License to Kill

Submitted by Dmitry Orlov  –  The ClubOrlov Blog

The story is the same every time: some nation, due to a confluence of lucky circumstances, becomes powerful—much more powerful than the rest—and, for a time, is dominant. But the lucky circumstances, which often amount to no more than a few advantageous quirks of geology, be it Welsh coal or West Texas oil, in due course come to an end. In the meantime, the erstwhile superpower becomes corrupted by its own power.

As the endgame approaches, those still nominally in charge of the collapsing empire resort to all sorts of desperate measures—all except one: they will refuse to ever consider the fact that their imperial superpower is at an end, and that they should change their ways accordingly. George Orwell once offered an excellent explanation for this phenomenon: as the imperial end-game approaches, it becomes a matter of imperial self-preservation to breed a special-purpose ruling class—one that is incapable of understanding that the end-game is approaching. Because, you see, if they had an inkling of what’s going on, they wouldn’t take their jobs seriously enough to keep the game going for as long as possible.

The approaching imperial collapse can be seen in the ever worsening results the empire gets for its imperial efforts. After World War II, the US was able to do a respectable job helping to rebuild Germany, along with the rest of western Europe. Japan also did rather well under US tutelage, as did South Korea after the end of fighting on the Korean peninsula. With Vietnam, Laos and Cambodia, all of which were badly damaged by the US, the results were significantly worse: Vietnam was an outright defeat, Cambodia lived through a period of genocide, while amazingly resilient Laos—the most heavily bombed country on the planet—recovered on its own.

The first Gulf War went even more badly: fearful of undertaking a ground offensive in Iraq, the US stopped short of its regular practice of toppling the government and installing a puppet regime there, and left it in limbo for a decade. When the US did eventually invade, it succeeded—after killing countless civilians and destroying much of the infrastructure—in leaving behind a dismembered corpse of a country.

Similar results have been achieved in other places where the US saw it fit to get involved: Somalia, Libya and, most recently, Yemen. Let’s not even mention Afghanistan, since all empires have failed to achieve good results there. So the trend is unmistakable: whereas at its height the empire destroyed in order to rebuild the world in its own image, as it nears its end it destroys simply for the sake of destruction, leaving piles of corpses and smoldering ruins in its wake. Continue reading

Disinflation Is Not Cash

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Personal spending had fallen, seasonally-adjusted, for two consecutive months placing warning upon the household sector. The just-released estimates for January show only the smallest of rebounds, just +0.1%, in February suggesting that nothing yet has been resolved in either direction. Unlike last year, there is no surge that would indicate a temporary straying from the otherwise only tepid path.

ABOOK March 2015 PCEDPI Nominal PCEABOOK March 2015 PCEDPI Nominal PCE MM

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Iceland To Take Back The Power To Create Money

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Gottscho-Schleisner Plaza buildings from Central Park, NY 1933

Who knew that the revolution would start with those radical Icelanders? It does, though. One Frosti Sigurjonsson, a lawmaker from the ruling Progress Party, issued a report today that suggests taking the power to create money away from commercial banks, and hand it to the central bank and, ultimately, Parliament.

Can’t see commercial banks in the western world be too happy with this. They must be contemplating wiping the island nation off the map. If accepted in the Iceland parliament , the plan would change the game in a very radical way. It would be successful too, because there is no bigger scourge on our economies than commercial banks creating money and then securitizing and selling off the loans they just created the money (credit) with.

Everyone, with the possible exception of Paul Krugman, understands why this is a very sound idea. Agence France Presse reports:

Iceland Looks At Ending Boom And Bust With Radical Money Plan

Iceland’s government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”.

“The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy,” Prime Minister Sigmundur David Gunnlaugsson said. The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

According to a study by four central bankers, the country has had “over 20 instances of financial crises of different types” since 1875, with “six serious multiple financial crisis episodes occurring every 15 years on average”. Mr Sigurjonsson said the problem each time arose from ballooning credit during a strong economic cycle.

He argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions. In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money, which occurs as soon as a commercial bank offers a line of credit. The central bank can only try to influence the money supply with its monetary policy tools.

Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. “Crucially, the power to create money is kept separate from the power to decide how that new money is used,” Mr Sigurjonsson wrote in the proposal. “As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote.

Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. Mr Sigurjonsson, a businessman and economist, was one of the masterminds behind Iceland’s household debt relief programme launched in May 2014 and aimed at helping the many Icelanders whose finances were strangled by inflation-indexed mortgages signed before the 2008 financial crisis.

Central Banking Refuted In One Blog. Thanks Ben!

Blogger Ben’s work is already done. In his very first substantive post as a civilian he gave away all the secrets of the monetary temple. The Bernank actually refuted the case for modern central banking in one blog.

In fact, he did it in one paragraph. This one.

A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.” Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.” The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere.

Not true, Ben.  Why not ask the author of the 1913 Federal Reserve Act and legendary financial statesman of the first third of the 20th century—–Carter Glass.

The then Chairman of the House Banking and Currency Committee did not refer to the new reserve system as a “banker’s bank” because he was old-fashioned or unschooled in finance. The term evoked the  essence of the Fed’s original mission. Namely, to passively rediscount good commercial collateral (receivables and inventory loans) brought to its window by member banks—priced at a penalty spread floating above the market rate of interest.

Notwithstanding Bernanke’s spurious claim that the Fed has to “set the short-term rate somewhere”, the reserve system designed by Congressman Glass was authorized to do no such thing. It had no target for the Federal funds rate; no remit to engage in open market buying and selling of securities; and, indeed, no authority to own or discount government bonds and bills at all.

Instead, its job was to passively respond to the ebb and flow of trade and industry on main street as mediated through the commercial banking system. If business conditions were robust, interest rates would rise on the free market in order to balance the demand for working capital loans and long-term debt financing with the available supply of private savings.

In that environment, commercial banks wishing to expand their loan books beyond what could be supported by their deposits and reserves ( the latter generally amounted to between 9% and 15% of deposits), could “rediscount” their loans for cash at a penalty rate. Likewise, solvent banks holding good commercial collateral which faced unexpected or untimely deposit redemptions could borrow cash in the same manner in lieu of liquidating their loan books. The entire purpose of the original Fed’s rediscounting tool was to augment liquidity in the banking system at market determined rates of interest.

This modus operandi was the opposite of today’s monetary central planning model. Back then, the rediscount window at each of the twelve Reserve Banks had no remit except the humble business of examining collateral.

The green eyeshades who toiled in the Richmond, St. Louis and Dallas reserve banks thus did not know from the macros. That is, they were on the look-out for “slow” paper, not slow GDP growth or slow progress in lifting housing starts, retail sales and business inventories—–or even “slowflation” on the CPI less food and energy index.  And that’s not only because most of such “incoming data” measures did yet exist—- or even because the Fed had no proactive tools to guide the macro-economy in any event.

In fact, the Fed was created on the earlier side of the Keynesian divide. When Woodrow Wilson signed the act on Christmas eve of 1913, the notion that the state must manage the business cycle and turbocharge capitalist prosperity did not exist.

And well it didn’t. During the prior 40 years, the US economy had grown at a 4% compound rate—the highest four-decade long growth rate before or since—- without any net change in the price level; and despite the lack of a central bank and the presence of periodic but short-lived financial panics largely caused by the civil war-era national banking act. Continue reading

The “Deep State” Is Now in Charge

Submitted by William Bonner, Chairman – Bonner & Partners

The Most Important Change

But when he is disposed of foreign enemies by conquest or treaty, and there is nothing to fear from them, then he is always stirring up some war or other, in order that the people may require a leader.

– Plato on tyrants, The Republic

This is the last in our series on how America’s money, economy and government have changed since the collapse of the Bretton Woods agreement and the end of gold-backed money.

Today, we keep the focus on government… and what it has become. The period is hardly coincidental: On August 15, 1971, President Nixon hammered the last nail in the coffin of honest money.

It was not the only reason for the profound changes that followed. There was also the opening up of Communist China to capitalism, the fall of the Soviet Union and the rise of the Internet, to name just a few. But the new credit-based money system was the least obvious change… and probably the most important.


