Tag Archives: interest rates

The evolution of credit and debt in 2023, by Alasdair Macleod

The productive sector of the U.S. economy is already in a recession. From Alasdair Macleod at goldmoney.com:

The evidence strongly suggests that a combined interest rate, economic and currency crisis for the US and its western alliance will continue in 2023.

This article focuses on credit, its constraints, and why quantitative easing has already crowded out private sector activity. Adjusting M2 money supply for accumulating QE indicates the degree to which this has driven the US tax base into deep recession. And the wider effects on credit in the economy should not be ignored. 

After a brief partial recovery from the covid crisis in US government finances, they are likely to start deteriorating again due to a deepening recession of private sector activity. Funding these deficits depends on foreign inward investment flows, which are faltering. Rising interest rates and an ongoing bear market make funding from this source hard to envisage.

Meanwhile, from his public statements President Putin is fully aware of these difficulties, and a consequence of the western alliance increasing their support and involvement in Ukraine makes it almost certain that Putin will take the opportunity to push the dollar over the edge.

Credit is much more than bank deposits

Economics is about credit, and its balance sheet twin, debt. Debt is either productive, in which case it can extinguish credit in due course, or it is not, and credit must be extended or written off. Money almost never comes into it. Money is distinguished from credit by having no counterparty risk, which credit always has. The role of money is to stabilise the purchasing power of credit. And the only legal form of money is metallic; gold, silver, or copper usually rendered into coin for enhanced fungibility.

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Rate Hikes, Recessions and the Death of Spiritual Boomerism, by Tom Luongo

As debt implodes and the economy collapses, many will make their acquaintance with reality for the first time. From Tom Luongo at tomloungo.me:

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Rising rates lead to financial accidents, by Alasdair Macleod

The world has never been more primed for a financial accident. From Alasdair Macleod at goldmoney.com:

A recent Bank for International Settlements paper warning of unappreciated risks in foreign exchange markets echoes my earlier warning in an article for Goldmoney published over a month ago describing derivative risks in FX markets.[i]

In this article I also show evidence that banks in both the US and Eurozone are reducing the deposit side of their balance sheets by turning away big deposits which are ending up in central bank reverse repos, parking unwanted liquidity out of public circulation. The great unwind is well under way.

Credit contraction is not only driving a bear market in financial assets, but the exposure to malinvestments by rising interest rates is having negative consequences for the non-financial economy as well. Private equity, which has thrived on cheap finance used to leverage targeted businesses, is showing signs of unwinding with two major Blackrock funds suspending redemptions.

As we approach the season for year-end window dressing, we must hope that the volatility in thin markets that often accompanies it does not destabilise global financial markets. 

Inflation and stagnation

Make no mistake: interest rates have bottomed at the zero bound and can go no lower. The forty-year trend of declining interest rates has ended, with an initial rally, which six weeks ago had halved the value of the 30-year US Treasury bond. The suddenness of this change probably needed a pause, and that is what we have today. Since October, there has been a spectacular recovery in bond prices with this UST bond yield dropping ¾% to 3.5%.

Fears of price inflation have been replaced in large measure by fear of recession. Having dismissed monetarism, bizarrely for a Keynesian led establishment analysts and commentators are now frequently citing the slowing of monetary growth as evidence of a looming recession. Perhaps this means that the failure of their economic models has them grasping at straws, rather than being evidence of a conversion to monetarism. But what is definitely not in the Keynesians’ playbook is a combination of inflation and recession, commonly attributed to an unexplained phenomenon of stagflation.

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How Big Are the Fed’s Losses and Where Can We Go See Them?

You wouldn’t think an institution that can legally print money would lose money. From Wolf Richter at wolfstreet.com:

We find a good rubbernecking spot.

How Big Are the Fed’s Losses and Where Can We Go See Them?

We find a good rubbernecking spot.

By Wolf Richter for WOLF STREET.

A collapse-chart has been making the rounds in the social media, financial blogs, and the like. It’s being handed around without context, as if self-explanatory, sort of like, look, the world is collapsing. It’s from the St. Louis Fed’s data depository. The title of the chart says, among other things, ominously, “Liabilities: Remittances Due to the U.S. Treasury.” Whatever this is, it’s violating the WOLF STREET dictum, “Nothing Goes to Heck in a Straight Line.”

But beyond the funny aspects of the chart, there is something happening on the Fed’s balance sheet that is taking on momentum and heft: How much money the Fed is losing, where this lost money shows up, and how it derails a taxpayer gravy-train. The chart reflects that in a bizarre manner — it does a switcheroo — that we’ll get to in a moment.

