They don’t call it funny money for nothing. The only guarantee you have of fiat money’s value is the promise from the government not to print up too much of it. That’s a sucker bet. From Thorsten Polleit at mises.org:
Now and then, it pays to take a step back to get a broader perspective on things, to look beyond the daily financial news, to see through the short-term ups and downs in the market to find out what is really at the heart of the matter. If we do that, we will not miss the fact that we are living in the age of fiat currencies, a world in which basically everything bears their fingerprints: the economic and financial system, politics—even people’s cultural norms, values, and morals will not escape the broader consequences of fiat currencies.
You may not notice it in your daily use of fiat currencies—that is, for instance, when receiving wages, buying goods and services, paying down mortgages, depositing money with the bank for saving purposes—that something is terribly wrong with fiat currencies, be it in the form of the US dollar, the euro, the Chinese renminbi, the Japanese yen, the British pound, or the Swiss franc. However, the truth is that all these fiat currencies suffer from severe economic and ethical flaws, which are actually not difficult to understand.
Fiat currencies are produced by central banks and commercial banks’ credit expansion. In fact, central banks in cahoots with commercial banks increase the outstanding money supply by extending loans to firms, private households, and government entities. It amounts to money creation from thin air or—in a way—counterfeiting money. Issuing new fiat currencies sets into motion a boom, an illusion of prosperity. Consumption and investment expand, the economy enjoys higher corporate profits, increased employment, rising stock, housing prices, etc.
It should be a supply-and-demand thing—an increasing supply of debt should drive interest rates up to attract marginal funding. Not, however, when yield-insensitive central banks can buy unlimited amounts of debt. From David Stockman at davidstockmanscontracorner.com via lewrockwell.com:
After decades of unhinged money-pumping, the Fed has driven real interest rates so low that there are no more bond investors — just traders and suckers.
The former have driven the 10-year yield in recent days to just 150 basis points in nominal terms (and deeply into the red in real terms in the face of surging monthly inflation numbers), because they are “pricing-in” one thing and one thing only: simple and supreme confidence that the spineless fanatics who occupy the Eccles Building will keep buying $120 billion per month of government and quasi-government debt.
Real Yield on 10-Year UST, 1985–2021
These are no longer even “markets” by any historical sense of the term. The bond markets and the stock exchanges are just mindless gambling casinos.
Inflation-adjusted yields had previously meandered around the 10%+ level for several decades. But no more. The real yield is so low that yield starved fund managers are throwing caution to the wind and setting themselves up for massive future losses.
That’s not an honest price discovery. It’s the crazed trading that has been fostered by fanatical central bankers who have literally lost touch with history, reality and every canon of sound finance.
The Federal Reserves debt monetization program is leaving banks flush with reserves. (When the Fed monetizes debt, it buys the debt from banks, which increases their reserves with the central bank.) The only thing the banks can do with the reserves is lend them back to the Fed in the repo market. From Tyler Durden at zerohedge.com:
In today’s FOMC Minutes there was a brief section that received little focus amid the broader analysis of the Fed’s tapering, inflation language, yet which could be far more important in coming weeks in light of the violent move higher in overnight reverse repo usage.
This is what the Fed said in its discussion of money market rates and the Fed’s balance sheet:
Reserve balances increased further this intermeeting period to a record level of $3.9 trillion. The effective federal funds rate was steady at 7 basis points. However, amid ongoing strong demand for safe short-term investments and reduced Treasury bill supply, the Secured Overnight Financing Rate (SOFR) stood at 1 basis point throughout the period. The overnight reverse repurchase agreement (ON RRP) facility continued to effectively support policy implementation, and take-up peaked at more than $100 billion. A modest amount of trading in overnight repurchase agreement (repo) markets occurred at negative rates, although this development appeared to largely reflect technical factors. The SOMA manager noted that downward pressure on overnight rates in coming months could result in conditions that warrant consideration of a modest adjustment to administered rates and could ultimately lead to a greater share of Federal Reserve balance sheet expansion being channeled into ON RRP and other Federal Reserve liabilities. Although few survey respondents expected an adjustment to administered rates at the current meeting, more than half expected an adjustment by the end of the June FOMC meeting.“
This language confirms what we said last night when we discussed the spike in overnight reverse repo usage as part of the coming QE endgame…
… and where we quoted from former Fed staffer Zoltan Pozsar, who warned that “The heavy use of the o/n RRP facility tells us that foreign banks too are now chock-full of reserves.”
