Tag Archives: interest rates

The Fed’s Answer to the Ghastly Monster of its Creation, by MN Gordon

In politics and central banking, nothing succeeds like failure. The Fed’s answer for the problems its creating is more of the same, only bigger and better. From MN Gordon at economicprism.com:

The launch angle of the U.S. stock market over the past decade has been steep and relentless.  The S&P 500, after bottoming out at 666 on March 6, 2009, has rocketed up over 370 percent.  New highs continue to be reached practically every day.

Over this stretch, many investors have been conditioned to believe the stock market only goes up.  That blindly pumping money into an S&P 500 ETF is the key to investment riches.  In good time, this conditioning will be recalibrated with a rude awakening.  You can count on it.

In the interim, the bull market may continue a bit longer…or it may not.  But, to be clear, after a 370 percent run-up, buying the S&P 500 represents a speculation on price.  A gamble that the launch angle furthers its steep trajectory.  Here’s why…

Over the past decade, the U.S. economy, as measured by nominal gross domestic product (GDP), has increased about 50 percent.  This plots a GDP launch angle that is underwhelming when compared to the S&P 500.  Corporate earnings have fallen far short of share prices.

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The Fed Detests Free Markets, by Raúl Ilargi Meijer

The Fed is head of the US banking cartel. The last thing it wants is free markets, especially in interest rates and banking risk. Interest rates are to be suppressed, and banking risk socialized. From Raúl Ilargi Meijer at theautomaticearth.com:

To be completely honest, I wrote -most of- the second part of this a while ago, and then I was thinking this first part should be part of the second, if you can still follow me. But it doesn’t really, it’s fine. I wanted to write something to address how little people know and acknowledge about how disastrous central bank policies have been for our societies and economies.

Because they don’t, and they have no clue, largely and simply because of the way central banks are presented both by themselves and by the financial press that covers them. Make that “covers”. Still, going forward, we will have no way to ignore the damage done. All the QE and ZIRP and NIRP will turn out to be so destructive for us all they will rival climate change or actual warfare. That’s what I wanted to talk about.

You see, free markets are a great idea in theory. Or you can call it “capitalism”, or combine the two and say “free market capitalism”. There’s very little wrong with it in theory. You have an enormous multitude of participants in an utterly complex web of transitions, too complex for the human mind to comprehend, and in the end that web figures out what values all sorts of things, and actions etc., have.

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Underestimating Them and Overestimating Us, by Jim Quinn

People, including SLL, have been saying a cataclysmic crisis is coming for years. It hasn’t happened yet, but that doesn’t make them wrong, just early. From Jim Quinn at theburningplatform.com:

“Do not underestimate the ‘power of underestimation’. They can’t stop you, if they don’t see you coming.” ― Izey Victoria Odiase

Image result for bernanke, yellen, powell

During the summer of 2008 I was writing articles a few times per week predicting an economic catastrophe and a banking crisis. When the biggest financial crisis since the Great Depression swept across the world, resulting in double digit unemployment, a 50% stock market crash in a matter of months, millions of home foreclosures, and the virtual insolvency of the criminal Wall Street banks, my predictions were vindicated. I was pretty smug and sure the start of this Fourth Turning would follow the path of the last Crisis, with a Greater Depression, economic disaster and war.

In the summer of 2008, the national debt stood at $9.4 trillion, which amounted to 65% of GDP. Total credit market debt peaked at $54 trillion. Consumer debt peaked at $2.7 trillion. Mortgage debt crested at $14.8 trillion. The Federal Reserve balance sheet had been static at or below $900 billion for years.

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How Beijing Uses Fake Money to Cannibalize the U.S. Transit Market, by MN Gordon

Ultra-low, and in some cases negative, interest rates have done many weird and not-so-wonderful things, including giving the Chinese a leg up in the US public transit market. From MN Gordon at economicprism.com:

One of the more remarkable achievements of fake money creation is that it distorts and disfigures the world in odd and uncanny ways.  Dow (not quite) 27,000.  Million dollar shacks.  Over $13 trillion in subzero-yielding debt.

You name it.  Any and every disfiguration is possible with enough fake money.

However, when it comes to the full range of ways fake money distorts the economic landscape, asset price inflation is merely a cheap facade.  The real, mega disfigurations pile up in the arena of international trade.  What’s more, they extend well beyond a gaping trade imbalance.

Currency wars, competitive devaluations, and the race to the bottom are all hazards formed out of the confluence of fake money, foreign exchange markets, and international trade.  So, too, the impetus for tit for tat trade tariffs and trade wars ties back to the deceit and deception of fake money.  Still, these facets aren’t the half of it.

