Central Banks

     

 

 

Flowing Toward the Great Depression

All remaining doubts concerning the place the U.S. economy and its tangled web of international credits and debts is headed were clarified this week. On Monday, Mark Yusko, CIO of Morgan Creek Capital Management, told CNBC that:

 

“…we’re flowing toward the path of 1928-29 when Hoover was president. Now Trump is president. Both were presidents with no experience who come in with a Congress that is all Republican, lots of big promises, lots of things that don’t happen and the fall is when people realize, ‘Wait, it hasn’t played out the way we thought.’ [By the fall], we’ll have a lot more evidence of declining growth. Growth has been slipping.”

 

A famous bad juju moment – the crash of 1929. Two of the annotations require a bit of elaboration. The so-called “Babson break” was a large down day on September 5 1929, two days after the market had peaked. Roger Babson was an entrepreneur (he inter alia invented the parking meter), an economic theorist and a famous skeptic who had already voiced doubts about the stock market bubble of the 1920s on numerous occasions before that day. This was the first time the market didn’t shrug his warnings off, and although it recovered most of the loss on the next trading day, it was the beginning of the end. “Fisher” refers to economist Irving Fisher, who famously announced “stocks have reached a permanent plateau” two weeks before the top. Fisher was a very wealthy man at the time, but lost the bulk of his fortune in the ensuing bear market. Although he couldn’t forecast his way out of a paper bag, his work has become the foundation of much of what is considered “orthodox” economic theory these days. His contemporaries Hayek and Mises, who like Babson warned of the coming crash, are shunned by the prevailing central planning paradigm. Hayek did so in the spring of 1929, when he said that there was no chance of a recovery in Europe unless interest rates decreased, which would require the collapse of the boom in the US; he added that this was very likely going to happen later that year. Mises was offered a well-remunerated post at Creditanstalt in the summer of 1929 and declined the offer. When asked why, he replied that he thought a great crash was coming soon and he didn’t want his name to be associated with it. Of course, Mises himself would probably point out that “prediction” is not a task of economic science. We just wanted to note in passing that these great economic theorists were also quite adept at sussing out what nearly everybody else missed at the time. Causal-realist economic theory does provide some advantages. [PT] – click to enlarge.

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Bent and Distorted

POITOU, FRANCE – This morning, we are wondering: How dumb is the Fed?

The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog.

 

They’re not the best map readers, that much is known for certain. [PT]

 

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Crackpot Schemes

POITOU, FRANCE – “Nothing really changes.” Sitting next to us at breakfast, a companion was reading an article written by the No. 2 man in France, Édouard Philippe, in Le Monde. The headline promised to tell us how the country was going to “deblock” itself.  But upon inspection, the proposals were the same old claptrap about favoring “green” energy… changing the tax code to reward one group and punish another…  and spending more money on various humbug initiatives.

 

Subsidized green energy scams are mainly creating eyesores – other than that, they add up to nothing but cronyism writ large. After the one of the biggest solar company bankruptcies ever happened in Spain, a detailed economic study found that for every subsidized renewable energy job the government “created” (at a cost of nearly $2 million per job!) 2.2 jobs were lost elsewhere. It is a good bet that the math isn’t much different elsewhere. To add insult to injury, there is precisely zero evidence that carbon emissions are reduced by even one iota due to these efforts. It is an apodictic certainty that no economy can possibly be “rescued” by the subsidization of this nonsense. There is a widespread belief in government circles that “economic growth” can somehow be conjured up by bureaucrats. That is a costly error that increasingly endangers the future of Western civilization. [PT]

 

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A Great Big Dud

Many of today’s economic troubles are due to a fantastic guess.  That the wealth effect of inflated asset prices would stimulate demand in the economy.

The premise, as we understand it, was that as stock portfolios bubbled up investors would feel better about their lot in life.  Some of them would feel so doggone good they’d go out and buy 72-inch flat screen televisions and brand-new electric cars with computerized dashboards on credit.

 

The Wilshire 5000 total market index vs. federal debt and real GDP (indexed, 1990=100) – mainly there is an ever wider gap between asset prices and the underlying economic output, and although federal debt has grown by leaps and bounds in the Bush-Obama era, it can’t hold a candle to asset price inflation either. If asset prices were an indication of how an economy is doing, we would have arrived in Utopia by now. Unfortunately that is not the case, as asset prices primarily reflect monetary inflation. Just consider the extreme example of Venezuela’s IBC General Index, which went from 40,000 to 120,000 points, while the economy contracted by 21% in real terms (officially, that is. If one were to apply private sector estimates of inflation, it would look a lot worse). It is certainly true that economic aggregates are benefiting from bubble conditions to some extent, but that is essentially phantom prosperity. If you burn all your furniture, your home will be warm – that this might be problematic only becomes glaringly obvious once all the furniture is gone, because then it will not only be cold, but there will be nothing left to sit on either. When the red line on this chart reverts to the mean (or the “other extreme”), there will be a lot of gnashing of teeth, as many of the mistakes made during the bubble era will be unmasked. [PT] – click to enlarge.

