Tag Archives: Central banks

The Greatest Game, by Jeff Booth

This article will stretch your brain a bit, but can’t we all use some mental exercise? From Jeff Booth at medium.com:

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete”

Buckminster Fuller

Breakthroughs, that step-change our lives for the better, invariably come from something that most people couldn’t see. Our belief of how the world should exist and operate is shaped from looking backwards, not forward, so it makes sense that new paradigms that change everything — face resistance in our minds. Because most people don’t see them, breaking through an existing paradigm needs to provide enough compelling value for users to disrupt an old paradigm. Apple’s iPhone for instance, didn’t copy the market leader, Research in Motion’s Blackberry design of needing a keyboard or selling to businesses who required RIM’s security. It created a digital interface when that wasn’t ‘needed’ and created an entirely new platform that changed the industry as a result. Along the way, the Blackberry died, unable to compete with the value for users, that was now increasing exponentially on Apple’s platform.

That process describes “Creative Destruction” a paradoxical term first coined by Joseph Schumpeter in 1942 to describe how Capitalism works in a “free market.” Entrepreneurs innovate and “create” value for society — and that value gained by society also often “destroys” the former monopoly power. That process and its importance is at the centre of how all modern economies have evolved and given rise to most of the benefits to society we take for granted today. New winners become so valuable that they disrupt existing market power or structures. It is all driven from a near-constant flow of innovative entrepreneurs with bold ideas and the capital backing them that go up against the status quo and are only successful, “if’’ they create value for society.

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Market Weekly: When Yields Rise, Narratives Fall, by Tom Luongo

Do central banks really control markets? Notwithstanding the fervent hopes of millions of investors, they don’t. From Tom Luongo at tomluongo.com:

The big story of the past couple of weeks is rising bond yields. Everyone’s talking about it. Everyone’s got a theory about it. Even me.

Why are yields rising?

What does rising yields mean?

But, to this point I’ve kept my mouth mostly shut on this, at least in public. I reserve my gut reactions for my Patrons, giving us the opportunity to work through ideas.

The financial press industry is obsessed with gut reactions because headlines are all that matters. It used to just be to sell newspapers or generate clicks. But now, with algorithmic trading, headlines are the market.

Central banks and politicians use their pulpit in real time to stick save markets or push them in whatever direction they want them to go — at least in the near term.

So do short-sellers, media personalities, and boiler room blowhards… but enough about Jim Cramer. The market is comprised of all of this confusing and contradictory information.

And it’s why we’re obsessed with the news flow and desperate to parse the purposefully opaque language of those with control over the money spigots.

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Unsound Banking: Why Most of the World’s Banks Are Headed for Collapse, by Doug Casey

You might want to read this article because the global financial system is about to collapse and after reading it you’ll at least know why. From Doug Casey at internationalman.com:

Bank collapse

You’re likely thinking that a discussion of “sound banking” will be a bit boring. Well, banking should be boring. And we’re sure officials at central banks all over the world today—many of whom have trouble sleeping—wish it were.

This brief article will explain why the world’s banking system is unsound, and what differentiates a sound from an unsound bank. I suspect not one person in 1,000 actually understands the difference. As a result, the world’s economy is now based upon unsound banks dealing in unsound currencies. Both have degenerated considerably from their origins.

Modern banking emerged from the goldsmithing trade of the Middle Ages. Being a goldsmith required a working inventory of precious metal, and managing that inventory profitably required expertise in buying and selling metal and storing it securely. Those capacities segued easily into the business of lending and borrowing gold, which is to say the business of lending and borrowing money.

Most people today are only dimly aware that until the early 1930s, gold coins were used in everyday commerce by the general public. In addition, gold backed most national currencies at a fixed rate of convertibility. Banks were just another business—nothing special. They were distinguished from other enterprises only by the fact they stored, lent, and borrowed gold coins, not as a sideline but as a primary business. Bankers had become goldsmiths without the hammers.

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The destructive force and failure of QE, by Alasdair Macleod

An analysis of the mechanics of monetary inflation, and how it may blow up the global financial system, by Alasdair Macleod at goldmoney.com:

This article concludes that quantitative easing as a means of stimulating economies and financing government deficits will fail. The underlying assumption is that the transmission of additional money to non-banks in order to inflate financial assets, and to banks to cover government finances, will become too great in 2021 for it to succeed without undermining fiat currencies and financial markets. Admittedly, this opinion stands in stark contrast to the common Keynesian view, that once covid is over economies will start to grow again.

To help readers to understand why QE will fail, this article describes how its objectives have changed from stimulating the economy by raising asset prices, to financing rapidly increasing government budget deficits. It walks the reader through the inflationary differences between QE subscribed to by banks and by non-bank financial institutions, such as pension funds and insurance companies.

Having exhausted the reduction of interest rates as the principle means of economic stimulation, central banks, and especially the Fed, have embarked on pure monetary inflation. Before the end of 2019, that became the driving force behind the Fed’s monetary policy. Since March 2020 the objective behind QE altered again to financing the US government’s budget deficit.

In this current fiscal year, just to fund budget deficits and in the absence of net foreign demand for US Treasuries, QE is likely to escalate to a monthly average of $450bn. Almost impossible with a stable exchange rate, but with the dollar being sold down on foreign exchanges and for commodities, the everything dollar bubble will almost certainly collapse.

Introduction

Now that the US has elected a new president who will appoint a new administration, we must forget recent political events and focus on future economic and monetary policies. It is a statement of the obvious that President-elect Biden and his new Treasury Secretary will be naturally more Keynesian than Trump and Mnuchin, and it is likely that the economic focus will be more on stimulating consumption than on supply side economics. Policies are likely to be closer to modern monetary theory, which is highly inflationary — certainly much more so than under Trump’s presidency.

