Tag Archives: Federal Reserve

Looming Dollar Shortage Getting Worse As Emerging Markets Implode, by Adem Tumerkan

US deficits and the Federal Reserve’s quantitative tightening are sucking dollars out of the international financial system, to the detriment of emerging markets. From Adem Tumerkan at palisade-research.com:

One of the most important macro-situations that’s developing right now is the looming U.S. dollar shortage.

I don’t mean in the sense that banks don’t have enough dollars to lend out – I’m talking about the foreign sovereign markets.

Here are some of the things that’s causing liquidity to dry up. . .

1. Soaring U.S. deficits – the United States’ need for constant funding is requiring huge amounts of capital

2. A strengthening U.S. Dollar – which is weakening the rest of the worlds currencies

3. Rising U.S. short-term rates and LIBOR rates – courtesy of the Federal Reserve’s tightening

4. The Fed’s quantitative tightening program – unwinding their balance sheet by selling bonds

These four things are making global markets extremely fragile. . .

I’ve written about this dollar shortage before – but things are getting much worse.

As a recap of why this all matters – when the U.S. buys goods from abroad, they are taking in goods and sending out dollars. Otherwise said, they are selling dollars out of the country in return for goods.

Those countries that sold to America now have dollars in return. But since countries don’t have a mattress to store their money under – they must find liquid and ‘safe’ places to put it.

With the dollar as the world’s reserve currency – and U.S. treasury market being the most liquid – countries usually take the dollars and funnel them back into the U.S. via buying bonds.

Since the U.S. is a net-debtor – inflows of new money is constantly required to pay out outstanding bills. So there’s always fresh debt that foreigners can buy.

And if you haven’t checked lately, the national debt is over $21 trillion – and growing faster. The latest Congressional Budget Office (CBO) report stated that at the current rate – U.S. debt-to-GDP will be over 100% by 2028 (if not sooner).

So how does this tie into a dollar shortage?

Let me break it down. . .

The always-rapidly-growing U.S. deficit requires constant funding from foreigners. But with the Federal Reserve raising rates and unwinding their balance sheet through Quantitative Tightening (QT) – meaning they’re sucking money out of the banking system.

These two situations are creating the shortage abroad. The U.S. Treasury’s soaking up more dollars at a time when the Fed is sucking capital out of the economy.

Not too mention the strengthening dollar and higher short-term yields are making it more difficult for foreigners to borrow in dollars. Especially at a time when Emerging Market’s are imploding.

To continue reading: Looming Dollar Shortage Getting Worse As Emerging Markets Implode

Advertisements

How Long Can The Federal Reserve Stave Off the Inevitable? by Paul Craig Roberts

It’s inevitable, we just don’t know when. If Paul Craig Roberts or anyone else gets the correct answer, an incalculable fortune can be made by Big Shorting equity and debt markets. From Roberts at paulcraigroberts.com:

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them? The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs. “Making America great again” means dealing with these corporations, not with China. When Trump learns this, assuming anyone will tell him, will he back off China and take on the American global corporations?

The loss of middle class jobs has had a dire effect on the hopes and expectations of Americans, on the American economy, on the finances of cities and states and, thereby, on their ability to meet pension obligations and provide public services, and on the tax base for Social Security and Medicare, thus threatening these important elements of the American consensus. In short, the greedy corporate elite have benefitted themselves at enormous cost to the American people and to the economic and social stability of the United States.

To continue reading: How Long Can The Federal Reserve Stave Off the Inevitable?

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?

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