 

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Popular Imagery of Money on the Move

For most financial commentators an important factor that either reinforces or weakens the effect of changes in the money supply on economic activity and prices is the “velocity of money”.

 

An image from an article on the intertubes that “explains” the velocity of money (one of the articles we came across started out as follows: “The economy runs smoothly only when there is enough money in circulation. How much is enough?”  The effect reading this has on us is not unlike that produced by the sound of fingernails scraping a chalkboard). We have found that many people find it extremely difficult to wrap their mind around the fact that the velocity concept actually doesn’t make sense, and that the matter has to be viewed from a different perspective. As an aside, we have noticed in discussions that even those who do eventually accept that a different conceptual approach is required, often insist on continuing to use the term because it “doesn’t matter what we call it”, or “to keep things simple” and similar excuses. It makes one feel like a priest trying to exorcise a particularly stubborn demon. [PT]

Illustration via supplychainbigairo.blogspot.com

 

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Crashing Unemployment

Dear Mr. Dudley, Your recent remarks in the wake of last week’s FOMC statement were notably unhelpful. In particular, your explanation that further rate hikes are needed to prevent crashing unemployment and rising inflation stunk of rotten eggs. Quite frankly, crashing unemployment is a construct that’s new to popular economic discourse, and a suspect one at that. Years ago, prior to the nirvana of globalization, the potential for wage inflation stemming from full employment was the main concern.

 


US unemployment rate vs. labor force participation rate. The employment situation may not be as all-around copacetic as the U3 unemployment rate seems to indicate… just a hunch.

 

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Frisky Fed Hike-o-Matic

We haven’t commented on central bank policy for a while, mainly because it threatened to become repetitive; there just didn’t seem anything new to say. Things have recently changed a bit though. A little over a week ago we received an email from Brian Dowd of Focus Economics, who asked if we would care to comment on the efforts by the Fed and the ECB to exit unconventional monetary policy and whether they could do so without triggering upheaval in the markets and the economy**, so we are taking this opportunity to do just that.

 

Outside view of a famous crime scene: the building where the central planners of the fiat money regime gather to “steer” the economy.

 

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Shrinking the Balance Sheet?

The big news last week came from the Fed, which announced two things. One, it hiked the Fed Funds rate another 25 basis points. The target is now 1.00 to 1.25%, and there will be further increases this year. Two, the Fed plans to reduce its balance sheet, its portfolio of bonds.

 

Assets held by Federal Reserve banks and commercial bank reserves maintained with the Fed – note that while asset purchases and bank reserve creation are connected, the connection is loose (there are other factors influencing movements in reserves as well). [PT] – click to enlarge.

 

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Down the Rabbit Hole

“The hurrier I go, the behinder I get,” is oft attributed to the White Rabbit from Lewis Carroll’s, Alice in Wonderland.  Where this axiom appears within the text of the story is a mystery.  But we suspect the White Rabbit must utter it about the time Alice follows him down the rabbit hole.

 

Pick a rabbit to follow…

 

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[Ed. note: This article was originally posted in November of 2010 – we have decided to republish it with updated charts, as it has proved to be very useful as a reference – the mechanics of QE are less well understood than they should be, and this article explains them in detail.]

 

Printing Money

We have noticed that lately, numerous attempts have been made to explain the mechanics of quantitative easing.  They range from the truly funny as in this by now ‘viral’ You Tube video with two robotic teddy-bears discussing the Fed chairman’s qualifications (‘my plumber has a beard too’), to outright obfuscation such as the propagation of this ‘Bernanke explains he’s not printing money, it’s just an asset swap‘ notion. This was apparently repeated by NY Fed president William Dudley on one occasion as well.

 

Are they printing money? You bet they do.

 

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Mass Infusions of New Credit

 

“The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath

 

Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce.  This, in itself, is nothing too remarkable.  However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down to 2.15 percent.

 

It looks hungry… once it is finished with this little Godzilla snack, it will probably come for the rest of us.

Illustration by Larry T Quach

 

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Central Banks Produce Dire Consequences for the Free Market

Todd “Bubba” Horwitz has recently produced a podcast with our friend Claudio Grass of Global Gold, which we can be called up further below. Bubba has provided a summary of the topics discussed, an edited version of which you find below as well.

 

Global Gold CEO Claudio Grass, tireless advocate for free markets, sound money and liberty.

Photo via Global Gold

 

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