Tag Archives: Central banks

You Are Not An Investor, by Raúl Ilargi Meijer

Investment requires markets, and Raúl Ilargi Meijer argues that financial markets, controlled by central banks, no longer function as markets. From Meijer at theautomaticearth.com:

You are not an investor. One can only be an investor in functioning markets. There have been no functioning markets since at least 2008, and probably much longer. That’s when central banks started purchasing financial assets, for real, which means that is also the point when price discovery died. And without price discovery no market can function.

You are therefore not an investor. Perhaps you are a cheat, perhaps you are a chump, but you are not an investor. If we continue to use terms like ‘investor’ and ‘markets’ for what we see today, we would need to invent new terms for what these words once meant. Because they surely are not the same thing. Even as there are plenty people who would like you to believe they are, because it serves their purposes.

Central banks have become bubble machines, and that is the only function they have left. You could perhaps get away with saying that the dot-com bubble, maybe even the US housing bubble, were not created by central banks, but you can’t do that for the everything bubble of today.

The central banks blow their bubbles in order to allow banks and other financial institutions to first of all not crumble, and second of all even make sizeable profits. They have two instruments to blow their bubbles with, which are used in tandem.

The first one is asset purchases, which props up the prices for these assets, through artificial demand. The second is (ultra-) low interest rates, which allows for more parties -that is, you and mom and pop- to buy more assets, another form of artificial demand.

The most important central bank-created bubble is in housing, if only because it facilitates bubbles in stocks and bonds. Home prices in many places in the world have grown much higher than either economic growth or homebuyers’ wages justify.

To continue reading: You Are Not An Investor



You Will Be Poor, by Robert Gore



There has been a progression through each iteration of monetary theft. A trial balloon launches, usually from academia, which proposes an “innovation” contrary to reigning practice and orthodoxy. A curmudgeonly minority reject it; the majority, securing their places on the intellectual fashion forefront, excoriate the old and after a suitable time for faux consideration and discussion, embrace the new.

The public, insufficiently appreciative of the arcane language, abstruse reasoning, and self-evident erudition and brilliance of the experts, sometimes presents an obstacle. It was hostile towards the US’s first foray into monetary theft: central banking. The anti-central bank contingent won battles for 137 years, but lost the war in 1913. J.P. Morgan and cronies laid the intellectual groundwork: conferences, scholarly papers, legislative proposals, and a Greek chorus of the day’s one-percenters singing at the top of their lungs that America needed to join the civilized world and establish its own central bank.

If you understand the main purpose of central banks, then notwithstanding obfuscatory “Fedspeak,” endless media drivel, and academics’ Greek-letter-laden equations, you know all you need to know about these larcenous institutions. They exist to make it easier for governments to steal, and everything else is window dressing. Gold is finite and requires real resources to find, mine, and mint; central banks’ fiat debt can be produced in infinite quantities at virtually zero cost and exchanged for the government’s fiat debt.

Substitute central bank “notes” for gold and the resources available to the government expand dramatically. It can, in conjunction with the central bank, conjure its own money. Couple a central bank with 1913’s other “innovation”—the income tax—and lovers of government had the wherewithal for their fondest dreams, one of which was American empire. World War I, the US’s first involvement in Europe’s wars, followed close after 1913’s depredations, notwithstanding President Wilson’s vow to stay out in his 1916 reelection campaign.

Franklin Roosevelt and Richard Nixon completed the switch from a gold-backed currency to fiat debt. After Nixon slammed shut the gold window in August, 1971, there have been no legal constraints (aside from the farcical debt ceiling) on either the creation of government debt or Federal Reserve purchases of that debt. The only constraints are political and those policy makers and central bank bureaucrats impose upon themselves, in other words none.

Whatever jolt debt monetization once might have given the economy has disappeared since the economy reached debt saturation before the last financial crisis. The increasing debt burden is slowing rather than promoting economic growth, and will soon, if it has not already, stop and reverse it. Elevation of financial asset and real estate prices (aka “bubble blowing”) supposedly promotes wealth effects that trickle down to the broader economy. The claim was dubious when first made during the housing bubble. Rising wealth inequality since then has revealed its absurdity. Whatever debt-based speculative “wealth” has been created has gone mostly to the financially well-connected who can borrow at negligible rates.

