The Japan Way is for the central bank suppresses interest rates and monetizes debt through its buying of the government’s debt, until interest rates are so low that the bank is the only buyer. From Daniel Lacalle at dlacalle.com:
The European Central Bank announced a tapering of the repurchase program on September the 9th. One would imagine that this is a sensible idea given the recent rise in inflation in the eurozone to the highest level in a decade and the allegedly strong recovery of the economy. However, there is a big problem. The announcement is not really tapering, but simply adjusting to a lower net supply of bonds from sovereign issuers. In fact, considering the pace announced by the central bank, the ECB will continue to purchase 100% of all net issuance from sovereigns.
There are several problems in this strategy. The first one is that the ECB is unwillingly acknowledging that there is no real secondary market demand for eurozone countries’ sovereign debt at these yields. One would have to think of twice or three times the current yield for investors to accept many eurozone bonds if the ECB does not repurchase them. This is obviously a dangerous bubble.
The second problem is that the ECB acknowledges that monetary policy has gone from being a tool to help implement structural reforms to a tool to avoid them. Even with the strong GDP bounce that the ECB predicts, few governments are willing to reduce spending and curb deficits in a meaningful way. The ECB estimates show that after the massive deficit spending of 2020, eurozone government spending will rise again by 3.4% in 2021 only to fall modestly by 1.2% in 2022. This means that eurozone government spending will consolidate the covid pandemic increase with little improvement in the fiscal position of most countries. Indeed, countries like Spain and Italy have increased the structural deficit.
Posted in Banking, Business, Collapse, Currencies, Debt, Economics, Economy, Financial markets, Governments
Tagged Debt monetization, ECB, interest rates
Maybe there’s some sort of fleabag apartment or hotel level between trailer park eviction and homelessness, and maybe not. From Michael Maharrey at schiffgold.com:
The Federal Reserve is helping corporate real estate investors evict poor people from mobile home parks.
NPR highlighted the growing number of mobile home part evictions. According to the report, real estate investors continue to buy up mobile home parks across the US. They then raise lot rents and fees, and evict residents who can’t pay.
As the report explains, the government makes this scheme possible with easy financing through agencies such as Fannie Mae and Freddie Mac. Here’s how it works in a nutshell.
A company raises rates and fees in a park. That makes the park more valuable. So they can now borrow more money against it, kind of like when you refi your house and get cash out of the deal. They pull out, say, $3 million, and they use that to go buy another mobile home park. And then they do that again and again. It’s a cascade of borrowed money. And often, these loans are backed by the US government. They provide very, very low-cost debt for these investors to get enough cash out to go buy additional parks. The loans have super cheap interest rates because they’re guaranteed by Fannie Mae and Freddie Mac, the government-backed entities at the heart of the US mortgage market.”
NPR gets part of the story right. In fact, it’s pretty impressive that they didn’t just pin the blame on “greedy capitalists.”
Nevertheless, the story completely misses the biggest player in this game – the Federal Reserve.
NPR asserts that the interest rates are low because the government backs the loans. That’s certainly part of the equation. But it’s the central bank that pushes interest rates to artificially low levels. And the Fed also makes it possible for these quasi-governmental agencies to continue to buy loans through its quantitative easing program.
There’s an old saying that it’s better for central bankers to remain silent and have people suspect that they’re brain-dead clueless than open their mouths and removed all doubt. From David Stockman at davidstockmanscontracorner via lewrockwell.com:
We start with this gem from NY Fed president John Williams. He claims the Fed must keep injecting $120 billion per month of fraudulent credit into Wall Street because, apparently, this quarter’s likely 7% real GDP growth and 5% inflation are not sufficient to meet the Fed’s goals:
“… the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery.”…
You can’t say enough bad things about this knucklehead. He’s the very poster boy for the camarilla of academics and Fed lifers who have hijacked the nation’s central bank.
For want of doubt, here is William’s career since age 18:
- 1980-1984: A.B. in economics at University of California at Berkeley;
- 1985-1989: MA in economics at London School of Economics;
- 1990-1994: PhD in economics at Stanford University;
- 1995-2002: Federal Reserve Board staff economist;
- 2003-2010: Director of Research at the San Francisco Fed;
- 2011-2018: President, San Francisco Fed;
- 2018-2021: President, New York Fed.
