Tag Archives: Federal Reserve

The new deal is a bad old deal, by Alasdair Macleod

The Internet’s best economist explains why the New Deal was a huge mistake, and why we’re about to repeat it, except this time only huger. From Alasdair Macleod at goldmoney.com:

So far, the current economic situation, together with the response by major governments, compares with the run-in to the depression of the 1930s. Yet to come in the repetitious credit cycle is the collapse in financial asset values and a banking crisis.

When the scale of the banking crisis is known the scale of monetary inflation involved will become more obvious. But in the politics of it, Trump is being set up as the equivalent of Herbert Hoover, and presumably Joe Biden, if he is well advised, will soon campaign as a latter-day Roosevelt. In Britain, Boris Johnson has already called for a modern “new deal”, and in his “Hundred Days” his Chancellor is delivering it.

In the thirties, prices fell, only offset by the dollar’s devaluation in January 1934. This time, monetary inflation knows no limit. The wealth destruction through monetary inflation will be an added burden to contend with compared with the situation ninety years ago.

Introduction

Boris Johnson recently compared his reconstruction plan with Franklin D Roosevelt’s New Deal. Such is the myth of FDR and his new deal that even libertarian Boris now invokes them. Unless he is just being political, he shows he knows little about the economic situation that led to the depression.

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Mount Printmore, from The Burning Platform

https://www.theburningplatform.com/2020/07/04/mount-printmore/

Busted, by Sven Henrich

The Federal Reserve has distorted the economy and financial markets beyond recognition. From Sven Henrich at northmantrader.com:

First they dismiss you as a conspiracy theorist then they join you. The secret is out, the Fed is busted: Central banks have distorted asset prices far above the economy.
I’ve been harping about the market cap to GDP ratio for a while and even called the Fed’s asset price distortion operation a direct threat to the economy.

Now it appears the IMF agrees:

This disconnect between markets and the real economy raises the risk of another correction in risk asset prices should investor risk appetite fade, posing a threat to the recovery”

Posing a threat to the recovery. This was precisely my point on CNBC Fast Money last week:

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MMT: Not Modern, Not Monetary, Not a Theory, by Jeff Deist

Jeff Deist spares SLL the trouble of debunking the Modern Monetary Theory fantasy. From Deist at mises.org:

Modern monetary theory (MMT) has a new champion, and a new bible. Stephanie Kelton, economics professor at SUNY Stony Brook, is the author of The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. Professor Kelton was an advisor to the Bernie Sanders presidential campaigns, and her ideas increasingly find purchase with left progressives. It is certainly possible that she has a future either in a Biden administration or even on the Federal Reserve Board, which is a testament to how quickly our political and cultural landscape has shifted toward left progressivism. And left progressivism requires a “New Economics” to provide intellectual cover for what is essentially a political argument for painless free stuff from government.

Kelton’s essential argument, first advanced by MMT guru Warren Mosler in the 1990s, is quite simple: federal spending is unconstrained by revenue. Taxes function only to regulate demand and hence inflation; federal borrowing functions only to regulate interest rates. Sovereign government treasuries can create and spend as much money as they like to stimulate growth, especially when the economy is underperforming. If inflation spikes, taxes can be imposed to take money out of the economy.

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The Federal Reserve is Getting Desperate, by Ron Paul

It doesn’t matter how desperate the Fed gets, whatever they do won’t work. From Ron Paul at ronpaulinstitute.org:

In a sign that the Federal Reserve is growing increasingly desperate to jump-start the economy, the Fed’s Secondary Market Credit Facility has begun purchasing individual corporate bonds. The Secondary Market Credit Facility was created by Congress as part of a coronavirus stimulus bill to purchase as much as 750 billion dollars of corporate credit. Until last week, the Secondary Market Credit Facility had limited its purchases to exchange-traded funds, which are bundled groups of stocks or bonds.

The bond purchasing initiative, like all Fed initiatives, will fail to produce long-term prosperity. These purchases distort the economy by increasing the money supply and thus lowering interest rates, which are the price of money. In this case, the Fed’s purchase of individual corporate bonds enables select corporations to pursue projects for which they could not otherwise have obtained funding. This distorts signals sent by the market, making these companies seem like better investments than they actually are and thus allowing these companies to attract more private investment. This will cause these companies to experience a Fed-created bubble. Like all Fed-created bubbles, the corporate bond bubble will eventually burst, causing businesses to collapse, investors to lose their money (unless they receive a government bailout), and workers to lose their jobs.

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David Stockman on Fiscal Disaster, Social Unrest, and the Presidential Election

The fiat debt the Federal Reserve has created has to go somewhere, and it’s going into stocks. From David Stockman at internationalman.com:

Fiscal Disaster
International Man: Recently, massive riots have broken out in many cities across the US.

Despite the unrest—and the economic damage from the shutdowns—the stock market continues to rally.

It seems that markets don’t reflect earnings, economic prosperity, or growth. What is going on here?

David Stockman: It’s quite simple. The Fed has unleashed the greatest torrent of liquidity ever, and it’s finding its way into a relentless, massive bid for risk assets.