Quantitative easing was an application from central banking’s conventional tool kit—debt monetization—although its magnitude and global scale were unprecedented. More recent central bank “innovations”—zero and negative interest rates (ZIRP and NIRP) and now, proposed bans on cash—amount to outright theft. It is doubtful that even proponents believe their own transparently phony rationalizations for these measures. ZIRP and NIRP destroy the return on saving while rewarding debtors. And who are the world’s biggest debtors? Profligate governments, who are financing their unsustainable improvidence at history’s lowest interest rates and picking the pockets of individuals, companies, pension funds, insurance companies, and other entities that must generate a reasonable safe current return to meet future liabilities.

Proposed bans on cash, or even active discouragement of its use, are the next milestone in governmental larceny. Once all “money” (a misnomer, it’s really debt; there has been no “real money” in the global financial system since 1971) is forced into the banking system, it doesn’t take much imagination or foresight to see what comes next. The civil liberties’ implications of the government keeping track of everyone’s money and how it’s spent are of course ominous. However, the main reason the government wants financial assets confined to the banking and financial system is so that it can purloin them. Once bank accounts, brokerage accounts, insurance accounts, pension funds, and other easy-to monitor repositories of financial assets become the only stores of value, the government can partially or wholly nationalize—steal—assets and perhaps the repositories themselves.

At every juncture, the government runs into the self-defeating consequences of its policies, ongoing larceny threatens future larceny. Increase debt, taxes, and regulation enough and the economy collapses, putting a dent in government’s revenues. Nobody worries about grandpa and grandma eating cat food because ZIRP and NIRP deprive them of retirement income, but when those policies threaten the solvency of the insurance industry and pension funds and the government may be called upon to bail them out, it’s cause for concern. Any future moves by central banks to raise interest rates will be driven by that unacknowledged concern.

The financial system as a whole is heavily leveraged, its liabilities are many times its equity. Economic collapse would wipe out financial system equity, as it did in 2008, whether deposits are forced to stay in the system or not. The government has no equity to wipe out. Forced to stay, deposits will be expropriated by the government for its benefit or the benefit of the financial repositories (so-called bail-ins). That’s obviously only a one-time expedient that will temporarily forestall, but not prevent, ultimate insolvency for either the government or the financial system.

Governments can outlaw or seize any asset, including cash, precious metals, real estate, chattels, overseas accounts, or intellectual property. In its desperate rapacity nothing is off the table. For individuals, reducing deposits within the financial system and converting them to precious metals or cash while ownership is still legal makes some sense. However, outlawing the former has the weight of Roosevelt’s 1933 precedent, and outlawing the latter is under consideration, so their value as mediums of exchange may be set in the black markets that will inevitably arise as the government continues to expand its destructive domination of the economy.

Absent the kind of collective, preemptive measures described in “Revolution in America” to leverage the government and financial system’s indebtedness, bankrupting them before they bankrupt us, your assets are sitting ducks. If inertia, wishful thinking, the “you go first” problem, and fear of legal consequences prevent the revolutionary initiative, the government will still give up the ghost…but not before it makes you poor.

The sole capital that is 100 percent safe is intellectual capital: what you know. They can’t nationalize self-reliance and your self may be the only one on which you can rely. If you have not already started, expanding your knowledge of skills useful in a time of collapse and chaos would be well-advised.



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The Coming War of Central Banks, by Charles Hugh Smith

Whoever wins in the global foreign exchange management battle, someone else loses. From Charles Hugh Smith at oftwominds.com:

Welcome to a currency war in which victory depends on your perspective.

History has shifted, and we’re leaving the era of central bank convergence and entering the era of central bank divergence, i.e. open conflict. In the good old days circa 2009-2014, central banks acted in concert to flood the global banking system with easy low-cost credit and push the U.S. dollar down, effectively boosting China (whose currency the RMB/yuan is pegged to the USD), commodities, emerging markets and global risk appetite.