A liability is money that the Fed owes some other entity – in this case, money that the Fed owes the US Treasury Department. But this particular liability account, “Earnings remittances due to the U.S. Treasury,” is kind of a funny creature.

It has a negative balance of -$13.2 billion as of the Fed’s weekly balance sheet released yesterday. On a balance sheet measured in trillions, this is pretty small. But it’s going to get a lot funkier.

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If Red States Want Protection From Collapse They Will Have To Build Alternative Economies, by Brandon Smith

If you’re relying on the federal government to make you anything but more miserable when the apocalypse comes you’re bound to be disappointed. Think local. From Brandon Smith at alt-market.com:

Economic centralization is the ultimate form of organized conspiratorial power, because it allows a small group of people to dictate the terms of trade for a society and therefore dictate the terms of each person’s individual survival.

For example, the Federal Reserve as a banking entity has free rein to assert policy controls that can disrupt the very fabric of the US economy and the buying power of our currency. They can (and do) arbitrarily create trillions of dollars from thin air causing inflation, or arbitrarily raise interest rates and crash stock markets. And according to former Fed chairman Alan Greenspan, they answer to no one, including the US government.

I have started to see a new narrative being spread within mainstream media platforms as well as alternative media platforms suggesting that the Fed is necessary because it is working to “counter” the agenda of Joe Biden and the Democrats. Some people claim the central bank is “protecting” America from the schemes of the UN and European interests.

This is perhaps the most moronic theory I’ve ever heard, but it makes sense that the central bank and its puppets would be trying to plant the notion that the Fed is some kind of “hero” secretly fighting a war on our behalf. The money elites associated with the Fed have inflated perhaps the largest financial bubble in the history of the world over the past 14 years. They did this with bailouts, they did this with QE, they did this with covid pandemic checks and loans, and now the bubble is popping. They know it is popping, because they WANT it to pop.

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15.7 trillion new reasons to be concerned about the national debt, by Simon Black

Gargantuan deficits become much more problematic when interest rates are rising. From Simon Black at sovereignman.com:

Last Friday, September 30th 2022 was the close of the Fiscal Year for the US federal government.

If you’re not familiar with the term, the ‘Fiscal Year’ refers to the government’s official accounting period. It starts on October 1st and ends the following September 30th. And everything from the federal budget to the Supreme Court’s case schedule is based around the Fiscal Year.

So are calculations for the national debt.

And based on the figures just released, the US national debt has now reached nearly $31 trillion as of the close of the Fiscal Year last Friday.

(If you want to see the number down to the penny, it’s $30,928,911,613,306.73)

At the start of the Fiscal Year back on October 1, 2021, the national debt was $28.4 trillion. So over the course of the past twelve months, the debt increased by a whopping $2.5 trillion.

That’s the second highest annual increase in the US national debt EVER, after the $4.2 trillion increase in the 2019-2020 Fiscal Year during the pandemic.

Now, a $2.5 trillion increase in the national debt is terrible, and alarm bells should be sounding from coast to coast. But there’s actually something more worrisome going on with the debt.

Remember that whenever governments borrow money, they do so by issuing some form of government bond. A bond, just like a loan, is a type of IOU. One of the key differences, however, is that a bond is a financial security that, just like stocks, can be easily bought and sold by investors around the world.

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Banking crisis — the Great Unwind, by Alasdair Macleod

Europe will be the epicenter of the banking crisis, which has already begun and which will engulf the world. From Alasdair Macleod at goldmoney.com:

There is a growing feeling in markets that a financial crisis of some sort is now on the cards. Credit Suisse’s very public struggles to refinance itself is proving to be a wake-up call for markets, alerting investors to the parlous state of global banking.

This article identifies the principal elements leading us into a global financial crisis. Behind it all is the threat from a new trend of rising interest rates, and the natural desire of commercial banks everywhere to reduce their exposure to falling financial asset values both on their balance sheets and held as loan collateral. And there are specific problems areas, which we can identify:

  • It should be noted that the phenomenal growth of OTC derivatives and regulated futures has been against a background of generally declining interest rates since the mid-eighties. That trend is now reversing, so we must expect the $600 trillion of global OTC derivatives and a further $100 trillion of futures to contract as banks reduce their derivative exposure. In the last two weeks, we have seen the consequences for the gilt market in London, warning us of other problem areas to come.
  • Commercial banks are over-leveraged, with notable weak spots in the Eurozone, Japan, and the UK. It will be something of a miracle if banks in these jurisdictions manage to survive contracting bank credit and derivative blow-ups. If they are not prevented, even the better capitalised American banks might not be safe.
  • Central banks are mandated to rescue the financial system in troubled times. However, we find that the ECB and its entire euro system of national central banks, the Bank of Japan, and the US Fed are all deeply in negative equity and in no condition to underwrite the financial system in this rising interest rate environment. 

