Tag Archives: interest rates

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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An Honest and Easy Solution to Wealth Inequality, by MN Gordon

This one simple trick would indeed go a long way to solving the problem of inequity of wealth inequality. From MN Gordon at economicprism.com:

Here we are, less than one month into the New Year, and absurdity levels have broken above 120 decibels.  Society, it seems, has spun itself up to a fever pitch.  The common culture is working towards a common freak-out.

This week, for example, we discovered, courtesy of U.S. Representative Alexandria Ocasio-Cortez, that: “The world is gonna end in 12 years if we don’t address climate change.”  This gifted insight was mixed between meticulous news analysis of a peaceful exchange between a smirking teen wearing a MAGA hat and a drum beating Native American wearing a costume.  But this ain’t the half of it…

The annual hootenanny for the elite, the World Economic Forum in Davos, Switzerland, took place this week.  The gathering successfully delivered many high-volume absurdities.  An impartial program listing includes:

Globalization 4.0, how cities can fight back against climate change, radically reinventing social systems, plastic pollution, safeguarding our planet, the rise of techno nationalism, media freedom in crisis, averting peak Europe, escaping extinction, when global order fails, a new deal for nature, shaping the future of democracy, and much, much more.

No doubt, the best and the brightest at Davos see these constructed ails as opportunities to provide technocratic solutions – at your expense.

Amongst all this noise, however, we’re after something different.  Our aim today, first and foremost, is directed at the valuable commodity of silence.  We don’t get enough of it.  We need more of it.

One area more silence is needed is the federal government.  In contrast to the small and quiet government envisioned by the nation’s founders, today’s gigantic federal rule is full of much clatter and racket.  Yet some progress is being made.

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Fire the Fed? by Ron Paul

Central banks are an idea whose time never should have come. From Ron Paul at ronpaulinstitute.org:

President Trump’s frustration with the Federal Reserve’s (minuscule) interest rate increases that he blames for the downturn in the stock market has reportedly led him to inquire if he has the authority to remove Fed Chairman Jerome Powell. Chairman Powell has stated that he would not comply with a presidential request for his resignation, meaning President Trump would have to fire Powell if Trump was serious about removing him.

The law creating the Federal Reserve gives the president power to remove members of the Federal Reserve Board — including the chairman — “for cause.” The law is silent on what does, and does not, constitute a justifiable cause for removal. So, President Trump may be able to fire Powell for not tailoring monetary policy to the president’s liking.

By firing Powell, President Trump would once and for all dispel the myth that the Federal Reserve is free from political interference. All modern presidents have tried to influence the Federal Reserve’s policies. Is Trump’s threatening to fire Powell worse than President Lyndon Johnson shoving a Fed chairman against a wall after the Federal Reserve increased interest rates? Or worse than President Carter “promoting” an uncooperative Fed chairman to Treasury secretary?

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It’s official: the Federal Reserve is insolvent, by Simon Black

By mark-to-market accounting, or as it’s sometimes known, honest accounting, the Fed’s losses on its bond portfolio are greater than it’s capital. In other words, it’s broke. From Simon Black at sovereignman.com:

In the year 1157, the Republic of Venice was in the midst of war and in desperate need of funds.

It wasn’t the first time in history that a government needed to borrow money to fight a war. But the Venetians came up with an innovative idea:

Every citizen who loaned money to the government was to receive an official paper certificate guaranteeing that the state would make interest payments.

Those certificates could then be transferred to other people… and the government would make payments to whoever held the certificate at the time.

In this way, the loan that an investor made to the government essentially became an asset– one that he could sell to another investor in the future.

This was the first real government bond. And the idea ultimately created a robust market of investors who would buy and sell these securities.

When a government’s fortunes changed and its ability to make interest payments was in doubt, the price of the bond fell. When confidence was high, bond prices rose.

It’s not much different today. Governments still borrow money by issuing bonds, and those bonds trade in a robust marketplace where countless investors buy and sell on a daily basis.

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Double Debt Problem, by John Mauldin

There’s no bigger global issue right now than debt. From John Mauldin at mauldineconomics.com:

The selloff in GE is not an isolated event. More investment grade credits to follow. The slide and collapse in investment grade debt has begun… (and later) Don’t be fooled by bond prices holding up, because trading volumes are down. There are fewer bids in the market, and the dispersion of bids is wider. It is time to jog—not walk—to the exits of credit and liquidity risk.

– Scott Minerd, Guggenheim Partners Chief Investment Officer

From a 50,000-feet viewpoint, we’re probably in a global debt bubble…Global debt to GDP is at an all-time high…This is going to be a very challenging time for policymakers moving forward.

– Paul Tudor Jones at the Greenwich Economic Forum in Connecticut, November 15, 2018

Last week, I talked about Ray Dalio’s new book on debt cycles. He describes how debt is inherently cyclical, because it enables more spending now that must be offset by less spending later.

Ray’s book helped me refine my description of The Great Reset. It’s a critical refinement, too. After reading the book, I realized it is entirely possible we will have another debt crisis before what I think of as The Great Reset. I firmly believe the latter is still coming, but there may be another “mere” credit crisis beforehand.

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Salvini Takes Control of Europe’s Future, by Tom Luongo

Will Italy face off with the European Union? From Tom Luongo at tomluongo.me:

Deputy Prime Minister Matteo Salvini just declared himself the leader of the Europe’s future.  He refuses to budge one inch in negotiations with the European Union over Italy’s budget now threatening to take down the government.

And in doing this he not only speaks for Italians, he is now speaking for that growing part of the European population who sees what the EU is morphing into and recoiling in horror.

Protests in France over Emmanuel Macron’s new tax on diesel have turned violent.  The British leadership has completely betrayed the people over Brexit.  They may win this battle but the animosity towards the Britain’s leadership will only grow more virulent over time.

As the core leadership in France and Germany fades in popularity, held in place because of domestic political squabbling, Angela Merkel and Macron are ratcheting up the rhetoric against the rising nationalism Salvini represents and are now pushing hard for their Federation of Europe before both of them leave the scene in the next few years, at best.

If they lose their battles with Salvini and Hungary’s Viktor Orban they may be run out of office with pitchforks and firebrands.

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