Tag Archives: Debt monetization

The Eurozone Is Going Down The Japan Way, by Daniel Lacalle

The Japan Way is for the central bank suppresses interest rates and monetizes debt through its buying of the government’s debt, until interest rates are so low that the bank is the only buyer. From Daniel Lacalle at dlacalle.com:

The European Central Bank announced a tapering of the repurchase program on September the 9th. One would imagine that this is a sensible idea given the recent rise in inflation in the eurozone to the highest level in a decade and the allegedly strong recovery of the economy. However, there is a big problem. The announcement is not really tapering, but simply adjusting to a lower net supply of bonds from sovereign issuers. In fact, considering the pace announced by the central bank, the ECB will continue to purchase 100% of all net issuance from sovereigns.

There are several problems in this strategy. The first one is that the ECB is unwillingly acknowledging that there is no real secondary market demand for eurozone countries’ sovereign debt at these yields. One would have to think of twice or three times the current yield for investors to accept many eurozone bonds if the ECB does not repurchase them. This is obviously a dangerous bubble.

The second problem is that the ECB acknowledges that monetary policy has gone from being a tool to help implement structural reforms to a tool to avoid them. Even with the strong GDP bounce that the ECB predicts, few governments are willing to reduce spending and curb deficits in a meaningful way. The ECB estimates show that after the massive deficit spending of 2020, eurozone government spending will rise again by 3.4% in 2021 only to fall modestly by 1.2% in 2022. This means that eurozone government spending will consolidate the covid pandemic increase with little improvement in the fiscal position of most countries. Indeed, countries like Spain and Italy have increased the structural deficit.

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One Lockdown from Disaster, by MN Gordon

The next lockdown may well be the knockout blow to the economy. From MN Gordon at economicprism.com:

The popular economic tune being played by the popular press drones on.  You know the melody by now…

That the post-pandemic boom is alive and well.  That growth is enduring.  That blue skies are here to stay.

If you listen closely, however, several notes ring sour.

The Commerce Department reported on Thursday that second quarter gross domestic product (GDP) increased at an annualized rate of 6.5 percent.  This may sound good, initially.  But economists with Dow Jones had estimated an 8.4 percent Q2 GDP increase.  Once again, extreme fiscal stimulus, at the expense of a long term debt burden, drifted off key.

The monetary policy refrain was also lacking.  This week, at the Federal Open Market Committee meeting press conference, Fed Chair Jay Powell remarked that, “we’re some way away from having had substantial further progress toward the maximum employment goal.”

Thus the Fed will continue to hold the federal funds rate near zero and will continue creating credit from thin air at a rate of $120 billion per month to purchase Treasuries and mortgage backed securities in the amounts of $80 billion and $40 billion, respectively.  By now these damaging actions have become exceedingly mindless.  The aim for maximum employment will ultimately prove to be a shortsighted calamity.

If the economy was really strengthening, the Fed would be tapering back these security purchases and even normalizing its balance sheet.  At the very least, it would be talking about tapering.

But the economy’s not really strengthening at all.  Rather, the economy and financial markets, handicapped by extreme intervention, are entirely dependent on this monetary stimulus.

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We Can Have Low Interest Rates Or Robust Growth. But Not Both. By Daniel Lacalle

A naysayer economist is saying that you can’t have your cake and eat it, too, in a world that believes you can have your cake, eat it, have it again, and eat it again. From Daniel Lacalle at mises.org:

Central banks should know by now that you cannot have negative interest rates with low bond yields and strong growth. One or the other.

Central banks have chosen low bond yields at any cost, despite all the evidence of stagnation ahead. This creates enormous problems and perverse incentives.

It is not a surprise that markets have bounced aggressively, driven by the tech sector, after a slump based on concerns about the pace of economic growth. Stimulus package effects are increasingly short, and this was pretty evident in the poor figures of industrial production and the ZEW survey gauge of expectations. The same can be said about a weakening ISM index in the United States. United States ISM Services PMI came in at 60.1, below expectations (63.5) in June, precisely in the sector where the recovery should be strongest.

Interestingly, European markets declined sharply after the European Central Bank sent the ultimate dovish message, a change in its inflation target that would allow the central bank to exceed its 2 percent limit without change of policy. What does it all tell us?

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Fiat Money Economies Are Built on Lies, by Thorsten Polleit

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.

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Soaring Debts and Plummeting Yields… by David Stockman

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.

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Fed Alert: Overnight Reverse Repo Usage Soars Above Covid Crisis Highs, by Tyler Durden

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.”

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If Not Now – WHEN?? by Dennis Miller

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.”

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Cradle-to-Grave Stimmy: How We Got Here, by David Stockman

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

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Calling the Holdings of Central Banks “Assets” Is a Travesty, by Egon von Greyerz

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.


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.

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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.


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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