That convergence trade blew up in mid-2014, and the global central banks have been unable to reverse history. In a mere seven months, the U.S. dollar soared from 80 to 100 on the USD Index (DXY), a gain of 25%–an enormous move in foreign exchange markets in which gains and losses are typically registered in 100ths of a percent.

This reversal blew up all the positive trades engineered by central banks: suddenly the yuan soared along with the dollar, crushing China’s competitiveness and capital flows; commodities tanked destroying the exports, currencies and economies of commodity-dependent nations; carry trades in which financiers borrowed cheap USD to invest in high-yielding emerging markets blew up as currency losses negated the higher returns, and global risk appetite vanished like mist in the Sahara.

The net result of this reversal is global markets have struggled since mid-2015, when the headwinds of the stronger dollar finally hit the global economy with full force.

In one last gasp of unified policy convergence, G20 nations agreed to crush the USD again in early March 2016, to save China from the consequences of a stronger yuan and the commodity markets (and lenders who over-extended loans to commodity producers.

To continue reading: The Coming War of Central Banks


The Cult Of Central Banking Is Dead In The Water, by David Stockman

The world will be a much better place when David Stockman’s headline comes true. From Stockman at davidstockmanscontracorner.com:

The Fed has been sitting on the funds rate like some monetary mother hen since December 2008. Once it punts again at the June meeting owing to Brexit worries it will have effectively pegged money market rates at the zero bound for 90 straight months.

There has never been a time in financial history when anything close to this happened, including the 1930s. Nor was interest-free money for eight years running ever even imagined in the entire history of monetary thought.

So where’s the fire? What monumental emergency justifies this resort to radical monetary intrusion and repression?

Alas, there is none. And that’s as in nichts, nada, nope, nothing!

There is a structural growth problem, of course. But it has absolutely nothing to do with monetary policy; and it can’t be fixed with cheap money and more debt, anyway.

By contrast, there is no inflation deficiency—–even by the Fed’s preferred measure. Indeed, the very idea of a central bank pumping furiously to generate more inflation comes straight from the archives of crank economics.

The following two graphs dramatize the cargo cult essence of today’s Keynesian central banking regime. Since the year 2000 when monetary repression began in earnest, the balance sheet of the Fed has risen by 800%, while the amount of labor hours used in the US economy has increased by 2%.

At a ratio of 400:1 you can’t even try to argue the counterfactual. That is, there is no amount of money printing that could have ameliorated the “no growth” economy symbolized by flat-lining labor hours.

Owing to the recency bias that dominates mainstream news and commentary, the massive expansion of the Fed’s balance sheet depicted above goes unnoted and unremarked, as if it were always part of the financial landscape. In fact, however, it is something radically new under the sun; it’s the footprint of a monetary fraud breathtaking in its magnitude.

In essence, during the last 15 years the Fed has gifted the US economy with a $4 trillion free lunch. Uncle Sam bought $4 trillion worth of weapons, highways, government salaries and contractual services but did not pay for them by extracting an equal amount of financing from taxes or tapping the private savings pool, and thereby “crowding out” other investments.

Instead, Uncle Sam “bridge financed” these expenditures on real goods and services by issuing US treasury bonds on a interim basis to clear his checking account. But these expenses were then permanently funded by fiat credits conjured from thin air by the Fed when it did the “takeout” financing. Central bank purchase of government bonds in this manner is otherwise and cosmetically known as “quantitative easing” (QE), but it’s fraud all the same.

In essence, Uncle Sam has gotten $4 trillion of “something for nothing” during the last 16 years, while the Washington politicians and policy apparatchiks were happy to pretend that the “independent” Fed was doing god’s work of catalyzing, coaxing and stimulating more jobs and growth out of the US economy.

No it wasn’t!

