Money Supply Growth Accelerates, Credit to Private Sector Still in Decline

While money supply growth is slowing down in the US, it has recently continued to accelerate somewhat in the euro area. The effects of the ECB’s “QE”-type debt monetization activities in the form of covered bond and ABS purchases have not yet impacted aggregate money supply data much as of yet, but the 12-month growth rate of the narrow money supply aggregate M1 (currency and demand deposits, essentially equivalent to money TMS-1) has nevertheless continued to increase:




1-M1, euro area,annThe 12-month growth rate of the euro area’s money supply supply has recently accelerated from an interim low of 5% to approx. 6.5% – click to enlarge.


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Negative Interest Rates and Capital Consumption

Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about.

At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road.

However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.

Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action.

Mises warns however that if interest payments are abolished by decree, or even a negative interest rate is imposed by decree, owners of capital will indeed begin to consume their capital – precisely because want satisfaction in the present will continue to be preferred to want satisfaction in the future regardless of the decree. This threatens to eventually impoverish society and reduce it to a state of penury:



If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment.

Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption.

The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction. Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”


(emphasis added)


Ludwig von Mises: he warned that the abolition of interest payments would induce the owners of capital to consume rather than invest it. Society would soon be impoverished as a result.

(Photo via Wikimedia Commons)


Of course today’s central bankers to a man seem to believe that what makes the economy grow is “spending” and consumption. This is putting the cart before the horse. Since the accumulation of capital threatens to go into reverse due to their policies, there may well come a time period during which reports of aggregate economic statistics appear to indicate that “economic growth has returned”, while all they reflect in reality is the fact that scarce capital is in the process of being consumed. This process is also known colloquially as “eating one’s seed corn”.


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TMS-2 Growth Rate Declines Further

The U.S. money supply as represented by TMS-2 (True “Austrian” Money Supply), our broadest and preferred U.S. money supply aggregate, posted a year-over-year rate of growth of 7.7% in October, down from an 8.3% rate in September. Now down 880 basis points (53%) from the current boom-bust monetary inflation cycle high of 16.5% posted in November 2009, this is the lowest year-over-year rate of growth in TMS2 since the 6.9% rate seen in November 2008 (month 4 in this 75 month long and counting inflation cycle). As a result, although we are not yet ready to declare that the economy is staring at an imminent bust in the face, this decelerating trend in the rate of monetary inflation is bringing us ever so closer to one. To investors and speculators alike, we say time to be especially cautious.

Here’s the current growth rate in TMS2 in the context of the last 20 year experience …

 1-TMS-2, long termUS true money supply TMS-2, total and 12-month growth rate. Decelerating further – click to enlarge.


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A Key Flaw

There is now a very interesting initiative on the Swiss ballot, which will require the Swiss National Bank (SNB) to hold 20 percent of its reserves in gold. The voters will decide on November 30. I won’t predict the vote, but I want to discuss the likely impact of a yes vote.

Much of the analysis of this initiative is about the price of gold. A typical prediction is that it will go up, as SNB buying will exceed supply. However Mike Shedlock notes that, “Nearly all of the gold ever mined is available…”

That’s because gold is not consumed. The SNB is small compared to worldwide gold inventories, so it won’t move the price much. Shedlock adds, “It is entirely possible that SNB purchases could significantly alter perceptions…” I agree sentiment is ripe for a change.

The price isn’t very interesting, unless you’re a gold trader. It’s much more important that the referendum brings the first positive monetary change in decades. It reintroduces a link between gold and banking, and imposes a barrier to currency debasement. For this, the Swiss are heroes.

There is a key flaw in our system of floating currencies. Every financial asset is someone’s liability. When a currency moves, it creates winners and losers. Big moves can harm banks with loan portfolios outside their home.

That’s why the SNB currently doesn’t allow the euro to fall below 1.2 francs. To maintain this currency peg, the central bank sells francs and buys euros. There is no limit to this deliberate franc devaluation, which robs Swiss savers, investors, and businesses.

