Tag Archives: Federal Reserve

Critical Mass: When Will Investors Care About The Dollar Shortage Crisis? by Adem Tumerkan

Investors may not care about an impending dollar shortage until there aren’t enough dollars around to drive markets higher. From Adem Tumerkan at palisade-research.com:

Former Federal Reserve Chairman – Ben ‘Helicopter’ Bernanke – just threw cold water on the mainstream growth narrative. He said the economy by 2020 is going to go right over the cliff.

Although rarely – I do agree with Helicopter Ben about something. . .

President Trump’s $1.5 trillion in personal and corporate tax cuts – plus $300 billion in increased federal spending – was done at the “very wrong moment.”

The huge tax cuts and government spending requires a significant amount of new debt to be issued, all while the Fed’s tightening and unwinding their balance sheet via Quantitative Tightening (QT). 

This is going to cause an evaporation of dollar liquidity – making the markets extremely fragile.

Putting it simply – the soaring U.S. deficit requires an even greater amount dollars from foreigners to fund the U.S. Treasury. But if the Fed is shrinking their balance sheet, that means the bonds they’re selling to banks are sucking dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into the economy). This is creating a shortage of U.S. dollars – the world’s reserve currency – therefore affecting every global economy.

This illiquidity is going to cause the oil that greases the wheels of markets to dry up – fast.

So, with the dollar shortage making matters worse – we also have that there’s never been a time when the Fed began tightening and it didn’t lead to negative economic growth or a market crisis.

The historic evidence of the Fed’s rate hikes – and the inverting yield curve – right before a recession is irrefutable.

Take a look at over the last 40 years. . .

As the Fed continues their rate hikes and QT, the over-indebted system becomes illiquid and more fragile. Things will eventually crack.

The protégé of Austrian Economist Ludwig Von Mises – Murray Rothbard – once asked a series of questions that stumped many economists defending the Fed.

From his book America’s Great Depression, he called these ‘The Sudden Cluster of Errors’, which were. . .

1. Most businesses in the economy generate steady profits and can service their debts fine. Then suddenly, without warning, conditions change, and the bulk of businesses begin posting huge losses and can’t pay their creditors.

2. How did all these astute business men, MBA graduates, and ‘professional’ forecasters make such huge errors together. And – most importantly – why did it all suddenly happen at this particular time?

3. Why do the capital goods industries – raw materials, construction, etc – fluctuate much more wildly than the consumer goods industries? During recessions you see home construction firms belly up, but places like GAP and Hollister survive.

The explanation is the Fed’s artificial moving of rates up after keeping them down for years triggers the harsh bust.

To continue reading: Critical Mass: When Will Investors Care About The Dollar Shortage Crisis?

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The Myth that Central Banks Assure Economic Stability, by Richard M. Ebeling

Central banks promote economic instability; just check their record. From Richard M. Ebeling at fff.org:

The world has been plagued with periodic bouts of the economic rollercoaster of booms and busts, inflations and recessions, especially during the last one hundred years. The main culprits responsible for these destabilizing and disruptive episodes have been governments and their central banks. They have monopolized the control of their respective nation’s monetary and banking systems, and mismanaged them. There is really nowhere else to point other than in their direction.

Yet, to listen to some prominent and respected writers on these matters, government has been the stabilizer and free markets have been the disturber of economic order. A recent instance of this line of reasoning is a short article by Robert Skidelsky on “Why Reinvent the Monetary Wheel?” Dr. Skidelsky is the noted author of a three-volume biography of John Maynard Keynes and a leading voice on public policy issues in Great Britain.

Skidelsky: Central Banking Equals Stable Prices and Markets

He argues against those who wish to denationalize and privatize money and the monetary system. That is, he criticizes those who want to take control of money and monetary affairs out of the hands of the government, and, instead, put money and the monetary order back into the competitive, private market. He opposes those who wish to separate money from the State.

Skidelsky sees the proponents of Bitcoin and other “cryptocurrences” as “quacks and cranks.” He says that behind any privatization of the monetary system reflected in these potential forms of electronic money may be seen “the more sordid motives” of “Friedrich Hayek’s dream of a free market in money.” The famous Austrian economist had published a monograph in 1976 on theDenationalization of Money, in which Hayek insisted that governments have been the primary cause behind currency debasements and paper money inflations through the centuries up to our own times. And this could not be brought to an end without getting government out of the money controlling and the money-creating business.

In Skidelsky’s view, any such institutional change would be a disaster. As far as he is concerned, “human societies have discovered no better way to keep the value of money roughly constant than by relying on central banks to exercise control of its issue and to act directly or indirectly on the volume of credit created by the commercial banking system.”

To continue reading: The Myth that Central Banks Assure Economic Stability

Deutsche Bank CoCo Bonds Plunge, Shares Hit Record Low, after US Entity Makes FDIC’s “Problem Bank List”, by Wolf Richter

Who’s going to “win” the race to the bottom of the banking pile: Italy’s banks or Germany’s Deutsche Bank? It could be a dead heat. From Wolf Richter at wolfstreet.com:

The old question: When will she buckle?