To continue reading: The Cult Of Central Banking Is Dead In The Water

An Exponential Decay Function, by Robert Gore

For a long time, economic policy in affluent, developed countries has attempted to end-run reality. While there have been isolated remnants of intellectual integrity that stood in opposition, much of what passes for the field of economics has provided cover. Delusions being more comforting than reality—and often more profitable in the short term—financial markets have fully endorsed them. Evading reality doesn’t make it go away, and evasion makes the eventual consequences that much more severe. Governments and central banks have postponed and ameliorated the consequences, but the mounting long-term costs are staggering. Now, the end run is no longer possible.

A phrase used to sell the Federal Reserve Act in the early 1900s—“an elastic currency”—denotes its foundation in fantasy. When money is left to private actors, choices, and markets, it is neither elastic or inelastic. Just like other goods and services, it’s acquisition and use is governed by the dynamic forces of supply, demand, and the price mechanism. Money has obvious functions and usefulness, so there is a demand for it. It will be, if government has no role, something tangible that requires resources to produce, probably a precious metal, or something directly convertible to that intrinsically valuable medium (see “Real Money”). Its supply will be governed by the same factors that determine the supply of other tangible items. Its price is its exchange value relative to other goods and services. In a system where government has no monetary role, debt is not money, although it may sometimes fulfill monetary functions, and is tethered to production. Its quantity can not long outrun the means to repay it.

The welfare state—theft from those with productive ability to the government and those it deems “in need”—is a self-evident attempt to abridge reality. Ability and its fruits are limited, needs are not. Governments now meet “needs” for income, pensions, shelter, medical care, child care, weaponry, military bases, corporate subsidies, bailouts, mass transit, crop price supports, education, and anything else those running the governments judge necessary, or more correctly, politically expedient. In most if not all welfare states, the “needy” now outnumber the able. Not surprisingly, economic performance has deteriorated for decades. Economies are sputtering around the zero growth line, depending on the abstruse calculations underlying seasonal adjustments and price indexes, on their way to destinations well below zero.

Debt delays reality and its attendant pain. Both public and private sectors have been going deeper into debt. The growing debt service burden bears a significant share of the responsibility for deteriorating economic performance. Debt is the last refuge of the delusional, but now each additional dollar, yen, yuan, and euro of debt exacts a cost greater than any putative benefit. Debt expansion has slowed and may have stopped altogether. If it hasn’t it soon will, on its way to contraction, because the benefits of reducing debt are now greater than the benefits of additional debt.

The debt overhang—not just stated, on-the-books debt, but governments’ unfunded pension and medical promises—is the salient feature of the global economy; everything else pales in significance. Governments and central banks are engaging in absurd stratagems: monetizing government fiat debt with central bank fiat debt, negative interest rates, and perhaps helicopter money drops, to force already over-indebted individuals and businesses to spend more and take on additional debt. These stratagems are distractions, totems on which financial markets can affix whatever optimism they can still muster.

Financial markets are exercises in crowd psychology. Extremes in either optimism or pessimism give way to reactions the other way. Governments and central banks fighting debt deflation with more debt and low interest rates have delayed the deflation but are, by increasing debt, making it worse. Deflation is everywhere. Despite a weak rebound in some prices propelled by overly exuberant shorts covering ill-timed bets, the collapse in commodities continues, with markets glutted and demand shrinking as economies shrink. Commodities are no longer a leading edge anomaly; gluts and weak prices characterize much of the rest of the global economy: intermediate and finished goods, transportation, retail, and services. Most of the remaining pockets of inflation and supposed economic activity reflect the inefficient hand of government: housing, medical insurance and care, and education.

The reality of debt contraction and deflation has not changed since commodities heralded their arrival in 2014, and will not change until a huge chunk of the world’s $225 trillion in debt is paid down, repudiated, or written off. Even those who focus only on financial markets and pronouncements and statistics from Wall Street and Washington must notice that something is amiss. While central bank machinations have a lot to do with negative interest rates, they couldn’t get away with it in anything but a deflationary environment. With occasional interruptions credit spreads have been widening and bank and other financial companies’ share prices have been declining for months. Legitimate, GAAP-compliant S&P 500 earnings peaked in the third quarter of 2014 and are down 18.5 percent since then. Incidentally, the gap between GAAP-earnings and companies’ dressed up, “adjusted” earnings reached an all time high this latest quarter. The Atlanta branch of the Federal Reserve is predicting just 6 tenths of 1 percent annualized growth in the first quarter, a seasonal adjustment or inflation index tinker away from outright contraction.

