8 trillion between them in FY 2019 alone—and at a time which is exceedingly late in the business cycle. That double whammy of government debt supply will generate a thundering “yield shock” which, in turn, will pull the props out from under equity and other risk asset markets—-all of which have “priced-in” ultra low debt costs as far as the eye can see.

The anomalous and implicitly lethal character of this prospective clash can not be stressed enough. Ordinarily, soaring fiscal deficits occur early in the cycle. That is, during the plunge unto recession, when revenue collections drop and outlays for unemployment benefits and other welfare benefits spike; and also during the first 15-30 months of recovery, when Keynesian economists and spendthrift politicians join hands to goose the recovery—-not understanding that capitalist markets have their own regenerative powers once the excesses of bad credit, malinvestment and over-investment in inventory and labor which triggered the recession have been purged.

By contrast, the Federal deficit is now soaring at the tail end (month #102) of an aging business expansion. And the cause is not the exogenous effects of so-called automatic fiscal stabilizers associated with a macroeconomic downturn, but deliberate Washington policy decisions made by the Trumpian GOP.

During FY 2019, for example, these discretionary plunges into deficit finance include slashing revenue by $280 billion, while pumping up an already bloated baseline spending level of $4.375 trillion by another $200 billion for defense, disasters, border control, ObamaCare bailouts and domestic pork barrel of every shape and form.

These 11th hour fiscal maneuvers, in fact, are so asinine that the numbers have to be literally seen to be believed. To wit, an already weak-growth crippled revenue baseline will be cut to just $3.4 trillion, while the GOP spenders goose outlays toward the $4.6 trillion mark.

That’s right. Nine years into a business cycle expansion, the King of Debt and his unhinged GOP majority on Capitol Hill have already decided upon (an nearly implemented) the fiscal measures that will result in borrowing 26 cents on every dollar of FY 2019 spending. JM Keynes himself would be grinning with self-satisfaction.

Moreover, this foolhardy attempt to re-prime-the-pump nearly a decade after the Great Recession officially ended means that monetary policy is on its back foot like never before.

 

Bank of Canada’s Poloz Is Right to Be Worried, by Peter Diekmeyer

Canada’s central bank has had a role in the “all-everything” bubble. From Peter Diekmeyer at Sprott Money via wolfstreet.com:

Three possibilities come to mind.

Bank of Canada governor Stephen Poloz cited numerous worries plaguing the economy during his speech to Toronto’s financial elites at the prestigious Canadian Club. However, the title of Poloz’s presentation, “Three things keeping me awake at night” seemed odd, given positive recent Canadian employment, GDP and other data.

Poloz highlighted high personal debts, housing prices, cryptocurrencies and other causes for concern, along with actions that the BoC is taking to alleviate them. His implicit message was (as always) “We have things under control.” But if that’s all true, then Canada’s central bank governor should be sleeping like a baby. So, what is really keeping Mr. Poloz up at night? Three possibilities come to mind.

The Poloz Bubble

Firstly, far from just a housing bubble, Canada’s economy shows signs of being in the midst of an “everything bubble.” Bitcoin, for example, hovered near CDN $23,000 this week. Stock and bond valuations are not far behind in their relative loftiness. Worse for Poloz, who took office four years ago, his fingerprints are all over those bubble-like levels.

Canadian stock, bond and house prices were already at dizzying heights when Stephen Harper hired Poloz with the implicit expectation that he would juice up the economy, in preparation for what Canada’s then-Prime Minister knew would be a tough upcoming election.

Poloz didn’t disappoint, promptly delivering a nice Benjamin Strong-styled “coup de whiskey” to asset prices in the form of two interest rate cuts, which brought the BoC’s policy rate down to just 0.50% during the ensuing months. Although Harper lost the election, loose BoC policy continues to provide the Canadian government with free money to borrow and spend as it wishes.

