The Fed’s in a bind

Submitted by Alasdair Macleod – FinanceAndEconomics.org

One can understand the Fed’s frustration over the failure of its interest rate policy, and its desire to escape the zero bound.

However, since the FOMC has all but said it will increase rates at its December meeting, events have turned against this course of action. The other major central banks are in easing mode, and the slowdown in China has further undermined both world trade flows and commodity prices. The result has been a strong dollar, which has effectively eliminated any perceived need for higher dollar interest rates. Meanwhile, the US’s non-financial economy remains subdued.

Last August, a similar situation existed, when the FOMC signalled that a rise in the Fed Funds Rate might be announced at its September meeting. Ahead of it, China revalued the dollar by announcing a small devaluation of its own currency, taking the wind out of the Fed’s sails. While the talking heads saw this as a failure of Chinese financial policy, it was nothing of the sort. Given the US was dragging its feet over the yuan’s inclusion in the SDR, it was a salvo in the financial war between the two states, and the Fed found itself in the firing line.

Since then the pressure has been mounting from the IMF for the US to back down over the SDR issue. The result was announced only this week, with the dollar content hardly changing and the yuan being accommodated mostly at the expense of the euro from September next year. However, despite the SDR issue having been dealt with for now, the Fed appears to have very little room for manoeuver before higher interest rates will give rise to a new financial crisis.

The chart below illustrates the problem. It is of the Fed Funds Rate since 1980 and the Fiat Money Quantity, which simply put is the sum of the commercial banks’ reserves at the Fed, plus cash and sight deposits held at the banks.

Interest Rate Cycle

Continue reading

ECB Greeted by Collective Whine of Liquidity Junkies

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Bizarre Monetary Experiment Expanded

As is well known by now, the ECB Council has decided to expand its bizarre monetary experiment further. All users of the euro are to be subjected to additional impoverishment, by means of the ECB lengthening the duration of its outright money printing scheme (while keeping its level steady at what is an already stunning €60 billion per month) and the even more absurd decision to lower its deposit facility interest rate further, to minus30 basis points.

 

larry-summers-i-only-like-mario-draghi-right-nowECB chief Mario Draghi, who increasingly looks like something that has risen from the Crypt. US high IQ moron export Larry Summers likes his policies. Any more questions?

Photo credit: Michael Probst / AP

 

In much of the German-speaking press, the ECB’s deposit facility rate is rightly referred to as a “Strafzins”, which translates as “penalty interest rate”. As we have discussed in these pages at length in the past (see “The Consequences of Negative Interest Rates” as an example), if you still needed proof that our John Law-type monetary overlords are nothing short of insane, the imposition of negative interest rates is surely providing it in spades.

To briefly recapitulate: the passage of time is actually meaningful for human beings. We all differentiate between “sooner” and “later”. The natural interest rate can never become zero or negative, as this would indicate that the categories “sooner” and “later” have lost their meaning. As Mises pointed out, such an interest rate would imply a complete cessation of consumption – all our efforts would be directed toward providing for the future. We’d all starve to death.

As he remarked, a zero or negative interest rate would never emerge in an unhampered free market economy. It can only emerge because it is imposed by force by a monetary authority. This has consequences – the chief consequence is that it promotes the consumption of capital. After all, why would anyone save if they have topay borrowers instead of getting paid by them? The imposition of negative interest rates is utter economic nonsense. Continue reading

Why This Sucker Is Going Down…….Again!

George Bush famously told an assembled group of Congressional leaders in the aftermath of the Lehman filing that unless they immediately passed an open-ended Wall Street bailout “this sucker is going down”.

They blindly complied. Yet for awhile it seemed of no avail.

By the post-crisis bottom in Q1 2009, household net worth had plunged from $68 trillion to $55 trillion or by nearly 20%. That reflected a 60% collapse in the stock averages and a 35% meltdown of housing prices.

For a fleeting moment it appeared that economic truth had come home to roost. Namely, that permanent gains in wealth and living standards cannot be achieved by the kind of rampant speculation and debt-fueled financialization that had generated the phony boom of the Greenspan era.

But that didn’t reckon with the greatest and most unfortunate accident of modern financial history. The White House advisors who counseled George Bush in September 2008 to violate the free market in order to save it had long ago proved their cluelessness about economic matters. They had advised him to appoint Ben Bernanke to the Fed in 2002, and then to promote him to the post of Chairman of the Council of Economic Advisors in 2005 and finally to become head of the Fed in January 2006.

But here’s the thing. Bernanke was an academic hybrid of the two worst economic influences of the 20th century——the out and out statism of John Maynard Keynes and the backdoor statism of Milton Freidman’s central bank based monetarism.

Both of these grand theoreticians got the causes of the Great Depression wrong, and Bernanke did doubly so. You can reduce all of his vaunted expertise about the 1930s to a single proposition.

To wit, the Fed should have bought up the entire $17 billion of government bonds outstanding at the time in order to liquefy the banking system and thereby arrest the plunge in economic output. Continue reading

The End of the Beginning

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The call for minimizing the onrushing downdraft has continued, particularly in the wake of yesterday’s huge disappointment in the ISM. Where the “12%” figure had slowly entered the mainstream lexicon before, it has fast become fully incorporated into any article’s template. There are hardly any pieces about the curious manufacturing recession that don’t mention it, as it has evolved into economists’ shorthand for “nothing to see here”:

With manufacturing accounting for only 12 percent of the economy, analysts say it is unlikely the persistent weakness will deter the Federal Reserve from raising interest rates this month.
“Manufacturing is being pummeled by the stronger dollar and the weakness of global demand, but the other 88 percent of the economy continues to perform well. This won’t prevent the Fed from raising interest rates at the mid-December meeting,” said Steve Murphy, a U.S. economist at Capital Economics in Toronto.