The resolutely bullish must ignore the real economy and the growing list of financial and statistical indicators, leaving only central bank faith, hope, and pixie dust, which has been in full florescence since early February. Debt contraction and deflation are exponential decay functions. They start slowly, gather steam, reach a point of inflection, and drop dramatically, approaching or reaching zero. Recall in the last crisis that the housing market topped out about a year-and-a-half before the headline stock market indices did in October of 2007, and most of the financial damage came in a few-month span a full year after that.

The train has left the station. Asset values have been reduced, mountains of IOUs await rescheduling and write-offs, debt-based wealth shrinks, economic activity deteriorates, and reverberations multiply throughout the extensive interlinkages of the global economy. Fools will pay attention to the stratagems and pixie dust. The rest of us don’t have that luxury. The inflection point looms: the unavoidable can no longer be avoided.

This is Crisis Progress Report 17. For the first 16 CPRs, see the Debtonomics Archive.



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Exposed – How Two Janet Yellen Phone Calls Saved The World, by Tyler Durden

From Tyler Durden at zerohedge.com:

Thanks to the just released February diary of Fed chief Yellen, we now know exactly when she called Bank of England Governor (and former Goldman Sachs employee) Marc Carney and ECB President (and former Goldman Sachs employee) Mario Draghi.

Can you guess when?

The answer:

This marked the exact bottom in the market. As someone suddenly decide to panic-buy stocks right as Carney’s 40 minute conversation was over – and all amid spiking CDS, collapsing bank stock prices, a Deutsche Bank which even the “serious” media outlets said was near bankruptcy, surging Yuan vol, and “real” crashing earnings expectations:

And that is how, with just two phone calls, Janet Yellen saved the world.

Unrigged, efficient markets for all:

Did we just get the closest glimpse of Keyser Soze the global Plunge Protection Team communication by phone call? Only the NSA knows…


It Takes a Village to Raise a Debt Slave, by Robert Gore

Historically, you’ve been able to tell everything you need to know about a government by the quality of its money.

Deacon Bainbridge, The Golden Pinnacle, by Robert Gore

Debt represents moral issues that transcend its economic role. The heart of debt is a promise: to pay the agreed upon interest and repay the principle at an agreed upon date in the future. The name of one class of debt—bonds— carries an unmistakable moral connotation: one’s word is one’s bond. Creditors must assess character—the willingness to repay—before they evaluate borrowers’ incomes, assets, and future prospects—the ability to repay. That formulation looks quaintly anachronistic, which tells you all you need to know about contemporary morality. As debt has become the centerpiece of global economics, so too has it become emblematic of global ethics, or more properly, their absence.

In 1913, a perceptive few recognized the political and economic dimensions of the new income tax and central banking legislation; fewer still recognized the philosophical and moral implications. Under a real money standard (money defined as: a medium of exchange, a store of value, and a unit of account, with intrinsic value, and not a liability of an individual or entity, e.g., a gold standard), the creation of debt hinges on the supply of real money and its value relative to goods and services. So limited, most debt will be incurred for productive uses that have a prospective return greater than the cost of debt service.

When governments and central banks are not so limited, they can create fiat debt at will. In 1971, President Nixon completed the transition begun in 1913 away from the convertibility of dollars for gold. Since then, the dollar has been a fiat debt unit. The government and the Federal Reserve can produce an unlimited amount of fiat debt units, not just Federal Reserve Notes, but member banks’ reserve balances at the Fed, and Treasury bills, notes, and bonds.