The Fed is never going to do anything about inflation. It can’t, the government can’t pay higher rates and the Fed has to keep buying the government’s debt. From Dennis Miller at theburningplatform.com:
My grandfather was a WWII Army Sargent, an uneducated farmer with a Ph.D. in common sense. One of the lessons he preached; the longer you ignore a problem, the more it will grow.
Fed Chairman Jerome Powell never met my grandfather.
This Schiff Gold article confirms my grandfather’s thinking: (Emphasis mine)
“During a webinar sponsored by the Economic Club of Washington DC, Powell said the economy can handle the current debt load. But he did warn that the long-term trajectory of the US budget is unsustainable.
‘The US federal budget is on an unsustainable path, meaning simply that the debt is growing meaningfully faster than the economy. And that’s by definition unsustainable over time. It’s a different thing to say the current level of the debt is unsustainable. It’s not. The current level of debt is very sustainable….’
Powell said the US government will eventually have to ‘get back to a sustainable path.’
‘That is something that is best done in very good times when the economy is at full employment and when taxes are rolling in. This is not the time to prioritize than concern.’
…. Newsflash – this will never happen.
Of one thing you can be certain – politicians will always find a reason to borrow and spend money.
…. Powell is right when he says the federal budget is on an unsustainable path. He’s wrong to imply anything will ever be done about it. The powers that be will stay right on that unsustainable path to the bitter end. And it will be a bitter end.”
If you’re wondering where all the money comes from, it comes from the central bank, which exchanges its debt instruments, called Federal Reserve Notes, for the government’s debt instruments. If this sounds like hocus pocus, it’s because it is hocus pocus. From David Stockman at stockmanscontracorner.com via lewrockwell.com:
You would think that knuckleheads like Senate GOP Leader Mitch McConnell would finally wake up. Last night the biggest spender since LBJ and FDR combined laid-out Part 3 of a $6 trillion in 100 days spending spree – which comes on top of the Donald’s $4 trillion fiscal bacchanalia last year. Yet the bond vigilantes barely wiggled their small toe.
Indeed, at 1.65%, the 10-year UST is still buried deep below the running inflation rate, which rate itself is on the verge of liftoff.
Still, today’s negative 50 basis point real yield on the benchmark UST is only the culmination of a 30-year campaign by the Greenspan Fed and his heirs and assigns to destroy honest price discovery in the bond pits on the misbegotten theory that cheap debt fosters growth, prosperity and wealth.
No, what it actually does, among countless other ills, is unshackle the politicians to bury future generations in unspeakable debts.
Thus, if the real spread on the 10-year (purple area) was even +200 basis points, as it was at the turn of the century, the 10-year UST would now be yielding 4.25%. At that level, even Easy Janet (Yellen) would not have blessed Sleepy Joe’s $6 trillion spend-a-thon and centrists like Senator Manchin would have been a lot more than merely “uneasy” upon its presentation to the Congress.
33-Year Destruction of Honest Bond Prices by the Fed: 10-Year UST Yield Minus Inflation
Central Banks are holding trillions of dollars in fiat debt instruments issued by governments that will never be repaid. From Egon von Greyerz at goldswitzerland.com:
Akhlys, the Greek goddess of Misery and Poison, is exerting a major influence on the world currently. And sadly the dosage of misery and poison will increase in coming months and years.
What is now crystal clear is that this excess dose of fake assets and fake liabilities will totally poison the financial system and the world economy.
As Paracelsus, the renowned 16th century Swiss physician said; “all things are poison, it is the dosage that makes it either a poison or a remedy.”
When a world already in trouble was hit by a severe financial crisis in September 2019, the dose of debt was already excessive. But as the Fed and the ECB opened the money spigots fully, they filled the world with poisoned or fake money. The BY team (Biden & Yellen) will now be certain to finish this process with their profligate spending plans.
MAJOR CENTRAL BANKS BALANCE SHEETS UP 6X SINCE 2006
The financial system has been poisoned for decades by governments’ excess spending and central banks’ prodigal printing of toxic and worthless money.
And now, with Covid, they have the perfect excuse to senselessly create trillions of dollars, euros, yuan or yen. The world doesn’t realise that this money, fabricated by pressing a button, is no different from the Monopoly board game money.
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.
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.