Ancient Greek philosopher Plato

Caution: “Deep State” at Work

The credit-based dollar brought about a new economy. It changed the way people thought and the way their government operated. Now, deep pools of money determine which candidates are presented to voters.

And there is a new branch of government: the “Deep State.” It is not mentioned in the Constitution. And it operates above and beyond the visible process of democratic government.

Americans voted for Barack Obama in 2008 because they wanted a change from the Bush-era policies. But nothing changed. Why? Because the fix was in… Continue reading

Bernanke Admits, After Decades Contrary, The Fed Is Powerless

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Former Fed Chairman Ben Bernanke welcomed himself to the online economics community by initiating a personal blog at the Brookings Institute where he has landed as a Distinguished Fellow in Residence. This initial posting has created quite a stir, as you might expect, which has to be among the primary reasons for this venture. I suspect and detect, however, that there may be another motive for Bernanke’s newfound public voice. In some sense, it may have made more sense for him to stay low-profile and let his work “speak” for him, but the way economics is going may have made that impossible.

The fact that he starts so defensively gives the endeavor away; he is concerned about a legacy and is obviously seeking to have at least a hand in shaping it – getting himself “on the record” before the judgment of history (and the fuller FOMC transcripts for the QE years) is fully congealed.

The bottom line is that the state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors. The Fed influences market rates but not in an unconstrained way; if it seeks a healthy economy, then it must try to push market rates toward levels consistent with the underlying equilibrium rate.
This sounds very textbook-y, but failure to understand this point has led to some confused critiques of Fed policy.

If you read through enough of the FOMC transcripts of the years that are currently available, especially prior to March 2008, Bernanke’s voice comes across as entirely robotic, cocksure in his theories and especially the abilities of the modern central bank apparatus to gain objectives. A good part of that was written during the housing bubble as coming from Greenspan forward there was a lot of certitude about how the FOMC had “guided” the US and global economies through only a mild recession despite a massive, 1929-style stock bust. It makes an impressive contrast to what he is actually saying now.

The disproportion of that view was given out in the form of the housing bubble, which its own bust has been the subject of all this “confusion.” When an orthodox official seeks to extricate past policy and involvement from any nightmare it always comes down to one theoretical capacity: monetary neutrality. As entirely expected, it is among the first assertions that Mr. Bernanke is making, shown above in the very first sentence in the quoted passage. If interest rates are low now or there is an asset bubble crash “the economy, not the Fed, ultimately determines” the outcomes; monetary neutrality.

To justify how that could possibly be, especially when under his watch the Fed went fromimplicit “guarantor” of global liquidity to explicit member who’s self-proclaimed job was to take over and manipulate entire markets, Bernanke turns to some 19th century theory on interest rates. That appeal to history is a logical fallacy of sorts, in attempting to establish his doctrine as if it were accepted hard science spanning more than a century.

To understand why this is so, it helps to introduce the concept of the equilibrium real interest rate (sometimes called the Wicksellian interest rate, after the late-nineteenth- and early twentieth-century Swedish economist Knut Wicksell). The equilibrium interest rate is the real interest rate consistent with full employment of labor and capital resources, perhaps after some period of adjustment.

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Austerity in Greece – What Has Gone Wrong?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Brief Update on Recent Developments

On Friday, the Greek government has submitted its latest reform proposals to the EU. According to press reports, these are supposed to raise €3 billion and consist of the following:

“[…] moves to combat tax evasion, more privatizations and higher taxes on alcohol and cigarettes. […] The Greek government said the 18-point reform program did not include any “recessionary measures”.”

In the meantime it has also emerged that the privatization of the port of Piraeus, which Syriza had previously reportedly opposed is about to go forward after all, and is expected to bring in proceeds of around € 500 m. Pressure on the Greek government has recently increased, not only due to the fact that it is expected to run out of money soon, but also as a result of a downgrade of its credit rating by Fitch late last week to a lowly CCC rating. This makes it even less likely that the government will be able to roll over maturing treasury bills.

greece-austerityPhoto credit: Yorgos Karahalis / Reuters

Below are the most recent updates of domestic deposit outflows and central bank credit to the banking sector, showing the situation as of the end of February. Note that we have adjusted the data on deposit outflows by deducting all government deposits from the domestic deposits time series, so that only the deposits of Greek households and business are shown.