Shares of Deutsche Bank fell 7.2% today in Frankfurt to €9.16, the lowest since they started trading on the Xetra exchange in 1992. They’re now lower than they’d been during its last crisis in 2016. And they’re down 71% from April 2015.

This came after leaked double-whammy revelations the morning: One reported by the Financial Times, that the FDIC had put Deutsche Bank’s US operations on its infamous “Problem Bank List”; and the other one, reported by the Wall Street Journal, that the Fed, as main bank regulator, had walloped the bank last year with a “troubled condition” designation, one of the lowest rankings on its five-level scoring system.

The FDIC keeps its “Problem Bank List” secret. It only discloses the number of banks on it and the amount of combined assets of these banks. A week ago, the FDIC reported that in Q1, combined assets on the “Problem Bank List” jumped by $42.5 billion to $56.4 billion (red bars, right scale), the first such surge since 2008, as I mused…  Oops, It’s Starting, Says This Chart from the FDIC:

That increase in assets of $42.5 billion on the “Problem Bank List” nearly matches the assets of Deutsche Bank’s principle subsidiary in the US, Deutsche Bank Trust Company Americas (DBTCA) of $42.1 billion as of March 31. And this has now been now confirmed by the sources: it was DBTCA that ended up on the “Problem Bank List.”

The Fed’s downgrade a year ago of Deutsche Bank’s US operations to “troubled condition” was what apparently nudged the FDIC in Q1 to put the bank on its Problem Bank List. The Fed’s ranking of banks is also a secret – for a good reasons: When these things come out, shares plunge and investors lose what little confidence they have left, as we’re seeing today. This loss of trust can entail larger problems that then coagulate into a self-fulfilling prophesy that perhaps should have self-fulfilled itself years ago.

In addition to the shares sinking to a new low, Deutsche Bank AG’s contingent convertible bonds, one of the instruments with which the German entity has increased its woefully drained Tier 1 capital after the Financial Crisis are now plunging again. The 6% CoCos dropped 3.6% today, to 90.12 cents on the euro. They’re now down 15% from the beginning of the year:

To continue reading: Deutsche Bank CoCo Bonds Plunge, Shares Hit Record Low, after US Entity Makes FDIC’s “Problem Bank List”

How the Government Became a Deep State Puppet, by Bill Bonner

Somebody once said if voting meant anything they wouldn’t let us do it. The “they” must have been referring to the true powers in the US government, the Deep State. From Bill Bonner at bonnerandpartners.com:

When you’ve got a chainsaw, you cut down a tree.

And when you’ve got control of monetary and fiscal policy… you go to work on an economy.

In both cases, you leave them in pieces.

Knuckleheaded Experiment

The difference between the next crash and the last two is that this time, the feds have less room to maneuver. At the end of an expansion cycle, like the one America has had for almost ten years, the federal government should be running a surplus.

That’s the whole idea of countercyclical fiscal policy. When the economy is hot, you’re supposed to be cool, with budget surpluses. When the economy cools off, you then heat it up with more spending.

But currently, the U.S. government is conducting a pro-cyclical fiscal experiment.

It’s late in the expansion cycle, but it’s already borrowing heavily, with annual deficits already programmed to reach $2 trillion by 2028. And that’s without a crash or a recession.

Good luck with that.

Meanwhile, over at the Fed, another knuckleheaded experiment is going on. It has left real rates (adjusted for inflation) below zero for nearly a decade, even though a recovery, such as it was, began in 2009.

This, too, is unprecedented… and almost surely disastrous.

That, of course, is what we’re waiting to find out.

But what we’ve been looking at lately is how the dots connect, in a straight line – from Bad Guy Theory… to the Deep State… to the Empire… thence to bankruptcy, chaos, and catastrophe.

Deep State Puppets

As we pointed out on Tuesday, an empire is not just a bigger government. It is a different animal, as different from a small, local democracy as a pussy cat from a sabre-toothed tiger.

In a small government, citizens can run the show. They know what is going on, and have a say in what happens next.

In a global Deep State Empire, on the other hand, citizens play largely symbolic roles. They vote, but their votes don’t really matter. They voice their opinions, but no one really cares what they think.

They have their representatives in Washington, but these officials, too, are largely ornamental. They talk, but they don’t say anything. They vote on laws, but only after they’re told which laws to pass.

To continue reading: How the Government Became a Deep State Puppet

America 2018: Dicier by the Day, by Charles Hugh Smith

The US is a giant Jenga tower, and there aren’t too many more blocks that can be removed before the tower collapses. From Charles Hugh Smith at oftwominds.com:

Scrape all this putrid excrescence off and we’re left with a non-fantasy reality: everything is getting dicier by the day.

