Tag Archives: Central banks

The crisis goes up a gear, by Alasdair Macleod

The world may be only months away from the collapse of fiat currencies, led by the dollar. From Alasdair Macleod at goldmoney.com:

Dollar-denominated financial markets appeared to suffer a dramatic change on or about the 23 March. This article examines the possibility that it marks the beginning of the end for the Fed’s dollar.

At this stage of an evolving economic and financial crisis, such thoughts are necessarily speculative. But an imminent banking crisis is now a near certainty, with most global systemically important banks in a weaker position than at the time of the Lehman crisis. US markets appear oblivious to this risk, though the ratings of G-SIBs in other jurisdictions do reflect specific banking risks rather than a systemic one at this stage.

A banking collapse will be a game-changer for financial markets, and we should then worry that the Fed has bound the dollar’s future to their fortunes.

The dollar could fail completely by the end of this year. Against that possibility a reset might be implemented, perhaps by reintroducing the greenback, which is not the same as the Fed’s dollar. Any reset is likely to fail unless the US Government desists from inflationary financing, which requires a radically changed mindset, even harder to imagine in a presidential election year.

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The looming derivative crisis, by Alasdair Macleod

The best monetary economist on the internet analyzes the gold and gold derivative markets. From Alasdair Macleod at goldmoney.com:

The powerful forces of bank credit contraction are at the heart of a rapidly evolving financial crisis in global derivatives, whose gross value is over $600 trillion; an unimaginable sum. Central banks are on course to destroy their currencies through unlimited monetary expansion, lethal for bullion banks with fractionally reserved unallocated gold accounts, while being dramatically short of Comex futures.

This article explains the dynamics behind the current crisis in precious metal derivatives, and why it is the observable part of a wider derivative catastrophe that is caught in the tension between contracting bank credit and infinite monetary inflation.

Introduction

One of the scares at the time of the Lehman crisis was that insolvent counterparties risked collapsing the whole over-the-counter derivative complex. It was for this reason that AIG, a non-bank originator of many derivative contracts, had to be bailed out by the Fed. By a mixture of good judgement and fortune a derivative crisis was averted, and by consolidating some of the outstanding positions, the gross value of OTC derivatives was subsequently reduced.

According to the Bank for International Settlements, in mid-June last year all global OTC contracts outstanding were still unimaginably large at $640 trillion, a massive sum in anyone’s book. It is unlikely to have changed much by today. But in bank balance sheets only a net figure is usually shown, and you have to search the notes to financial statements to find evidence of gross exposure. It is the gross that matters, because each contract bears counterparty risk, sometimes involving several parties, and derivative payment failures could make the payment failures now evident in disrupted industrial supply chains look like small beer.

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The Monetary Abyss Stares Back and Asks Who’s Next? by Tom Luongo

The central bankers are making their last stand to stop their sworn enemy, deflation, with copious amounts of debt. It can’t work. From Tom Luongo at tomluongo.me:

We are at a critical moment in the history of politics and markets. Everyday the U.S. government stares into the fiscal and monetary abyss and chucks trillions in hoping that will be enough to finally fill it.

We stand by hoping that it will work to reflate markets collapsing from a catastrophic mispricing of assets. At least some of us do. I don’t.

I hope it fails and it’s because those inflated prices fuel the very global political order that is anathema to human advancement.

President Trump is finally happy with his FOMC chair, Jerome Powell, after he opened the door to unlimited quantitative easing, nearly unlimited liquidity injections via the repo markets, and taking interest rates to the zero-bound.

It’s clear that the Keynesians at the Fed and the U.S. Treasury Dept. have no answers to the problems in front of them. They are simply doing what they always do when a crisis hits. Print money and hope someone still believes the new money is worth buying.

The sudden supply and demand side shock to the global economy thanks to the COVID-19 coronavirus is outside of their frame of reference.

To best understand what we’re dealing with here you have to understand how these people think. Modern economic theory, based on John Maynard Keynes’ General Theory of 1936, imagines the economy as a bathtub.

And that bathtub is constantly draining as credit is destroyed. Money flowing out of the economy has to be replaced with a constant stream of new money, in the form of new credit, or the bathtub drains. The velocity of new money has to keep up with old money or the system drains.

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The Fed’s Irresponsible Rate Cut Accelerated Panic, by Daniel Lacalle

Central banks can’t cure what ails the economy and financial markets and they’re just going to make things worse. From Daniel Lacalle at dlacalle.com:

The monumental mistake of the Federal Reserve cutting rates this week can only be understood in the context of the rising God’s complex of central planners. An overwhelming combination of ignorance and arrogance.