Deacon Bainbridge, a fictional character, was right on the money, so to speak. The quality of a government’s money is an infallible moral bellwether. A moral government would not be involved in the monetary system at all. Production of fiat debt amounts to fraud and counterfeiting. Its only “backing,” implicit at that, is the government’s ability to steal from its productive citizens. General acceptance of such intrinsically valueless debt requires legal compulsion. Fiat debt depreciation and devaluation steals from creditors for the benefit of debtors, which invariably includes the government doing the depreciating and devaluing.

When debt becomes a government-administered shell game relying on fraud, theft, and compulsion, the ethics of debt break down throughout the society. Neither the coercive welfare state nor the imperial warfare state would be possible without fiat debt. If the government had to extract its funding from a real money economy, with a finite and limited supply of currency, every dollar taken from that economy for income redistribution or bombs would be a dollar that could not be spent for private investment, production, or consumption. The real cost of government spending, and the real burden it placed on the economy, would be direct and clear. Long before governments reached the roughly 40 percent of the GDP they currently spend (combined federal, state, and local governments) their parasitic load on the economy would kill the host. The unethical means of funding the welfare and warfare states indict their ends; intellectual and moral bankruptcy precede fiscal bankruptcy.

Any entity that continuously spends more than it takes in will inevitably go bankrupt. Governments do so with monotonous frequency; insolvency has probably eliminated more of them than wars and revolutions. Such a fate looms for a host of governments that have made promises to their citizens they cannot keep. The mounting spending and debt loads these promises entail have exerted an ever-increasing drag on the economically productive and have shrunken opportunities. Less-than-bright future prospects has led to shrinking birth rates, which negatively feed back into economic drag.

The above characterization obviously applies to most of Europe, Japan, and China, where debt has funded not welfare benefits in the Western sense, but massive and often unnecessary infrastructure spending, factories, and other commercial projects that keep the population employed and docile. The US has its welfare state, but it also tries to militarily maintain its version of “order” in the world, a confederated empire. A mini welfare state resides within the warfare state. An appreciable portion of the trillions the US has spent on the military-industrial-intelligence complex has been dictated by domestic political considerations, unnecessary to achieve policy objectives, even if one holds that Pax Americana is a legitimate objective. A military limited to an actual defensive mission would shrink the warfare state and its embedded welfare state dramatically.

Debt has become a lifestyle in most of the developed world, the foundation of the modern economy, devoid of moral considerations. Impressively credentialed economic “experts” hold that expanding debt is the essential propellant of economic growth. Obtaining one’s first credit card—and consequently a credit score—is now an important rite of passage, with the ultimate ascension into full creditworthy consumer-hood marked by one’s first mortgage.

Republicans, long holding themselves out as a bastion of morality, look set to nominate a man for president whose corporations filed for bankruptcy four times, and who claims that stiffing creditors is a legitimate business tactic. Democrats look set to nominate a woman who wrote a book that supposedly demonstrates her solicitude for future generations, but whose proposed spending will only add to the government’s mountain of debt and unfunded promises it cannot pay. It takes a village to raise a debt slave.

An aviary of canaries in the credit coal coal mine face a mass die off, models all of responsiveness to something-for-nothing political “demand” and exemplars of contemporary economic theory. Which one expires first? Europe’s Mediterranean spendthrifts? America’s walking dead municipalities, with their underfunded pensions and medical plans? Japan, where debt is over four times the GDP and adult diapers now outsell baby diapers? China, as its staggering debt refuses to heed the commands of the commanders of its command economy? Oil exporting nations, revenues slashed by 70 percent? South America, in a reprise of its historical role as the deadbeat continent? It doesn’t really matter, because with today’s inextricably intertwined financial system, where virtually every financial asset is someone else’s debt or equity, when the first ones go the rest follow in short order.

Ethics are in harmony with reality. Living within our means is a requirement of survival, not a quaint homily. Perpetually living beyond our means is as impossible as perpetual motion, meaning our multiply mortgaged future is indeed bleak. Impending default has been preceded by a wholesale default of morality and reason. When the financial collapse arrives, the protestations of “good intentions” will be as phony and useless as the scrip currencies and debt littering the globe.


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