Since the eve of the Lockdown Nation disaster on March 11, the Fed’s balance sheet has erupted from $4.3 trillion to nearly $7.2 trillion. That’s $32 billion per day—including weekends, Easter, and nationwide riot days.

Worse still, at their June meeting, the mad money printers domiciled in the Eccles Building promised to keep printing $120 billion per month to buy US Treasuries and other assets for an indefinite period. That should get us to a $10 trillion balance in less than two years’ time.

What this means, of course, is that honest price discovery in the canyons of Wall Street is deader than a doornail. We now have a putative capitalist economy in which the most important prices in all of capitalism—the prices of financial assets—are pegged, rigged, and manipulated by the central banking agents of the state.

The result, of course, is speculation and malinvestment on a biblical scale.

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On Juneteenth, A Conversation of Reparations, by Bill Bonner

Reparations is a no less worthy cause for government funny money than many of the other “causes” the government has already rewarded. From Bill Bonner at bonnerandpartners.com:

Week 14 of the Quarantine

In those days they shall say no more, the fathers have eaten a sour grape and the teeth of their children are set on edge…

– Jeremiah 31:29

SAN MARTIN, ARGENTINA – Many years ago, during the anti-war riots of 1970, we attended a student rally at the University of New Mexico. Jane Fonda had come to Albuquerque to support the protestors.

Speaker after speaker got up and railed against the war, and against racism. Each one was careful to include the local victims – “Chicanos” (Hispanics) and “Native Americans” (the American Indians, who were an important minority at the University of New Mexico).

Then, after Ms. Fonda had left the podium, we heard drums… and saw a contingent of Indians headed toward the stage. One, a stout young man, took the microphone:

“Stop using us, man” was all he said.

The crowd was silent. What did he mean? Weren’t they trying to help?

The Indians marched off and the rally went back to its usual windy complaints.

Reparations

And today, here at the Diary, we end this week’s ramble by looking at where bad ideas and bad money come together. That is, we will look at “reparations”… and a group that has been badly used for centuries. In preview: Once you begin handing out free money, it is hard to stop.

For years, “reparations” seemed like just another dumb gripe. But it’s becoming real. Last week, the California Assembly agreed to take the case for “reparations” seriously. Joe Biden says he is not opposed to the idea, as long as American Indians are included.

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Deep State to Powell: Stop Goosing Stocks Higher Or You’ll Re-Elect Trump, by Charles Hugh Smith

Traditionally there’s been a strong correlation between the stock market and the electoral fortunes of presidents and their challengers. From Charles Hugh Smith at oftwominds.com:

Come on, Jay, you can always goose stocks back to new highs after the election.

Indulge me for a moment in some backroom speculation. It’s absurdly obvious that the unelected, permanent, ever-expanding National Security State, a.k.a the Deep State, and its Democratic Party allies have been attempting to torpedo Donald Trump since the 2016 election took them by surprise. (Imagine doing everything that worked so well in the past and failing at the last minute. Ouch. Revenge is best served cold, n’est pas?)

The comedy-of-errors RussiaGate collapsed in a foul heap, the impeachment backfired, and so what’s left in the Deep State quiver other than its usual bag of, ahem, accidents?

Some might argue that urban riots and civil unrest might be enough to cause Trump to lose the election in November, but this strategy can backfire just as easily as the previous Deep State strategies.

Assuming Americans will ultimately vote their pocketbook as in the past, the only sure way to sink Trump is to crash the stock market, the jewel in Trump’s crown. This is blinding obvious, but the Deep State’s political allies have been wary of shrinking the bloated wealth of their donors, and wary of a backlash from the wealthy who want to see Trump lose but not if it requires the personal sacrifice of surrendering any of the $548 billion they’ve gained in the recent stock market melt-up.

But with the election just months away, the pressure is now so intense that the Deep State is demanding Powell and the Fed stop the money-printing that’s goosing stocks higher. Hints have been elevated to suggestions which are about to become demands.

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How The Federal Reserve Unilaterally, De-Facto Amended the US Constitution, by Chris Hamilton

Wisely, the framers of the constitution did not provide the government with the power to establish a central bank. From Chris Hamilton at economica.blogspot.com:

The US Constitution is the spectacular framework upon which our nation is built. The framers even built in a means to right the terrible wrongs that were beyond their capabilities at the time…the amendment has been utilized 27 times in all (most recently in 1992), righting freedoms of religion, equality of all races and sex, among others. But not included anywhere in the Constitution was the Federal Reserve, allowing it the power to guide interest rates ever lower or infinitely purchase assets. The implications of the Federal Reserve policies have been to undermine the Congress’ primary function, that of compromise in an attempt to balance spending versus taxation. The Federal Reserve policies have removed market based discipline, (market based interest payments), encouraging Congress to raise seemingly infinite federal debt. Thus Congress’ role as an institution for compromise is broken. This de-facto Constitutional amendment has spurred ideas of infinite spending like MMT. Flawed as the framers were, this insertion of a de facto, unelected, quasi private/federal branch of government was explicitly never intended because of the cancer it represented.

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A Black Swan With Teeth, by Peter Schiff

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.)

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