1-Greece, depositsAs can be seen, our most recent estimate of the likely size of the additional decline in deposits since the end of January was pretty much on the mark. In March, outflows have reportedly continued – click to enlarge.

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$100 Trillion Global Bond Bubble Poses “Systemic Risk” To Financial System

Submitted by Mark O’Byrne  –  GoldCore

  • Global bond bubble poses systemic risk to financial system
  • FT warns that a June rate hike could put fixed-income funds under severe pressure
  • Fed’s Bullard warns of “dire consequences” of developing asset price bubbles
  • UK fund managers worried about “inflated value of bonds”
  • Regulators talk tough but have wavered since 2011
  • Mutual fund markets have “ballooned” since 2008
  • “Gates” or capital controls that limit investor withdrawals in troubled times are likely

The Financial Times warned today about the growing global ‘bond bubble’ and potential severe problems in the bond markets and ‘systemic risk’ which may come to a head in June if the Federal Reserve raises interest rates.


In an article entitled “Time to find out hard way if asset management is systemic risk“, it quotes James Bullard from the Fed warning of “dire consequences” due to developing asset price bubbles if the Fed does not raise rates soon.

It refers to fact that “80 per cent of fund managers surveyed by CFA UK, a financial standards body, signalled worries about the inflated value of bonds.” It discusses how plans have been in the making to manage risks posed by certain funds by “boosting supervision of asset managers.”

For example, earlier this month “the Financial Stability Board and the International Organisation of Securities Commissions promised a plan to identify systemically important funds and contain their risks.”

The FT explains that such regulation was requested by the G20 at the end of 2011. The FT warns that the plan to make a plan – which will not be operational until early next year – will come too late to deal with the expected Fed rate hike.


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The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• The US Economy Is Showing Cracks (CNN)
• Greek Construction Sector Crumbles By 80% In Just Five Years (Kathimerini)
• Bernanke: I Didn’t Throw Seniors Under The Bus (MarketWatch)
• The Fed’s Startling Numbers on Student Debt (Simon Black)
• The Fed’s ‘Repression’ Has Cost Savers $470 Billion (MarketWatch)
• Low US Consumer Spending Points To Slow First Quarter (MarketWatch)
• Jumping On Junk: Investors Crazy For High Yield (CNBC)
• 19 Economists Call On The ECB To Make ‘QE For The People’ (
• Foreign Investors Are Cashing Out of China (Bloomberg)
• Bank Of England Stress Tests To Include Feared Global Crash (Guardian)
• Germany Says Greece Must Flesh Out Reforms To Unlock Aid (Reuters)
• Yanis Varoufakis Calls For End To ‘Toxic Blame Game’ (BBC)
• Greek Plans To Unlock Aid ‘Lack Technocratic Input’ (Bloomberg)
• Tsipras Presses Allies for Support as Greek Cash Crunch Deepens (Bloomberg)
• Repeal, Don’t Reform the IMF! (Ron Paul)
• Americans See Putin As Only Slightly More Imminent Threat Than Obama (Reuters)
• Fracking’s New Legal Threat: Earthquake Suits (WSJ)
• Iran Deal Unlikely Before March 31 as Russia Leaves Talks (Bloomberg)
• Sierra Leone Ebola Lockdown Exposes Hundreds Of Suspected Cases (Reuters)

Cash Flow Seems To Explain Why 5% GDP Was A Myth (Among Other Discrepancies)

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Coincident to the “final” release of quarterly GDP are the updated estimates for corporate profits. While the Q4 headline didn’t much alter from the preliminary version sent out a month ago, there was much in the profit section relevant to both economic cycle and structure. The BEA provides several different breakouts of business profits, but the main emphasis should remain on current production as it relates to linking actual economic activity with the business of capitalistic sustainability.

To that end, there is always going to be a discrepancy between some measure of profits and that of cash flow. But what you find in the figures here is well beyond what I think would pass for reasonable expectations in that regard.