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Hyperinflation is here, by Alasdair Macleod

By Alasdair Macleod’s definition, hyperinflation has indeed arrived. From Macleod at goldmoney.com:

Definition: Hyperinflation is the condition whereby monetary authorities accelerate the expansion of the quantity of money to the point where it proves impossible for them to regain control.

It ends when the state’s fiat currency is finally worthless. It is an evolving crisis, not just a climactic event.

Summary

This article defines hyperinflation in simple terms, making it clear that most, if not all governments have already committed their unbacked currencies to destruction by hyperinflation. The evidence is now becoming plain to see.

The phenomenon is driven by the excess of government spending over tax receipts, which has already spiralled out of control in the US and elsewhere. The first round of the coronavirus has only served to make the problem more obvious to those who had already understood that the expansionary phase of the bank credit cycle was coming to an end, and by combining with the economic consequences of the trade tariff war between China and America we are condemned to a repeat of the conditions that led to the Wall Street crash of 1929—32.

For economic historians these should be statements of the obvious. The fact is that the tax base, which is quantified by GDP, when measured by the true rate of the dollar’s loss of purchasing power and confirmed by the accelerated rate of increase in broad money over the last ten years has been declining sharply in real terms while government spending commitments continue to rise.

In this article it is documented for the dollar, but the same hyperinflationary dynamics affect nearly all other fiat currencies.

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Sound Money Is Key to Defending Our Liberties, by Thorsten Polleit

If humanity is ever to be free, money must be private, with government having no role in it at all. From Thorsten Polleit at mises.org:

The title of this article epitomizes what the Austrian economist Ludwig von Mises (1881–1973) called the “sound money principle.” As Mises put it:

The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.1

And further:

It is impossible to grasp the meaning of the idea of sound money if one does not realise that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.2

Mises tells us that sound money is an indispensable line of defense of people’s liberties against the encroachment on the part of the state and that sound money is a kind of money that is not dictated by the state but is chosen by the people in the free marketplace. The world we find ourselves in is a rather different place. Our monies—be it the US dollar, the euro, the Chinese renminbi, the yen, or the Swiss franc—represent fiat currencies, monopolized by the state.

Fiat money is economically and socially destructive—with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine. Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society’s morals; and it paves the way toward the almighty, all-powerful state, toward tyranny.

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The Evolution of Fiat Money, Endless War, and the End of Citizenship, by ICE-9

This is a well-researched, thought-provoking, provocative, and all around excellent article. From ICE-9 at theburningplatform.com:

One topic missing from historians’ analysis of the West’s transition from a physical gold and silver based money system to a fiat money system is the defining events that facilitated and enabled this transition.  One can find no detailed and critical political / historical assessment of this transition, and it would be not for lack of effort.  The transition is always presented as if it is prima facie the refined and evolved state of things that warrants no investigation other than superficial praise followed with dogmatic platitudes.  But has this transition away from the “barbarous relic” money system actually made mankind more refined and evolved, or has it instead plunged mankind into an even more heightened and efficient state of barbarism?

One encounters additional blank pages when searching for any attempt at correlating the evolution and spread of fiat money to the prevalence and severity of war.  A collective learned silence descends when attempting to identify why it is, as money evolves, that war become more ideological, destructive, widespread, and prolonged.  We are all familiar with the endless adulations describing the global spread of “democracy”, but why is it so many are unwilling converts and it became imperative to spread “democracy” via war and regime change?  And closer to home, as our own nation “evolves” from a Constitutional Republic into pure “democracy”, how is it we as “citizens” feel more and more disenfranchised rather than empowered despite even greater doses of “democracy” at home?

This essay attempts to identify the defining events that facilitated and enabled the West’s transition to a fiat based money system, examines cause and effect between the evolution of money and the prevalence and severity of war, and binds together money evolution with the history of warfare by demonstrating cause and effect between money’s evolution, the rise and necessity of endless war, and the inevitable transition from “citizens” to subjects.

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Jubilee, by Robert Gore

The debt dam is crumbling as central bankers and government officials frantically refill the escaping lake with eye droppers.

As background to this article, it would be helpful to read an article I wrote in 2015, “Real Money.”

The foundation of the world financial system is debt. Every currency in the world is debt whose value is not tethered to any real value. In a rare display of official truth-in-packaging, right there on the instrument itself a US dollar bill tells you it’s debt: Federal Reserve Note. A note is a debt. What do holders of Federal Reserve Notes, officially creditors of the Federal Reserve, get for repayment of the debt they hold?

Federal Reserve Notes have no maturity date, pay no interest, and can never be redeemed. If you go to a Federal Reserve branch and try to redeem one, they will either not accept it or they will exchange it for an identical Federal Reserve Note. Why would anyone accept this peculiar instrument? Because you cannot refuse it. Also right there on the dollar bill it says: THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE. For American transactions, it’s reject the dollar, go to jail. The American government even levies punitive measures on foreign governments that just say no.

Because central banks and governments can repay their debt with more of their own debt, they have been unconstrained in the amounts they produce. You and I would do the same thing if we were so empowered. Governments, central banks, and debt are a ménage à trois from hell. The US ménage has debased the currency’s value against real goods and services at least 95 percent since the establishment of the central bank in 1913. The ménage’s ill-gotten gains are someone else’s loss—gullible savers and creditors who believe promises by politicians and central bankers that they will not engage in the debasement they have every incentive to promote.

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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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