Big exporters, like Swatch and Nestle, may have lobbied for a weaker franc, hoping to make their products more competitive, but that’s a sideshow. The real purpose of franc devaluation is to shield the Swiss banks from euro devaluation.

They’re vulnerable, because they do a lot of lending outside the country. They have assets denominated in euros and liabilities denominated in francs. They suffer losses when the euro falls, or the franc rises.



EUR-CHF exchange rate – pegged at a 1.20 minimum floor by the SNB since September 2011 – via StockCharts, click to enlarge.


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Arrows Boomerang

Not much market action yesterday. So, let us turn to what is bound to be the funniest… and scariest… story in the financial world.

Once again, our hat is off to the stalwart, intrepid and half-mad Japanese. They are going where no respectable economist would go… no responsible public policy should go… and no one with his wits about him would want to go.

We begin with the latest news: Nippon is in a slump. The numbers from the third quarter confirm that the feared “triple-dip” recession is here.

Japanese growth fell at a 1.6% annual rate for the June-to-September quarter. The consensus forecast had been for a 2.2% rise in growth.

This is bad news for Abenomics. He lets fly his arrows. They end up sticking in his derriere. The idea (if you can call it that) was to stimulate inflation, growth and job creation. How?

Easy. You print more money!


Arrows going awry

(Image via

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A Growing Shortfall

The Pension Benefit Guaranty Corporation is insuring the pensions of more than 40 million Americans employed in the private sector that have defined benefit pensions. We hadn’t been aware that it has run deficits for 12 years running, but it apparently has – and it is adding up. At the moment, the fund has a cumulative deficit of $62 billion. It has reportedly doubled just over the past year:


The deficit run up by the federal agency that insures pensions for about 41 million Americans has nearly doubled, to $62 billion. And the agency says that without changes, its program for pension plans covering 10 million of those workers will be insolvent within 10 to 15 years. It was the widest deficit in the 40-year history of the Pension Benefit Guaranty Corp., which has now run shortfalls for 12 straight years. The gap grew wider in recent years because the weak economy triggered more corporate bankruptcies and failed pension plans. If the trend continues, the agency could need an infusion of taxpayer funds to pay retirees, who are guaranteed their pensions by law. The PBGC said Monday that the increased deficit was due to worsening finances of some multi-employer pension plans, which are pension agreements between labor unions and a group of companies, usually in the same industry. The $62 billion deficit reported for the year ended Sept. 30 compared with $36 billion in the previous fiscal year. Labor Secretary Thomas Perez said fixing the problem is vital to the retirement security of the nation’s middle-class. Agency officials called for Congress to enact legislation submitted by President Barack Obama designed to shore up the program’s finances. The PBGC was created in 1974 as a government insurance program for traditional employer-paid pension plans, which have become much less common in recent decades as most employers turn to retirement accounts such as 401(k)s. The traditional plans are most prevalent in industries such as auto manufacturing, steel and airlines. If an employer can no longer support its pension plan, the PBGC takes over the assets and liabilities, and pays promised benefits to retirees up to certain limits. The agency didn’t name the multi-employer plans that it expects to run out of money or how many are involved. It said they represent a minority of the total 1,400 or so multi-employer pension plans, which cover about 10 million workers. “Plans covering over 1 million participants are substantially underfunded, and without legislative changes, many of these plans are likely to fail,” PBGC Acting Director Alice Maroni said in a statement. The agency said in its annual report that it has “sufficient liquidity to meet its obligations for a number of years.” The agency said the deficit in its multi-employer insurance program jumped to $42.4 billion in the budget year that ended on Sept. 30, from $8.3 billion in 2013. By contrast, the deficit in the single-employer program shrank to $19.3 billion from $27.4 billion as the economy strengthened. The PBGC reported that its pension obligations grew by $30.9 billion in fiscal 2014, to $151.5 billion. Assets used to cover those obligations increased by only $4.9 billion, to $89.8 billion. Rep. John Kline, R-Minn., chairman of the House Education and Workforce Committee, called the multi-employer insurance program “a ticking time bomb that will inflict a lot of pain on workers, employers, taxpayers and retirees if Congress fails to act.”