First of all, profit from current production (defined by the BEA series Profits with IVA and CCadj) is looking cyclically worn. The 4-quarter moving average of year-over-year gains is now negative for the first time since 2009. For the year 2014, the four quarterly gains were -4.8%, +0.1%, +1.4% and -0.2%, in that order. That hardly looks anything like the 4% and 5% GDP advances that were used as “proof” of the Yellen version of economic relativity. In fact, that weak profit growth would, by contrast, be very consistent with at least instability if not worse. That should only raise further alarm as we know without much doubt that profits are going to be contracting more severely in Q1 2015 if only on energy alone.

ABOOK March 2015 Corporate Profits Current Production

Financials have been a serious lag of late, which is not at all surprising or unexpected given the shape of domestic and international finance since the middle of 2013. But profitability is at least not being offset by strength in other sectors if the economy apart from these is actually performing as is proclaimed. If 2014 was a breakout year for the economy, it isn’t at all apparent anywhere here – instead not just more of the same but continued slide via attrition.

ABOOK March 2015 Corporate Profits After Tax

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Why The Mania Is Getting Scary – Central Bankers Are Running A Doomsday Machine

If you need evidence that we are in the midst of a lunatic financial mania, just consider this summary from a Marketwatch commentator as to why markets are ripping higher this morning:

“The dovish comments from both Fed Chairwoman Janet Yellen and People’s Bank of China Governor Zhou Xiaochuan are giving markets a big lift, and in the absence of negative data or news, I imagine this will continue to buoy the markets throughout the session,” Erlam said in emailed comments.

Yellen said gradual hikes are likely this year, but that the central bank will move cautiously……. the PBOC governor said he saw “more room” for China to ease policy if the economy stays soft and inflation continues to weaken.

Its just that frightfully simple. If any of the major central banks anywhere on the planet ease or even hint they might, the robo machines and day traders unleash an avalanche of buy orders and the stock averages jerk higher.

Indeed, Zero Hedge captured the motion succinctly this AM. In keeping with Bernanke’s inaugural blog revelation that 98% of monetary policy consists of “open mouth” operations, the markets leapt upwards on cue. That is, if central banker jaws are flapping, then buy!

What this means is that this third immense financial bubble of the current century will keep inflating until central bankers stop banging the “stimulus” lever or the bubble finally crashes under its own weight. The latter will surely happen, eventually—- and the potential carnage can be readily approximated.

Last time, global equity market inflated to a peak of $60 trillion in aggregate value before they plunged to barely $25 trillion during the post-Lehman meltdown. Now they have been pumped back to the $80 trillion mark by the sheer recklessness of the world’s central bankers, but this time the underlying economic advance has been even more artificial and unsustainable; it amounts to little more than a temporary outgrowth of the explosion in public and private credit since late 2008. At the same time, the bubble has been spread to virtually the entirety of the world’s $200 trillion credit market owing to the nearly universal embrace of massive central bank bond-buying under QE.

Yet do the central bankers have even the foggiest clue that they are sitting on a potential $50-$100 trillion financial market implosion? That the mother of all meltdowns lurks around the corner?

Not these boneheads. They have ripped all the stabilization circuitry out of financial markets, thereby completely disabling honest price discovery. That means they have destroyed the shorts, extinguished fear, obsoleted fundamental analysis, drastically cheapened the cost of hedging and offered speculators unlimited opportunities to shoot fish in a barrel by front-running their announced bond buying and currency manipulation campaigns. In short, they have showered speculators with stupendous windfalls, displacing self-correcting two-way financial markets with rigged gambling casinos in the process.

The immense damage visited upon the machinery of financial markets is sitting there in plain sight. The endless six-year buy-the-dips run of the S&P 500 since March 2009, for example, would be impossible in an honest free market. So why do they ignore the dangers, and stubbornly plow forward clutching to ZIRP, N-ZIRP, QE, forward guidance and all the other tools of central bank stimulus?

The utterances of the duo who kicked off today’s rip make absolutely clear why the central bankers will never stop stimulating. They have embraced a spurious “inflation deficiency” doctrine, and have thereby, in effect, lashed themselves to the wheel of a doomsday machine.

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