If we look beneath the cheery chatter of the financial media and the tiresomely repetitive Russian collusion narrative (that’s unraveling as the Ministry of Propaganda’s machinations are exposed), we find that America in 2018 is dicier by the day.
The more you know about the actual functioning of critical subsystems, the keener your awareness of the system’s fragility, reliance on artifice and an unceasing flow of “free money.” Keynesian economics boils down to a very simple premise: a slowing or stagnant economy can be goosed by distributing plenty of “free money” which can be freely blown on either speculation or goods and services.
The “free money” (either created out of thin air or borrowed into existence at rates of interest so low that they’re less than zero when adjusted for inflation) dumped into speculation gooses assets higher, generating the “wealth effect” beloved by Keynesians, and the “free money” dumped into goods and services gooses consumption, tax revenues, hiring and so on.
The catch is “free money” is never actually free. Creating trillions out of thin air reduces the purchasing power of all existing currency, and pretty soon you’re following Venezuela into “our money has lost all its value” territory.
Borrow trillions into existence and at some point even ludicrously low rates of interest start piling up serious sums of interest due, and the system eventually collapses under the weight of defaults and interest payments that stripmine the economy’s productive capacity.
Every subsystem in America has compensated for structural stagnation and increasing friction by reducing redundancy and buffers. Have you noticed how many airline flights are now delayed by mechanical issues? Nobody keeps spare parts in stock, and servicing is now concentrated in a handful of hubs; there’s no spare aircraft or flight crews available. All the buffers and redundancy have been stripped out to lower costs and maintain profits, lest the management team be fired for missing a quarterly earning target.
To continue reading: America 2018: Dicier by the Day

A Summer Of Disappointments Will Lead To An Extended Economic Crash, by Brandon Smith

SLL doesn’t always agree with Brandon Smith’s methodology, but this is a forecast worth paying attention to. From Smith at alt-market.com:

The summer season is often about renewed hope and revelry in comfort, and this goes for economic comfort as much as anything else. In parallel to the old tale of The Ant And The Grasshopper, we are all tempted to act like the grasshopper, forget about the trials and tribulations of the world and take a vacation from awareness.

I am seeing quite a lot of this in the past month as mounting global tensions appear to have subsided. But appearances can be deceiving…

I am reminded of the summer of 2008 when those of us in alternative economic analysis were warning of the overwhelming evidence of a debt based deflationary disaster. There seemed to be widespread complacency back then as well. September finally struck and reality began to sink in, and the rest is a history we are still dealing with to this day. Right now, economic optimism is desperately clinging to news headlines rather than data fundamentals, but this can just as easily sink markets as it can keep them artificially afloat.

Consider the numerous powder keg events coming our way over the next few months and what they will mean for economic sentiment if they go the wrong way.

Federal Reserve Meeting June 12-13

The next week will be packed with public statements from various Fed officials which may hint at how aggressive the central bank will be for the rest of the year in its tightening program. However, I think I can guess rather easily what they will do. The Fed has been sticking to its policy of interest rate hikes and balance sheet cuts as I predicted they would for the past couple years. Nothing has changed under new Fed chairman Jerome Powell.

I believe the June meeting will mark an important mid-year shift for the Fed into even more aggressive fiscal tightening. The mainstream media has been heavily pushing the idea that stagflation is now a true threat to the U.S. economy. This is a notion I actually agree with and have been warning about for quite some time.

To continue reading: A Summer Of Disappointments Will Lead To An Extended Economic Crash

Why the Empire Never Sleeps: War Finance Made Easy, Part 3, by David Stockman

The US empire couldn’t exist without the Federal Reserve and its fiat debt instruments. From David Stockman at davidstockmanscontracorner.com, via antiwar.com:

Woodrow Wilson’s Folly gave rise to more than the 1,000 year flood of Nazi and Soviet totalitarianism and their state orchestrated campaigns of mass murder.

It also opened the door to massive, cheap war finance. And that baleful innovation has sustained the Empire long after Hitler and Stalin met their maker and the case for the Indispensable Nation had become ragged and threadbare.

In the context of American democracy – special interest dominated as it is – the greatest deterrents to imperial adventurism and war are the draft and taxes. Both bring home to the middle class voting public the cost of war in blood and treasure (theirs), and force politicians to justify the same in terms of tangible and compelling benefits to homeland security.

We leave the draft for another day, but do note that when the draft expired in 1970 what ended was not imperial wars – only middle class protests against them.

In fact, the Empire has learned to make do, happily, with essentially mercenary forces recruited from the left behind precincts of the rust belt and southeast and the opportunity deprived neighborhoods of urban America.

But even mercenaries, and the upkeep, infrastructure and weaponry of the expeditionary forces which they comprise, cost lots of money. And that would ordinarily be a giant problem for the Imperial City because the folks in the hinterlands have a deep and abiding allergy to high taxes.

As we explain below, however, Woodrow Wilson solved that problem, too, by drafting the printing press of the newly minted Federal Reserve for war finance duty.

So doing, he opened the Pandora’s box of Federal debt monetization by permitting the Fed to own government debt – a step strictly forbidden by the stringent 1913 enabling statute drafted by the legendary maestro of sound money, Congressman Carter Glass.

Needless to say, as a political matter printing money is a lot easier than taxing the people. And that’s especially true when the spending in question involves the machinations of Empire in distant lands spread about the planet at a time when citizens on the home front feel abused and over-taxed already.

To continue reading: Why the Empire Never Sleeps: War Finance Made Easy, Part 3