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A Rare Freak Weather Event

It really doesn’t happen very often at this time of the year (this is to say, so early in the cold season): in all 50 US States, temperatures below freezing have been recorded overnight on Monday. Yes, even in Hawaii.


t8_conus1The coloring may be a bit confusing, but what this chart of US continental temperatures is saying is: it is as cold as hell, way too early in the year.


Of course we are just making fun of the situation – inclement weather, of whatever sort, is not indicative of “climate change”, unless the inclement weather becomes a permanent feature (e.g., if there is snow all year round and the soil remains frozen, one would have good reason to suspect that the next ice age has begun).

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Airline Fares Are Declining – Aren’t They?

A recent AP article published by ABC piqued our curiosity. It is entitled Why Airfare Keeps Rising Despite Lower Oil Prices.” Evidently, the authors felt an explanation was in order – maybe people have complained that air fares keep going up in spite of declining fuel prices? We can’t be sure what motivated them to write the article, but here are a few excerpts:


U.S. airlines are saving tens of millions of dollars every week because of lower prices for jet fuel, their largest expense. So why don’t they share some of the savings with passengers?

Simply put: Airlines have no compelling reason to offer any breaks. Planes are full. Investors want a payout. And new planes are on order.

In fact, fares are going higher. And those bag fees that airlines instituted in 2008 when fuel prices spiked aren’t going away either. In the 12 months ended in September, U.S. airlines saved $1.6 billion on jet fuel. That helped them post a 5.7 percent profit margin in the first three quarters of this year, robust for the industry but lagging behind the 10 percent average for the Standard & Poor’s 500.

In the past six years, airlines have done a great job of adjusting the number of flights to fall just short of demand. As a result, those who want to fly will pay a premium to do so. Airlines are selling a record 85.1 percent of their domestic seats. Thanks to several mega-mergers, four big airlines control the vast majority of flights, leaving very little room for another airline to undercut fares. With that in mind, here’s a closer look at what’s going on with airfare and the price of jet fuel:

— The average domestic airline ticket during the 12-month period ending in September rose 3.5 percent to $372.21, according to an Associated Press analysis of data from the Airlines Reporting Corp., which processes ticket transactions for airlines and travel agencies. That figure doesn’t include another $56 in taxes and fees that passengers pay.

— In the 12-month period ending in September, U.S. airlines burned through nearly 16.2 billion gallons of fuel. They paid an average of $2.97 a gallon — down from $3.07 the prior year, according to the Bureau of Transportation Statistics. That 10-cent drop saved the industry $1.6 billion. Fuel prices have since fallen further. United Airlines estimates it will pay $2.76 to $2.81 a gallon during the last three months of the year.

– Put another way: U.S. airlines burn through 311 million gallons of fuel in a week. Lower fuel prices are saving them $31 million a week.”


(emphasis added)

Actually, we are not really interested here in the reasons why air fares keep rising, or how airlines have managed to keep them high and have been able to avoid passing their fuel savings on to consumers. Undoubtedly that would make for an interesting topic as well.



 (Photo credit: fmh)

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Be Civilized …

Want to know the secret of success in today’s civilized world?

Be civilized. More on that in one moment …

First, we note that the Dow hit a new record high on Tuesday of 17,688, after rising 40 points. And gold was just a buck shy of the $1,200-an-ounce mark. It appears to have bottomed out. Time will tell.

Remember that gold is not an investment. It is money – the best money. You keep some on hand; you never know when you may need it.

Now, back to the secret of success …





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Sentiment on Stocks and Ratio Charts

Below is a brief update of a few stock market related data points we frequently discuss in these pages. Sentiment on stocks continues to be a mirror image of the gold market. Investor complacency is quite pronounced, to put it mildly.

