Tag Archives: Federal Reserve policy

David Stockman on the Banking Ponzi Scheme That’s Savaging Depositors

Banks are not paying enough interest to compensate good old-fashioned savers for the depreciation of their dollars due to inflation. From David Stockman at internationalman.com:

Banking Ponzi Scheme

The toxic effects of the Fed’s relentless interest rate repression are many, but among the worst has been the absolute savaging of bank depositors.

Interest rates on 12-month CDs (under $100,000) dropped below the inflation rate in October 2009 and have been pinned there ever since.

There is no other word for this than “expropriation” — an unconstitutional taking of property from tens of millions of households that needed to keep their funds liquid and didn’t wish to roll the dice in the junk bond market or stocks.

Worse still, the resulting vast transfer of income from depositors to banks has resulted in an egregious, artificial ballooning of bank profits and stock prices.

For instance, the combined market cap of the top six US banking institution — JP Morgan, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs — has risen from $200 billion at the bottom of the financial crisis during the winter of 2008-2009, where it reflected their true value absent government bailouts, to $1.5 trillion recently.

That 7.5X gain, which was 100% orchestrated by the Fed, is an unspeakable gift to the wealthy who own most of the stocks and especially to top bank executives who have cashed-in on vastly appreciated options.

Needless to say, this massive bubble in banks and other financial stocks is unsustainable. When the Fed is finally forced to shut down its printing presses, the bank stocks will be among the first to dive into the abyss.

While this might represent condign justice from a policy and equitable point of view, the extent of the harm to everyday Americans cannot be gainsaid.

That’s because Wall Street is going for one more bite at the apple, claiming that the currently accelerating rate of inflation is good for bank stocks.

Consensus stock price forecasts for JPMorgan are up 20% by 2023 and for Goldman Sachs by 70%.

Needless to say, this is just another 11th hour lure from big money speculators looking to unload vastly overvalued stocks on unwary retail investors.

Accelerating inflation supposedly portends higher growth and loan demand, but that’s a complete humbug because what we actually see in the market is stagflation. And that will cap loan demand even as it squeezes net interest margins, causing bank earnings to fall big time.

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‘Worth Celebrating’ My Eye, by David Stockman

David Stockman takes apart a Wall Street Journal bozo who thinks the Fed deserves congratulations for its off-the-charts fiat debt creation response to Covid. From Stockman at David Stockman’s Contra Corner via lewrockwell.com:

Once upon a time, the Wall Street Journal supported a bevy of reporters who were no one’s fool and who evinced a decent level of economic literacy and respect for the institutions of free markets and sound money.

Obviously, no more. We were reminded again today that these financial journalists of yore have been replaced by scribes who dutifully transmit the statist propaganda that emits from the Eccles Building and from the elected and appointed Federales encamped throughout the Imperial City.

Thus, the WSJ’s in-house Fed shill, Greg Ip, recently saw fit to praise the $10 trillion bacchanalia of fiscal largesse ($6 trillion) and Fed money-pumping ($4 trillion) that has been stood up by Washington since March 2020.

According to the Wall Street Journal’s man on the policy beat –

…..this week we got proof of something that really went right: the economic policy response. The pandemic-induced shutdown was initially the worst to hit the U.S. economy since the Great Depression….And yet poverty, by its broadest measure, went down…..after taking account of government benefits such as stimulus checks, food stamps and tax credits, the share dropped to 9.1% from 10.5% in 2019.

The Federal Reserve gets some credit for rapidly slashing interest rates to near zero and intervening in markets to prevent the economic crisis from becoming a financial crisis. But once the Fed’s interest rate ammunition was exhausted, fiscal policy rose to the challenge. Congress ultimately authorized $5.9 trillion of emergency measures of which $4.6 trillion has been spent….

As important as the magnitude of this relief was the variety. Unsure of the most effective remedy, Congress rolled out several: forgivable loans for small businesses that kept their employees (the paycheck protection program or PPP), stimulus checks to almost everyone, unemployment insurance expanded to gig workers and topped up with an extra $300 to $600 a week, low-cost loans from the Fed and Treasury to medium and large businesses, aid to state and local governments.