Whatever the central banking cult might believe, issuing endless debt at negative interest rates is not a recipe for last prosperity. From Daniel Lacalle at dlacalle.com:
One of the great mistakes among economists is to receive the measures of central banks as if it was the revealed truth. It is surprising and concerning that it is considered mandatory to defend each one of the actions of central banks. That, of course, in public. In private, many colleagues shake their heads in disbelief at the accumulation of bubbles and imbalances. And, as on so many occasions, the lack of constructive criticism leads to institution complacency and a chain of errors that all citizens later regret.
Monetary policy in Europe has gone from being a tool to help states make structural reforms to become an excuse not to carry them out.
The steady funding of deficits of countries that perpetuate structural imbalances has not helped strengthen growth, as the Eurozone has seen constant GDP estimate cuts already before the Covid-19 crisis, but it is whitewashing the extreme left populists that defend massive money printing and MMT, threatening the progress and growth of the eurozone. Populism is not fought by whitewashing it, and the medium and long-term impact on the euro area of this misguided policy is unquestionably negative.
Today, citizens are being told by numerous European extreme left politicians that structural reforms and budgetary prudence are things that were implemented by evil politicians with malicious intent, and the message that there is unlimited money for anything, whenever and however is whitewashed by the central bank actions.
It is surprising to hear some serious economists at the European Central Bank or the Federal Reserve say that they do not understand how the idea that money can be printed eternally without risk is spread all over the political debate when it is central banks themselves who are providing that false sense of security. The central bank may disguise risk for a time but does not eliminate it.
You can’t print your way to prosperity, and not even to recovery. There are a lot of dark economic and financial clouds on the horizon. From Frank Giustra at internationalman.com:
Doug Casey’s Note: In the over 30 years I’ve known him, my respect—and liking—for Frank Giustra has only grown. Not just because he’s a world-class businessman, having built Yorkton Securities into a powerhouse, and then founding Lionsgate Entertainment. More relevant to this interview, he’s a first-rate judge of the markets—one of the best I’ve ever met at seeing turning points and understanding trends.
He’s one of the few financiers in the “Master of the Universe” class that understands gold and economics. Frank knows what he’s talking about. I suggest you read this closely.
International Man: The coronavirus was the pin that popped the Everything Bubble. What do you think the economic ripple effects will be?
Frank Giustra: I think it was a bubble that was begging to be pricked. The cause was never the issue. I don’t think anybody predicted the cause would be a pandemic.
Last summer in an interview, I provided a list of things that might prick the bubble. A pandemic wasn’t on the list, but here we are.
As I said, the bubble was begging to be pricked. It was a bubble unlike any bubble we’ve ever seen in history—and it was a global bubble. It was a debt-driven bubble, spread over many asset classes.
I think the economic hit from COVID is going to be long-lasting. All the fiscal and monetary policy response is not going to address what is actually changing out there, which is a lack of demand.
Printing up trillions in response to the coronavirus shutdown will ultimately make the economic situation worse. From Peter Schiff at schiffgold.com:
For years, I have been warning that during the age of permanent stimulus (which began in earnest with the Federal Reserve’s reaction to the dotcom crash of 2000), each successive economic contraction would have to be met with ever larger, increasingly ineffective, doses of monetary and fiscal stimulus to keep the economy from spiraling into depression. I have also said that the enormity of the asset price gains over the last 10 years had increased the danger because reflating the bloated stock, real estate, and public and private debt markets would bring on doses of stimulus that could prove lethal for the economy. But even though I expected that the next financial crisis would be catastrophic, I thought that it would come into the world in the usual way, as a credit crisis triggered by over-leverage. But the Coronavirus ripped up those stage notes, and instead ushered in a threat that is faster and deeper than I imagined, and I imagined a lot. It’s a perfect storm, a black swan with teeth.
Even in my most pessimistic assessments, I did not expect that so many seemingly distant sectors of the economy would simultaneously evaporate, almost overnight, or that government deficits would expand to nearly $4 trillion in the first wave of the crisis, or that the Federal Reserve would so suddenly launch its largest-ever experiment in quantitative easing, (with almost none of the forward guidance they have used to telegraph lesser moves), which would expand its balance sheet by more than $3 trillion in a matter of just a few months. Nor did I expect that at its outset the Fed’s new buying plan would include, for the first time, corporate bonds and high yield debt ETFs. (I thought those expansions would come eventually, not immediately.)