Less than a week ago, several members of the Federal Reserve board reminded – rightly so – that cutting rates would not have a significant impact in a supply shock like the current one. We must also remember that the Federal Reserve already cut rates in 2019 and inflated its balance sheet by 14% to almost all-time highs in recent months, completely reversing the virtually nonexistent prior normalization. Only a few days after making calls for prudence, the Fed launched an unnecessary and panic-inducing emergency rate cut and caused the opposite effect to what they desired. Instead of calming markets, the Federal Reserve 50 basis points cut sent a message of panic to market participants. If the jobs and manufacturing figures were better than expected, and the economy is solid with low unemployment, what message does the Fed transmit with an emergency cut? It tells market participants that the situation is much worse than it seems and that the Fed knows more than the rest of us about how dire everything can be.  A communication and policy mistake driven by an incorrect diagnosis: The idea that the market crash would be solved with easy monetary policy instead of understanding the impact on stocks and growth of an evident supply shock from the coronavirus epidemic.

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And the Winner is? Deflation. By Tom Luongo

While central banks may try to inflate their way out of a debt deflation, when the bubble they’ve blown is as big as the current “everything” bubble, such efforts will be fruitless. From Tom Luongo at tomluongo.me:

Back in August I penned a post called, “The Battle of the ‘Flations Has Begun.

With an historic 2000 point drop in the Dow Jones Industrials on Monday in response to Saudi Arabia and Russia declaring an oil price war on, well, everyone it’s clear that one of the two ‘flations, deflation, has won out.

In retrospect the timing out that post was pretty good, because just a few weeks later the repo markets seized up, SOFR zoomed to an all-time high of more than 10% and the Fed was awoken from its slumber to begin intervening to keep markets from collapsing.

It initiated a reflation trade based on the hope that the Fed just being there was all that was needed to restore confidence in global markets.

In that post I made the point that the choice between inflation and deflation is a non-choice. They are two sides of the same coin. The question is only who benefits from which side.

Those in power always choose inflation because, in their minds, it is less upsetting to the social order than deflation.

And their power rests on maintaining the current social order.

Deflation benefits savers and, frankly, normal people who don’t have access to new money at the lowest available prices, those set by the Fed’s discount window.

It gives them back power stolen from them through inflation.

The media helps this narrative limp along bamboozling all of us with poorly-conceived first order analysis of why we want inflation while refusing to admit they are a recipients of this government/central bank largess through advertising fees paid with a portion of this fake capital.

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Why the Coming Economic Collapse Will NOT be Caused by Corona Virus, by Matthew Ehret

When it takes more than a dollar of debt to buy a dollar’s worth of economic growth, your economy is not performing well. From that perspective, neither the US nor the global economy has performed well for years. From Matthew Ehret at off-guardian.org:

(Photo by Philip FONG / AFP) (Photo by PHILIP FONG/AFP via Getty Images)

With last Monday’s 1000 point stock market plunge the internet has been set ablaze with discussion of a new crash looming on the horizon. The fact that such a chain reaction collapse was only kept at bay due to massive liquidity injections by the Federal Reserve’s overnight repo loans should not be ignored.

These injections which began in September 2019, have grown to over $100 billion per night… all that to support the largest financial bubble in human history with global derivatives estimated at $1.2 quadrillion (20 times the global GDP!).

Sadly economic illiteracy is so pervasive among today’s modern economists that the real reasons for this crisis have been entirely misdiagnosed with financial experts from CNN, to Forbes blaming the volatility on the spread of the Corona virus!

Not the Corona Virus: The real cause of the oncoming Financial collapse.

As refreshing as it is to hear candid criticisms of the system’s failure and even support for the restoration of Glass-Steagall bank separation from presidential candidates like Bernie Sanders, Tulsi Gabbard or even the lame Elisabeth Warren… we find that in each case, those candidates are on record supporting policies cooked up by the very same oligarchs they appear to despise in the form of the Green New Deal.

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How to return to sound money, by Alasdair Macleod

Alasdair Macleod outlines how the US could return to gold-backed money. From Macleod at goldmoney.com:

Given the current fiat money system is on a path towards its own destruction it is not surprising that there has been increasing talk of a monetary reset. Without a completely different approach and by retaining the same institutions and macroeconomic concepts, any such reset is bound to fail.

This article provides a template for an enduring sound money solution that will deliver economic progress while eliminating destructive credit cycles. It posits that a properly constructed gold and gold substitute monetary system, which also includes the removal of bank credit inflation as a means of providing investment capital, is the only way that lasting stability and prosperity can be achieved. As well as the establishment of an incorruptible monetary system, the state’s role in the economy must be curtailed, budgets always balanced, banking reformed, and the private sector allowed to accumulate the wealth necessary to provide the investment for producers to produce. 

Monetary reform involves a clear understanding of why free markets succeed and why socialism, together with neo-Keynesian macroeconomics, are responsible for the impending monetary and economic collapse. It will require a complete change of socio-political and economic cultures, but properly approached it can be done.

Introduction

There has been very little commentary in recent years about the benefits of sound money, being limited almost entirely to followers of the Austrian school of economics. Even less has been written about how to back out of inflationism, end unsound money and return to a monetary arrangement which cannot be corrupted by governments and the banking system.