Much of this was experimental, and the lessons learned may lessen the toll of future recessions. By depositing cash directly into household bank accounts, Treasury has learned how, with congressional approval, to deliver stimulus almost as quickly as the Fed. PPP has yielded new tools to preserve employer-employee bonds in the face of shocks, reducing wasted economic potential.

Nonetheless, the economy today is in a far healthier place than was imaginable in the spring of 2020. That’s worth celebrating.

What an unrelieved load of horse pucky!

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Doug Casey on How Politicians Will Try to “Fix” Inflation with 3 Dangerous Policies

The one thing you can count on with a government-created problem is that the government’s solution will make the problem worse. From Doug Casey at internationalman.com:

International Man: The US government has printed more money recently than it has in its nearly 250-year existence.

It’s the biggest monetary explosion that has ever occurred in the US, and it shows no sign of slowing down.

Retail prices are already starting to soar.

Where is this all headed? Is inflation out of control?

Doug Casey: It doesn’t look terribly out of control yet on a retail level. A Big Mac is generally under $5, and gas is around $3. The tens of millions of Americans earning $10–15 an hour can still scrape by after taking in a roommate to cover rent at say $1000 a month—especially since millions of them are still stiffing their landlords with rent and mortgage “forbearance.” But as that goes away and a radical wave of inflation washes over the country, a lot of them will wind up on the street.

The US monetary and economic situation is going to get insane, with the Fed monetizing $120 billion of debt every month. And the worse it gets, the more dollars the Fed is going to print in a vain attempt to hold the system together. It’s going to throw people who are just holding on off-balance.

So far, the vast majority of the trillions of dollars that the US government/Fed has created have gone into the financial markets. It’s boomed stock, bond, and property prices, making rich people even richer. The situation is still under control.

But it’s going to start filtering down to a retail level.

Here’s an example I encountered just today: As a lifelong car guy, I follow the prices of exotic cars. I saw a 1968 Porsche 911R soon to be auctioned—a low mintage car, but nothing exceptional in my opinion. Just a lightweight 911 with only a 220-horsepower engine. It’s estimated to trade hands for $5.5 million. That’s insane.

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The Most Monstrously Overstimulated Economy & Markets Ever, by Wolf Richter

One of these days this whole thing blows up. You may want to make sure you’re not on planet Earth at that time. From Wolf Richter at wolfstreet.com:

The Fed will trim back its stimulus, but it’s already too late, and it’ll be too little and too slow.

It’s mind-boggling just how many layers of stimulus were thrown out there, one layer on top of the other, $5 trillion by the federal government and $4 trillion by the Federal Reserve, all of it with follow-on effect as the trillions of dollars ricochet through the economy and the financial markets. And some of it hasn’t circulated yet and is just sitting there for now, such as some of the money sent to states and municipalities that are now floating in cash and that have redone their budgets, and they’re going to spend it eventually.

There were the many billions of dollars that big companies received. The airlines alone got around $50 billion, much of it in grants. They were supposed to use this money to keep their employees on the payroll, and they couldn’t do layoffs if they wanted to keep this money. So they offered big buyout packages to their employees, and lots of employees took that money and ran. Those were counted as voluntary departures and not as layoffs, and those folks went out and spent some of this money, and it flooded into the economy, and now the airlines are struggling to hire back employees, and they have lots of open positions.

Then there were the PPP loans. They’re forgivable, if you follow the rules, and so these loans would turn into grants, and this money was supposed to be for small companies, but even large chain restaurants and other large companies with good bank connections got their hands on it, and then smaller companies got their hands on it, and then everyone got their hands on it. Politicians and their families got it, the self-employed working from home got it, foreign fraudsters got it, everyone got it.

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Inflation, asset and consumer prices, by Alasdair Macleod

Inflationary dollar collapse or deflationary depression? That’s the choice facing the Fed. From Alasdair Macleod at goldmoney.com:

“The Fed finds itself between a rock and a hard place: either it keeps inflating or the whole confidence-based valuation of financial assets collapses. Either it raises interest rates or the dollar collapses.”

There has been occasional speculation about what happens to asset values in a hyperinflationary collapse. The basis of the question has recently become suddenly relevant, because consumption in America and Britain has been stimulated with unprecedented monetary inflation aimed at consumers, and been met with limited supply, leading to strongly rising prices across the board.