The Credit Suisse wake-up call

In the last fortnight, it has become obvious that Credit Suisse, one of Switzerland’s two major banking institutions, faces a radical restructuring. That’s probably a polite way of saying the bank needs rescuing.

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Gilty Finking, by Bill Bonner

Very few financial fiduciaries are set up for rising interest rates. Many of them are using leverage to bet that interest rates will stay stable or decline, which makes it quite painful when they go up. From Bill Bonner at bonnerprivateresearch.com:

BlackRock’s liabilities, the Bank of England’s pivot and the folly of fake rates…

(Source: Getty Images)

Bill Bonner, reckoning today from Baltimore, Maryland…

Yes, dear reader, it’s a YODO world now. Investors are realizing that when they are dead, they are dead forever. No Fed voodoo to raise them from the grave.

And it’s the first time for most of them. No chance to practice. No opportunity to learn.

And so, the mood was glum at the end of last week. The jobs report on Thursday showed a stronger employment market than expected. Investors figured the odds of a Fed U-turn had gone down. They sold stocks. MarketWatch:

While markets have not yet morphed into an actual state of alarm, an increasingly dark sentiment is starting to brew behind the scenes.

Nikko Asset Management’s John Vail said a “short but scary” global recession is likely to be ahead. Ben Emons of Medley Global Advisors said Wednesday’s decision by major oil producers to cut production, starting next month, has the potential to turn into a prolonged stretch of higher inflation and big market swings. And volatility expert Harley Bassman said stocks could drop as much as 20% from where they are now — a magnitude similar to the single-day decline that took place during 1987’s “Black Monday” scare.

As the Fed raises rates, they become more ‘normal’ than they’ve been for many years. But ‘normal’ terrifies investors. It makes them realize how weird things have gotten and that they may have to back up before they can go forward. That is, they may have to give up their Bubble Era profits and admit that much of what they believed was either a lie or a delusion.

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Why Bonds Are Behaving Like Risky Assets, by MN Gordon

Bonds are always risky assets. People just forget that after an almost 40-year bull market. From MN Gordon at economicprism.com:

“When the [credit] delusion breaks, people all with one impulse hoard their money, banks all with one impulse hoard credit, and debt becomes debt again, as it always was.  Credit is ruined.”

– Garet Garrett, 1932, A Bubble that Broke the World

Down, Down, Down

Third quarter 2022 ends today [Friday].  We’re entering the year’s home stretch.  Thus, we’ll take a moment to observe where money and markets have been, so we can conjecture as to where they’re going.

To begin, United States stock markets are in an epic battle between bulls and bears.  For most of the year, the bears have been delivering heavy blows.  But the bulls have not taken their punches lying down.  Here’s a quick review of the three major U.S. Indexes…

After peaking out on January 4, 2022, at 4,814.62 the S&P 500 declined 24.46 percent to an interim bottom of 3,636.87 on June 17, 2022.  The DJIA fell approximately 19.71 percent over this time.

The NASDAQ’s decline commenced on November 22, 2021, at a peak of 16,212.23.  It then cascaded to an interim bottom of 10,565.14 on June 16, 2022, for a top to bottom decline of 34.83 percent.

The indexes then rallied into mid-August.  Many investors thought the bear market was over.  They invested accordingly.  But, alas, it was merely a sucker’s rally.  September was ugly.

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What the End of the Fed Put Actually Means, by Tom Luongo

It means there’s a chance that U.S. finances  and its economy are restored to sanity, although I wouldn’t advise holding your breath waiting for it. From Tom Luongo at tomluongo.me:

gold-dollar-trap

For more than a year I’ve been arguing that the Fed was tightening US dollar supply. When I first put the idea out there it was met with intense skepticism and, for the most part, it still is.

The Fed has long been the punching bag of hard money and alternative finance types because, frankly, it always deserved it. For nearly the past generation, until June of 2021, the Fed acted as the Central Bank of the World.

But we’re rapidly reaching the moment where a lot of people are finally beginning to realize maybe the vaunted “Fed Put,” the belief that the Fed always comes to the market’s rescue isn’t going to show up anytime soon, if at all.

Whenever there was a major crisis on the horizon the Fed was always there to provide the world with the dollars needed to keep things from collapsing completely. This was especially true in the aftermath of Lehman Bros. and the 2008 housing crisis which broke the post-Bretton Woods Dollar Reserve Standard ushered in by Paul Volcker’s extreme monetary policy of the early 1980’s.

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