The first chart shows Rydex ratios – with bear assets throughout 2014 stuck at historical lows, the bull-bear asset ratio has recently hit a new record high above the 20 level (i.e., 20 times more Rydex assets were invested in bull and sector funds than in bear funds). This is incidentally quite a distance from the (then) record highs set in February-March 2000.

The second chart shows HYG, the HYG-SPX ratio and the TLT-HYG ratio. The most important takeaway from this chart is that the underperformance of high yield bonds relative to big cap stocks has reached a new annual extreme. A history of past occurrences of this phenomenon was recently shown at Zerohedge. Obviously, the lead times are highly variable, so this is not a timing indicator, but it certainly is a warning.



(Photo credit: fmh)


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A Touch of Paranoia Can’t Hurt

Following the G-20 commitment to “fight climate change” (short-hand for: hike taxes and increase regulations, while exerting precisely zero influence on the climate – whereby this latter point may be the only good thing about it), the White House has come out with a tweet announcing its newest climate-related initiative. The tweet is informing us of the so-called “climate resilience toolkit” as follows:


Worth sharing: Here’s a new toolkit to help communities respond to climate change →


We need a picture to go with that, don’t we? Well, here you are. The picture provided by the WH reminds one not just of “global warming” – it looks more like “roasting in hell”:


paranoiaThe picture accompanying the White House tweet on the “climate resilience toolkit”.

(Photo credit: White House via


Allow us to point out that the connection between modern-day forest fires and “climate change” is essentially zero – although admittedly, forest fires were not as frequent during the last ice age. On the other hand, if we still were in said ice age, we wouldn’t have to worry about houses burning down, as there would be no human civilization to speak of. Instead a few ten thousand people would barely subside on hunting and gathering and hide out in caves. “Noble savages” though they would possibly be, we actually prefer civilization, which in terms of the climate is a result of the warmer temperatures we enjoy today (we hereby confirm that this information is hiding out in various history books).

However, the picture they chose says a lot about the mindset informing modern climate propaganda – it is mainly a fear-based meme, not different from the campaigns of countless doomsayers of yore. For a fairly comprehensive overview of the history of professional prophets of doom see “The End is Nigh”. This is a well-worn profession people have always made money with – either provided by the gullible, or nowadays quite involuntarily by tax payers.


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Jonathan Gruber Spawns Hashtags and Hilarious Videos

As a little addendum to our recent look at the arrogant, but surprisingly honest (in unguarded moments) government advisor Jonathan Gruber, we would note that he has by now spawned numerous Twitter hashtags. These range from the simple #Gruber, to #GruberGate, to #Grubered.

The latter specifically has probably a very good chance of becoming a widely used figure of speech (see conclusion for a practical application).


In addition, people have become busy putting together videos, making liberal use of the fact-checking powers of the inter-tubes. What have politicians said about Mr. Gruber in the past and what are they saying about him now?

Examples of then: “He’s one of the best outside experts”, “…using super-duper computer models and helping the CBO”, “Most respected economist”, etc.

Examples of “now”: “Don’t know who he is. He never helped us write any bill.” “Some outside advisor, he never worked on our staff.” “I completely disagree with him”, “Errr….aaah”, etc.

Here is an especially hilarious example of these videos that we felt we had to share with our readers:


Fun with GruberGate


Something bothered us when seeing and hearing the president assert that Gruber “expressed an opinion that…err…I comletely disagree with…wrrrs…in term of, of the voters…”. A quick Google search of “how to spot when someone is lying” yields several indications that he didn’t really mean it, chiefly among them “change of head position”, “difficulty of actually speaking”, “repetitiveness”, “standing very still”, “having an answer for everything”, “not making eye contact”, “odd micro-expressions”, “pointing a lot” (note how Mr. Obama attempts to suppress this reflex but is still pointing up with his thumbs at the decisive moment).