In short, unless urgent action is taken, the possibility of a hyperinflationary outcome has become a possibility. The only alternative is to stop monetary inflation and thereby deliberately crash the global economy.

Along with other central banks, the Fed is trapped. We will assume that rather than face this reality, governments and central banks will continue with their money printing until both their fiat currencies and financial systems face collapse. All precedent points to this choice.

That being the case, an examination of how a collapse in the purchasing powers of fiat currencies is likely to affect asset and consumer prices is timely. This article draws on theories of money as well as empirical evidence in search of some answers. The answers will surprise and discomfort many of its readers.

Introduction

It is a common perception that in inflationary times financial and tangible assets afford protection from monetary debasement. Instead of rapidly escalating, so long as the consequences of inflation are contained as they have been since the early 1980s, non-fixed interest investments have been good inflation hedges. But what happens to asset prices if inflation is not contained and escalates?

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Powell Just Made A Huge Error: What The Market’s Shocking Response Means For The Fed’s Endgame, by Tyler Durden

The Fed is fooling itself if it thinks it can raise its administered interest rates much with the huge amount of debt outstanding. Any significant increase will incrementally increase the debt service burden far more than the over-leveraged real economy can sustain. The heart of this article is the graph at the bottom of this excerpt. From Tyler Durden at zerohedge.com:

Back in December 2015, just days before the Fed hiked rates for the first time since the global financial crisis, in its first tightening campaign since June 2004, we said that Yellen was about to engage in a great policy error, one which like the Ghost of 1937, would end in disaster…

… and sure enough it did, when after 9 rate hikes, Powell realized that a rate of 2.50% is unsustainable for the US economy which first cracked during the summer of 2019 repo crisis when the Fed cut rates three times, only to cut rates to zero from 1.75% in a matter of days after covid conveniently emerged on the global scene and led to an overnight shutdown of the US economy and “forced” the Fed to nationalize the bond market as well as inject trillions of liquidity into the market.

But what is it that prompted us to predict – correctly – that any rate hike campaign is doomed to fail (similar to the Fed’s ill-conceived plan to hike rates in 1937, which brought the already reeling country to its knees and only World War 2 saved the day, giving FDR a green light to unleash a fiscal stimulus tsunami the likes of which we hadn’t seen until the covid response)?

Simple: as we explained back in Dec 2015, the equilibrium growth rate in the US, or r* (or r-star), was far far lower than where most economists thought it was. In fact, as the sensitivity table below which we first constructed in 2015 showed, the equilibrium US growth rate was right around 0%.

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Why Consumer Price Inflation Is Here To Stay, by MN Gordon

Chinese imports have long kept a lid on US prices, but that’s fading. From MN Gordon at economicprism.com:

Jerome Powell might be done as a useful Federal Reserve Chairman.  Not that Fed Chairs provide a use that’s of any real value.  They mainly excel at destroying the wealth of wage earners and savers for the benefit of member banks.

But as Powell loses a grip on price inflation the business of supplying credit at a fixed rate of return becomes less fruitful.  Consumer price inflation, as measured by the consumer price index (CPI), is rising at an annual rate of 4.2 percent.  That’s well above interest rate of a 30 year fixed mortgage, which is currently 3.1 percent.

It doesn’t take much imagination to foresee a CPI over 6 percent.  At that rate of price inflation, what good to the bank is a home loan that’s only paying 3 percent?  This, among other reasons, is why Jay Powell is toast.

Powell, no doubt, has been going along to get along since long before he took over the reins of the Federal Reserve.  He’s always done what everyone asked.  He’s rapidly expanded the Fed’s balance sheet to fund massive government deficits and backstop the mortgage market.

Of course, he’s not alone.  The central planners in the U.S. and abroad manufactured this price inflation through decades of mass money printing, credit market intervention, and currency devaluations.  Anyone with half a brain knew the day would come when the glut of money and credit would jack up consumer prices.  Quite frankly, what took so long?

This is a complex question to answer.  One that’s much to intricate for us to comprehend.  Still, today we attempt to unfold one wrinkle of the complexity:

How the delicate trade relationship between the U.S. and China suppressed consumer prices in the U.S. over the last three decades…and how that delicate relationship has reversed to exasperate rising consumer prices going forward.