Does this man remind you of a medieval theologian who never escaped the bosom of the Roman Catholic Church, and who did truly believe you can count the number of angels on the head of a pin?
Stated differently, Williams has been so mentally flayed by 40 years of captivity in macroeconomic models and the Fed’s theological groupthink that he can no longer think at all. And the evidence is overwhelming.
Even as the Fed is injecting $120 billion of fresh cash into the dealer markets each and every month, Wall Street has become so waterlogged with cash that upwards of $800 billion is being loaned right back to the Fed via its so-called o/n RRP facility.
When interest rates really start to reflect the ongoing monetary inflation, it will blow the prices of most financial assets out of the water. From Alasdair Macleod at goldmoney.com:
here is an established theoretical relationship between bonds and equities which provides a framework for the future performance of financial assets. It would be a mistake to ignore it, ahead of the forthcoming rise in global interest rates.
Price inflation is roaring, and so far, central banks are in denial. But it is increasingly difficult to see how monetary policy planners can extend the suppression of interest rates for much longer. There can only be one outcome: markets, that is to say prices determined by non-state actors, will force central banks to capitulate on interest rates in the summer.
Hardly noticed, China is deliberately putting the brakes on its economy, which will cause an inflationary dollar to collapse, unless the US defends it by putting up interest rates. Deliberate? Almost certainly, as part of its strategy, China is taking the financial war with the US into the foreign exchanges.
Bond yields will rise, with the US Treasury 10-year bond leaving a 2% yield far behind. Equity markets will sense the danger, and it might turn out that the month of May marks a peak in financial asset values — following cryptocurrencies into substantial bear markets.
There is an old stock market adage that you should sell in May and go away. It has already proved its worth in the case of cryptocurrencies, with Bitcoin more than halving at one point, and Ethereum losing 57% between 10—19 May. A sea-change in cryptocurrencies’ market sentiment has taken place.
As for equities, it could also turn out that 10 May, which so far has marked the S&P 500 Index’s high point, will mark the beginning of their decline. But it’s too soon to tell. However, we do know that following the unprecedented dilution of the major currencies’ purchasing power since March 2020 commodity prices have increased substantially, global logistics are fouled up and consumer prices are rapidly rising everywhere, a combination of events which is bound to lead to higher interest rates. But as is usually the case in times like these, central bankers and market bulls are wishing this reality away.
Posted in Banking, Business, Currencies, Debt, Economics, Economy, Financial markets, Governments, Money
Tagged debt, Fiat currencies, Gold, interest rates, Silver
Bet on the Fed choosing fatal inflation. From Matthew Piepenberg at goldswitzerland.com:
Below we look at the dark corner in which the Fed has placed themselves and investors: A one-way path toward tanking markets or crippling inflation.
Alas: Pick your poison.
For us, the antidote is as good as gold.
More Inflation Signs
Stocks continue to gyrate nervously as the Fed continues to behave like a cornered animal trying to downplay inflation risks while paradoxically supporting a mega “everything bubble” with pro-inflationary tools.
April’s “official” CPI inflation number climbed by 4.2%, the fastest climb since 2008 and 2X the Fed’s mandate.
The Fed is claiming that’s because because COVID’s 2020 deflationary trends made such relative inflationary increases “expected,” “temporary,” and soon to be “contained.”
We’ve heard those words before…
Meanwhile, US producer prices surged by 6.2% for the same month, the highest move since 2010, as core inflation, which excludes energy and food, saw its highest move since 1981.
As for energy and food, we’ve already made it painfully clear that prices on everything from ethanol to canola and corn, or from milk, chicken wings and lean pork to beef and coffee are skyrocketing by high double digits.
Thus, in case you think inflation is still up for debate, the facts once again tell us it’s already here.
And as for inflation in the risk asset markets, that’s now as obvious as any bubble narrative.
The Fed is walking on egg shells trying not to say or do anything that would upset the markets and topple the house of cards. From Sven Henrich at northmantrader.com:
What a circus. I imagine there’s a big sign in every Fed building in America: Don’t drop, fragile, handle with care.
Janet Yellen, while no longer in a Fed building, committed the cardinal sin of pointing out the obvious yesterday: Rates may have to be raised in response to rising inflation.
The response sequence was as predictable as laughable:
Recognizing the market’s reaction of the unthinkable: Selling, the comments had to be caveated to immediately erase the damage of a near 3% drop in the tech sector.