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Massacring Zulus

The Dow rose 13 points on Monday. Gold jumped $18.40 to settle at $1,201.90. Nothing to get too excited about. So we return to “The Secret of Success.”

The Battle of Rorke’s Drift was either a triumph for Western civilization or a bloody disaster, depending on how you look at it. The battle – which pitted British against Zulu – took place on January 22, 1879, in what is now South Africa.

The Zulus vastly outnumbered the British. The Brits had 150 men – including regular troops, colonial troops and some sick men who were in the hospital at the mission station of Rorke’s Drift but who were able to fire a rifle. They faced between 3,000 and 4,000 Zulu warriors.

Did the battle show the world the secret to the West’s success? Necessity may be the mother of invention. But Sir Garnet Wolseley, commander-in-chief of the British Army, didn’t think it was worth a medal.

“It is monstrous making heroes of those who, shut up in buildings at Rorke’s Drift, could not bolt, and fought like rats for their lives which they could not otherwise save,” he said, commenting on the many awards given to the survivors.

But American military historian Victor Davis Hanson can hardly stop his chest from swelling when he reads accounts of the battle. “In the long annals of military history, it is difficult to find anything quite like Rorke’s Drift,” he writes, “where a beleaguered force, outnumbered 40 to 1, survived and killed 20 men for every defender lost.”

Was that success? Dead Zulus and living white men?


rorke's drift-1

Massacring Zulus at Rorke’s Drift. The lesson: if your enemy brings spears to a gun fight, you probably win even if outnumbered greatly.

(Image credit: The Royal Welsh Regimental Museum Trust)


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How Relevant is the Swiss Referendum to the Gold Price?

Regular readers will already know the answer to this question, while readers not familiar with our previous discussions of this particular topic should take a look at a recent post by Mish that does an excellent job of explaining the issue in the context of the gold demand potentially exercised by the SNB if the referendum succeeds.

To quickly summarize: gold is quite different from industrial commodities and therefore cannot be analyzed like an industrial commodity. This is in spite of the fact that renowned gold institutes like the World Gold Council (WGC) and numerous other “experts” are doing just that. For instance, the WGC publishes annual statistics on mine and scrap supply, central bank supply/demand, jewelry and industrial demand, and from this “infers” investment demand.

Superficially this exercise may appear to make sense, but in reality it doesn’t. Contrary to e.g. copper or oil, gold is not “used up” – most of the gold ever mined still exists above ground, in various more or less usable forms. As a result, gold is the commodity with the largest stock-to-flow ratio. This is a major reason why gold is so useful as money – its supply is relatively stable (it increases only by about 1.4% per year, and the trend is falling) and a very large amount of it is available. There is therefore no point in e.g. trying to divine the effect of a 10% change in annual mine supply on the gold price. All we can say about such a change is that it will almost certainly have no effect whatsoever (since it would only amount to 0.14% of the total supply).

Gold must be analyzed like a currency. Its price in terms of fiat monies is affected by the expectations of market participants about the future evolution of a range of macro-economic data and events, such as real interest rates, credit spreads, the steepness of the yield curve, the desire to increase savings, the growth rate of the fiat money supply, confidence in the economy, expectations regarding the growth of government debt and how it will be funded, and perhaps most importantly, the degree of faith in the monetary authorities.


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Missed Point

There are surely more things in heaven and earth than are dreamt of in our philosophy. If not, it’s a pretty sorry world.

We report what we see… what we think… and our guesses about what it means and where it leads. Sometimes right. Sometimes wrong. Always in doubt.

Today, we write about something that was hidden in our new book, Hormegeddon. Something hidden from the author, that is.

When you write a book you are supposed to be the master of your subject. That is especially true when you’ve practically invented the subject. But then, along comes someone who says:

“Don’t you see? You missed the most important point.”



Pssst …

(Image credit: McMillan Digital Art / Getty Images)


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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future