Here’s Canada’s ballooning Money Supply  M2 (via Trading Economics):

More broadly, the Poloz BoC’s current policy, like that of the US Federal Reserve, is to boost asset prices even higher in the hope that the resulting wealth effect will trickle down to spur economic activity among ordinary Canadians.

To continue reading; Bank of Canada’s Poloz Is Right to Be Worried

Fed Tightens, “and so far, Nothing Has Blown Up”, by Wolf Richter

The end of the world will come on its own timetable, not the Fed’s. From Wolf Richter at wolfstreet.com:

Gundlach frets about bonds during QE unwind, rate hikes, tax cuts, and rising deficits.

“A tax cut will reduce revenue and it will grow the deficit and therefore, it will probably grow bond supply, and perhaps boost economic growth,” DoubleLine Capital CEO Jeffrey Gundlach said on an investor webcast on Tuesday. And if it does, “it is going to be bond unfriendly.”

And possibly in a big way.

It’s a “strange environment” for cutting corporate taxes as the economy is already in its eighth year of expansion, he said, according to Reuters, which reported the webcast. He reiterated his prediction that the 10-year Treasury yield could reach 6% over the next “four years or so.”

Let that sink in for a moment. The last time the 10-year Treasury yield was at 6% (on the way down) was in August 2000! Four years from now, 6% would be a two-decade high-water mark.

“I don’t think it is at all strange to think we can tack on something like 75 basis points, on average, with volatility of course, per year for the next four years or so,” he said.

The 10-year yield is currently 2.36%, and sliding, as opposed to the shorter maturities whose yields have surged: the three-month yield reached 1.30% today and the two-year yield jumped to 1.83%, the highest since September 2008.

When bond yields rise, bond prices fall by definition. The 10-year yield is still very low. But if it rises from this level to 6% over the next few years, there will be a lot of wailing and gnashing of teeth along the way by bond investors, and it’s not going to be a fun time for a bond-fund manager to navigate this environment.

To continue reading: Fed Tightens, “and so far, Nothing Has Blown Up

Bank of Japan Tapers (Quietly), QE Party Over, by Wolf Richter

The world’s major central banks are quietly withdrawing the monetary fuel for the rally in financial assets. That includes Japan’s. From Wolf Richter at wolfstreet.com:

No flashy announcement, to avoid alarming the markets.

After years of blistering asset purchases, the Bank of Japan disclosed today that it held a total of ¥521.6 trillion in assets as of November 30, including Japanese Government Bonds (JGBs), gold, corporate bonds, Japanese REITs, equity ETFs, loans, etc. That is quite a pile, so to speak. It amounts to about 96% of Japan’s GDP.

By this measure, the BOJ’s balance sheet dwarfs the Fed’s balance sheet, which amounts to 23% of US GDP. When it comes to QE, no one can hold a candle to Japan. Its holdings of JGBs alone rose to ¥443.6 trillion. Its balance sheet looks like a typical post-Financial-Crisis central-bank balance sheet on steroids (chart in trillion yen):

There a couple of differences compared to other central banks: One, the BOJ started QE long before anyone even called it “QE,” but in 2013, it really got going, and those giant moves made the prior periods of QE look minuscule. And two, the BOJ actually unwound some of its earlier QE starting in late 2005 but soon gave up on it.

Now something else has been happening: Starting in December 2016 – the month the Fed raised rates and a few months after some Fed governors started to kick around the idea publicly that QE should be unwound – the BOJ began to curtail its asset purchases.

In other words, it began to “taper.” Assets are still increasing but at a much slower rate. During peak QE – the 12-month period ending December 31, 2016 – it added ¥93.4 trillion (about $830 billion) to its balance sheet. Over the 12-month period ending November 30, 2017, it has added “only” ¥50.8 trillion to its balance sheet. Though that’s still a good chunk of money (about $450 billion), that addition is down 46%.

To continue reading: Bank of Japan Tapers (Quietly), QE Party Over