Yes, this is how conditioned investors are, this is how pitifully everything is centered around policy makers where the slightest hint or thought of even just thinking about reducing the free money spigot may cause selling of equities.
And it wasn’t just Yellen coming to the rescue of her unforced error course. In the last 24 hours alone a multitude of Fed speakers coming out nearly every hour to assure markets that they either have the tools ideal with inflationary pressures or that inflationary pressures will be transitory or even moving the goalposts outright:
This pithy little article hits the nail on the head. From Tyler Durden at zerohedge.com:
On Tuesday morning, Deutsche Bank’s Jim Reid published his 23rd annual default study, a document he first put out in the 1990s which as he says, “makes me feel very old” and adds that the story of this report over the past decade or so has been the increasing divergence between economic growth and defaults. And while defaults have trended down alongside growth, the last 12 months have been a supersized version of this as defaults have peaked at a lower level than during the previous three big default cycles even as growth across many countries was at the lowest levels for several decades or centuries.
According to Reid, the reason for this is simple: it is because debt has become so large over this period, and of such extreme systemic importance, that when each cycle turns there is an ever larger policy move to ensure that many of the most heavily indebted entities don’t default and risk a severe contagion event for the global economy.
You can’t control an economy by controlling interest rates. From Alasdair Macleod at goldmoney.com:
This article explains why attempting to achieve economic outcomes by managing interest rates fails. The basis of monetary interventionist theories ignores the discoveries of earlier free-market thinkers, particularly Say, Turgot and Böhm-Bawerk.
It also ignores Gibson’s paradox, which demolishes the theory that managing interest rates controls price inflation. And incredulously, the whole basis of banking regulation assumes that commercial banks are just intermediaries between depositors and borrowers. That model of banking fails to address the simple fact that banks create credit out of thin air and that deposits are the property of the banks, and not their customers.
The process of credit creation is described herein and is markedly different from that commonly assumed. Changes in the level of outstanding bank credit have nothing to do with interest rates, except perhaps in extremis.
It is hardly surprising, therefore, that critical mistakes are being made by policy planners. And we find that the US bank cohort is now reducing outstanding bank credit for the non-financial economy, which will make it impossible for businesses to deliver sufficient product to satisfy expected consumer demand. Far higher consumer prices than currently discounted in financial markets will follow.
Consequently, bond yields are set to rise much further, marking the end of the global financial asset bubble, and the failure of the fiat currency regime.
It must be a mystery to central bankers that reducing interest rates to the zero bound hasn’t stimulated their economies as expected. It is also a surprise to the vast majority of economists and financial commentators. Part of the problem is the modern habit of taking government statistics as Gospel, another part is not understanding what individual statistics truly represent, and finally there are the fault lines in neo-Keynesian macroeconomics. And at the root of it is the cost of production theory of prices.
Why would you want to stay in a currency its sponsors are hell-bent on debasing? From Simon Black at sovereignman.com:
History is replete with governments who borrowed themselves to ruin, but not one that borrowed its way to prosperity. From Michael Lebowitz at realinvestmentadvice.com:
“It was assumed, even only a decade ago, that the Fed could not just print money with abandon. It was assumed that the government could not rack up huge debt without spurring inflation and crippling debt payment costs. Both of these concerns have been thrown out the window by large numbers of thinkers. We’ve seen years of high debt and loose monetary policy, but inflation has not come.
So the restraints have been cast aside.”
– David Brooks- New York Times- Joe Biden Is A Transformational President
Regardless of whether you agree or disagree with David’s politics, he makes an incredibly bold statement above. In no uncertain terms, he argues, massive amounts of monetary and fiscal stimulus can be employed with no consequences, no restraints.
We fear this naïve mindset is not just David Brook’s, but a rapidly growing school of thought among economists, politicians, and central bankers. We all want unicorn-like solutions to what ails us, but the truth, grounded in history, is there is no such thing as a free lunch.
Since David shrugs off any consequences of aggressive monetary and fiscal policy, we bring them to the forefront.
Who Is Funding Stimulus?
Someone must pay for rampant Federal spending.
Ask your spouse, neighbor, or friend who that might be, and they are likely to tell you the taxpayer is on the hook. To some degree, they are correct but increasingly less so.