To better understand what exactly fake money has wrought, a brief detour is in order.  You see, a world under the influence of fake money is a strange and curious place.  The clearest path between two points is not always a straight line.

Thus, before we get to how Beijing is using fake money to cannibalize the U.S. transit market, we deviate to the fake capitalism of the technology sector.  This may be an old and tired story.  But it offers important context for understanding the world at large…

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The ‘Deficits Don’t Matter’ Folly, by David Stockman

Entities that keep taking on more debt eventually can’t repay it and go broke, regardless of whether or not that entity is a government. From David Stockman at lewrockwell.com:

Well, that was timely. The US Treasury just posted a record $207 billion deficit for May and record monthly spending of $440 billion. That brought the rolling 12 month deficit to just shy of the trillion dollar mark at $986 billion.

The timely part is two-old. First, it just so happens that May marked month #119 of the current expansion, making it tied for the duration record with the 1990s cycle. But even JM Keynes himself would be rolling in his grave in light of the chart below.

To wit, even by the lights of hardcore Keynesians of yore, fiscal deficits were supposed to be falling sharply at the end of a business cycle or even moving into surplus as they did in 1999-2000, not erupting toward 5% of GDP as has now happened.

The second timely note, of sorts, is that the Wall Street Journal was Johnny on the Spot this AM with a front page story entitled, “How Washington Learned to Love Debt and Deficits”.

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EU monetary and economic failures, by Alasdair Macleod

Alasdair Macleod documents the reasons behind the EU’s impending failure. From Macleod at goldmoney.com:

Introduction and summary

The monetary, financial and political weaknesses of the EU are about to be exposed by the forthcoming global credit crisis.

This article assumes the combination of end of credit cycle dynamics and the rise in trade protectionism in 1929 is a valid precedent for gauging the scale of a developing global credit crisis today, as described in my earlier article published here. Then, it was heavier tariffs coinciding with a less destabilising inflation cycle than we face today, a combination that saw stock markets collapse. Today, we have the additional factors of far greater monetary inflation, far higher levels of government debt, low savings coupled with record consumer borrowing, and unbacked fiat currencies likely to lose purchasing power instead of gold-backed currencies which increased their purchasing power.

Declining international trade has already become evident in only a few months, and prescient observers detect early signs of a rapidly developing global recession. In response, the ECB has announced it will target lending to non-financial businesses with its TLTRO-III programme from September onwards.

The larger problem is the crony capitalists in the EU have captured the EU institutions, including the ECB, and will demand ever-accelerating monetary inflation. I have chosen to examine the consequences for the Eurozone, which is one of the more vulnerable economic and political constructs likely to be exposed in the severe economic downturn the world faces today.

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The dangerous zombie infestation (of the world economy), by Tuomas Malinen

Ultra-low interest rates keep alive walking dead companies and create a walking dead economy. From Tuomas Malinen at gnseconomics.com:

It is estimated that over 14% of companies in the S&P 1500 are zombies. In China, roughly 20 percent of A-share listed companies on Shanghai and Shenzhen exchanges are zombies. In the developed economies, approximately 12 percent of all non-financial companies are ‘zombies’. Only 30 years ago, this share was just 2 percent.

These are stunning figures.  How did we get there? What is behind the worrying phenomenon of zombification?

The risks of this zombie infestation to the economy and markets are also widely misunderstood and mostly ignored at the moment. They should not be. The large share of zombie companies creates the possibility of the spontaneous collapse of both global asset markets and economy.

“They’re coming to get you, Barbara!”

Zombies were introduced in the economic jargon by Caballero, Hoshi and Kashyap (2008) when they described the unproductive and indebted—yet still operating—firms in Japan as ”zombie companies”. They found that, after the economic crash of the early 1990’s, instead of calling-in or refusing to refinance existing debts, large Japanese banks kept lending flowing to otherwise insolvent borrowers (aka zombies).

Zombies companies restrict the entry of new, more productive companies, diminish job creation in the economy and lock capital into unproductive uses. In a word, they are a menace to the economy and society.

According to current academic research, the biggest factor in the creation of zombie companies is the health of banks. When they are fragile and unable to cope with loan losses, banks start to evergreen debtor companies. That is, weak banks support ailing companies, which support each other. This is why low interest rates foster zombie creation. Low (or negative) interest rates make banks weaker, by restricting their profits, and they provide cheap loans to zombie companies to avert losses.

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