It’s an intentional fallacy, of sorts, because manufacturing isn’t the end of the process. If we are strictly speaking of the “goods economy”, the 12% is woefully undercounting. There is a whole range of activity that precedes manufacturing (relevant, of course, to commodity prices) and even more that follows. Raw material has to get out of the ground and then all of it, whatever stage of processing, needs to move around; several times. Beyond that lies the heart of this “recovery”, the retail jobs that have become the synthesis and staple of monetary redistribution in the cracked financial age.

As noted previously, the number of jobs devoted to some element of the goods economy is almost exactly in the same proportion now as it was in 2007 just before the Great Recession started – in the goods economy.

ABOOK Sept 2015 Goods Economy Comps

While most economists remain steadfast in working backwards from “next year”, it is incredibly important to note that this, too, is changing. Citigroup’s strategists and economists have completely “evolved” in their expectations, and not just for China. Continue reading

Zuckerberg’s Facebook Gift Is as Harmful as Crack Cocaine…

Submitted by William Bonner, Chairman – Bonner & Partners

“The Zuck” Is on the Case

BALTIMORE – “Wow.”

That was how the world’s second biggest philanthropist, Bill Gates, described the decision yesterday of the world’s biggest philanthropist, Mark Zuckerberg, to give away most of his fortune.

Zuckerberg – the founder of Facebook and the antihero of the movie The Social Network (in which our daughter Mariah had a role) – has decided to “give back.” We saw the movie. It portrays Zuckerberg as a jerk.

 

ZuckMark Zuckerberg has decided to join other billionaire world improvers by giving away the part of his fortune he couldn’t possibly spend in 10 lifetimes. Those who have “unfriended” him should think again, in other words. He ain’t the jerk he was portrayed as in the movie!

Photo via biography.com

 

But if that were so, why would he make such a magnanimous, selfless, and generous gesture? Surely, he is a good guy after all. All over the world, the press is going gaga.

“See, the rich aren’t all SOBs,” say the reports. Apparently, some of those who have done well are willing and eager to “do good” with their money. Here’s Reuters:

 

“Facebook, Inc. CEO Mark Zuckerberg and his wife said on Tuesday they will give away 99% of their Facebook shares, currently worth about $45 billion, to a new charity in a letter addressed to their daughter, Max, who was born last week.

The plan mirrors a move by other high-profile billionaires like Warren Buffett and Bill and Melinda Gates, who have pledged and set up foundations to give away their fortunes to charity.”

 

! billion buckaroosOne billion in the form of State-issued scrip. As long as FB’s stock remains at absurd bubble valuations, Zuck’s gift is worth at least 45 times of what you see piled high on these 12 pallets.

Photo credit: Michael Marcovici Continue reading

Dovish ECB Disappoints – Gold Rises, Stocks and Bonds Fall Globally, Euro Surges

Submitted by Mark O’Byrne  –  GoldCore

‘Super Mario’, the European Central Bank’s monetary magician, disappointed markets yesterday as continuing and unprecedented monetary easing failed to prevent a sharp sell-off in stock and bond markets which has continued today.

GoldCore: Super Mario
ECB President – nicknamed ‘Super Mario’

There are sharp losses on financial markets after the ECBs President’s – nicknamed ‘Super Mario’ and more recently ‘Magic Mario’ – latest radical measures stopped well short of market expectations and traders desperation for more cheap money and deepening ultra loose monetary policies.

Draghi announced a deepening of probably the most radical monetary policies of any major central bank in history.

The ECB will extend its massive 60 billion euro ($63.5 billion) a month money printing, or debt monetisation, scheme to at least March 2017, an additional six months. Debt monetisation will now include both regional and local government debt and be reinvested upon maturity.

The ECB cut its deposit rate to a historic low and further into negative territory by 10 basis points to a fresh low of negative -0.3 percent, down from -0.2 percent. The cut means banks in effect must pay more for the ECB to hold their money. The ECB kept its main refinancing rate (or the price that banks pay to borrow funds from the ECB) unchanged at an unprecedented, essentially 0 percent – exactly 0.05 percent. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Stocks Plunge With Dollar, Bonds as ECB Decisions Disappoint (BBG)
• Mario Draghi Riles Germany With QE Overkill (AEP)
• “But It’s Just A 0.25% Rate Hike, What’s The Big Deal?” (ZH)
• Bankruptcy Might Be the Mining Industry’s Last Best Hope (BBG)
• “Distress” in US Corporate Debt Spikes to 2009 Level (WolfStreet)
• Hong Kong Housing Bubble Collapses, Sales Plunge 42% (ZH)
• For China, The Real Battle For A Global Currency Is Just Beginning (BBG)
• Top China Cop Targets Bankers After Putting Away Security Czar (BBG)
• America’s Leadership Just Doesn’t Seem To Get It (Tanosborn)
• It’s So Bad in Brazil That Olympians Will Have to Pay for Their Own AC (BBG)
• Putin Wants Russia To Become World’s Biggest Exporter Of Non-GMO Food (RT)
• Financial Engineering To Save The Planet (Kaminska)
• Denmark Rejects Closer EU Ties as Skeptics Dominate Referendum (BBG)
• Greece Asks EU For Help With Refugees Following Threats (Kath.)
• World’s Woes Huddle on Greek Shores as Another Crisis Year Looms (BBG)