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Fed Drains $351 Billion in Liquidity from Market via Reverse Repos, as Banking System Creaks under Mountain of Reserves, by Wolf Richter

The Fed is reaching the banking system limits of its quantitative easing operation. From Wolf Richter at wolfstreet.com:

This is the first time I’ve seen Wall Street banks clamor for the Fed to back off QE. The Fed is struggling to keep the liquidity it created from going haywire.

In the fall of 2019, when the repo market blew out, the Fed stepped in and bought Treasury securities and MBS and handed out cash via repurchase agreements. When these repos matured, the Fed got its money back, and the counterparties got their securities back. The Fed also did this during the market rout in March 2020. But by July 2020, the last repos matured and were unwound.

Now the Fed is doing the opposite, with “reverse repos.” Repos are assets on the Fed’s balance sheet. Reverse repos are liabilities. With these reverse repos, the Fed is now massively selling Treasury securities to counterparties and taking their cash, thereby draining liquidity from the market – the opposite effect of QE.

This morning, the Fed sold $351 billion in Treasury securities via overnight reverse repos to 48 counter parties, thereby blowing past the brief spike at the end of March 2020, and more than replacing yesterday’s $294 billion in Treasury securities that it has sold via reverse repos to 43 counterparties and that matured and unwound this morning.

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The Fed Finally Gets Some Tough Questions. And Fails to Answer Them. by Robert Aro

There’s something seriously wrong with a monetary system that must rely on continuous obfuscation. From Robert Aro at mises.org:

On Wednesday, Federal Reserve Chair Jerome Powell showed how simple questions do not always get simple answers. When speaking to the media after the latest Federal Open Market Committee (FOMC) meeting, some difficult questions were asked. So much so, Powell had to repeat one question to himself, asking:

When will the economy be able to stand on its own feet?

He immediately followed with:

I’m not sure what the exact nature of that question is.

FOX News correspondent Edward Lawrence elaborated, asking when the Fed would lower the number of treasuries it buys, and when the economy would function “without having that support from the monetary side.”

Powell found ways to avoid answering the idea of a nation which stands without central bank supports, but he did refer to various “tests” the Fed will do in order to make decisions like shrinking the balance sheet, explaining:

we’ve articulated our test for that, as you know, and that is just we’ll continue asset purchases at this pace until we see substantial further progress.

He went on to say that prior to making any decisions, such as buying fewer treasuries, they will give the public a lot of notice beforehand.

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There’s a Serious Flaw to the Team Powell-Yellen Inflation Scheme, by MN Gordon

There’s too much debt for the government ever to repay it, so the Federal Reserve wants to debase the currency and inflate it away. However, it was dollar debasement that got us here in the first place—federal debt has skyrocketed since Nixon finished taking the US off the gold standard. From MN Gordon at economic prism.com:

If you’re a wage earner, retiree, or a lowly saver, your wealth is in imminent danger.

A lifetime of schlepping and saving could be rapidly vaporized over the next several years.  In fact, the forces towards this end have already been set in motion.

Indeed, there are many forces at work.  But at the moment, the force above all forces is the extreme levels of money printing being jointly carried out by the Federal Reserve and the U.S. Treasury.

Fed Chairman Jay Powell and Treasury Secretary Janet Yellen have linked arms to crank up the printing presses in tandem.

This is what’s driving markets to price things – from copper to digital NFT art – in strange and shocking ways.  But what’s behind the money printing?

Surely it’s more than progressive politics – under the guise of virus recovery – run amok.

Where to begin?

The U.S. national debt is a good place to start.  And the U.S. national debt is now over $28 trillion.  Is that a big number?

As far as we can tell, $28 trillion is a really big number…even in the year 2021.  How do we know it’s a big number, aside from counting the twelve zeros that fall after the 28?

We know $28 trillion is a big number based on our everyday experience using dollars to buy goods and services.  You can still buy a lot of stuff with $28 trillion.  In truth, $28 trillion is so big it’s hard to comprehend.

Nonetheless, $28 trillion is not as big a number today as it was in 1950.  Back then, the relative bigness of $28 trillion was much larger.  It was unfathomable.

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