The most notable attempt was by Ludwig von Mises who appended a chapter on the subject in his updated 1952 version of The Theory of Money and Credit[i] The circumstances were very different from that of today. At that time, the US had corrupted its gold exchange standard to progressively exclude the ability of individuals to demand gold for paper dollars. And both Keynesianism and socialism, in the West at least, were in their earlier days. Today, we face more of an end game where considerable damage has been done since to the status of circulating money, and we face the prospect not of reform but of a collapse of the entire fiat money system.

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Three Major Imbalances – Financial, Trust and Geopolitical, by Michael Krieger

Many things are out of whack and it’s only a matter of time before everything falls apart. From Michael Krieger at libertyblitzkrieg.com:

But greed is a bottomless pit
And our freedom’s a joke
We’re just taking a piss
And the whole world must watch the sad comic display
If you’re still free start running away
Cause we’re coming for you!

– Conor Oberst, “Land Locked Blues”

It’s hard to believe 2020 is just around the corner. If the last ten years have taught us anything, it’s the extent to which a vicious and corrupt oligarchy will go to further extend and entrench their economic and societal interests. Although the myriad desperate actions undertaken by the ruling class this past decade have managed to sustain the current paradigm a bit longer, it has not come without cost and major long-term consequence. Gigantic imbalances across multiple areas have been created and worsened, and the resolution of these in the years ahead (2020-2025) will shape the future for decades to come. I want to discuss three of them today, the financial system imbalance, the trust imbalance and the geopolitical imbalance.

Recent posts have focused on how what really matters in a crisis is not the event itself, but the response to it. The financial crisis of ten years ago is particularly instructive, as the entire institutional response to a widespread financial industry crime spree was to focus on saving a failed system and then pretending nothing happened. The public was given no time or space to debate whether the system needed saving; or more specifically, which parts needed saving, which parts needed wholesale restructuring and which parts should’ve been thrown into the dustbin. Rather, unelected central bankers stepped in with trillions in order to prop up, empower and reward the very industry and individuals that created the crisis to begin with. There was no real public debate, central bankers just did whatever they wanted. It was a moment so brazen and disturbing it shook many of us, including myself, out of a lifetime of propaganda induced deception.

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Fiat’s failings, gold and blockchains, by Alasdair Macleod

Alasdair Macleod is the best writer on monetary economics on the Internet. From Macleod at goldmoney.com:

The world stands on the edge of a cyclical downturn, exacerbated by trade tariffs initiated by America. We know what will happen: the major central banks will attempt to inflate their way out of the consequences. And those of us with an elementary grasp of economics should know why the policy will fail.

In addition to the monetary and debt inflation since the Lehman crisis, it is highly likely the major international currencies will suffer a catastrophic loss of purchasing power from a new round of monetary expansion, calling for a replacement of today’s fiat currency system with something more stable. The ultimate solution, unlikely to be adopted, is to reinstate gold as circulating money, and how gold works as money is outlined in this article.

Instead, central banks will struggle for fiat-based solutions, which are bound to face a similar fate with or without the blockchain technology being actively considered. The Asian and BRICS blocs have an opportunity to do something with gold. But will they take it?

Introduction

Central banks around the world are praying that there won’t be a recession, and if there is that a further monetary stimulus will ensure economic recovery. Their problem is Keynesian theory says it will work, but last time it didn’t. In fact, it has never worked beyond a temporary basis. The big surprise this time was the lack of officially recorded price inflation. But this is due to the system gaming the numbers, making it appear there has been some moderate growth when a proper deflator would confirm most Western economies have been contracting in real terms for the last ten years.

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The Rush To A Cashless Society Only Serves Globalist Interests, by Brandon Smith

Brandon Smith is dead on, warning that cryptocurrencies could well be a Trojan horse for the cashless society, where governments, or a one-world government, and central banks or central bank know every unit of currency you spend. From Smith at alt-market.com:

A fundamental pillar of true free markets is the existence of choice; the availability of options from production to providers to purchase mechanisms without interference from governments or corporate monopolies. Choice means competition, and competition drives progress. Choice can also drive changes within society, for if people know a better or more secure way of doing things exists, why would anyone want to stay trapped within the confines of a limited system? At the very least, people should be allowed to choose economic mechanisms that work best for their particular situation.

This is NOT how our society functions today, and free market do not exist anywhere in modern nations including the US. Whenever I hear someone (usually a socialist) blame free market “capitalism” for the oppressive ailments of the world, I have to laugh. The alliance between governments and corporate monopolies (what Mussolini called national socialism or fascism) makes free markets utterly impossible. What we have today is an amalgamation of socialist economic interference and corporatocracy. Our system is highly restrictive and micro-managed for everyone except the money elites, who do not have to follow the same rules the rest of us do.

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