Central Banks

 

Money Supply Growth Surges Across the World

Michael Pollaro has recently updated his global TMS data up to the end of December 2014 (more up-to-date figures aren’t available yet). He delves into far more details than we usually do, and there are a number of things worth mentioning about the most recent data.

First of all, it is worth noting that in the final three months of 2014, and especially in December, money supply growth rates have accelerated sharply on an annualized basis in all three major currency areas (US, euro area, Japan). Here is a summary of the main data points (note, this is monthly growth annualized, quarterly growth annualized and y/y growth):

 

US: TMS-1: 1 month: 62.1%,   3 month: 21.9%, year-on-year: 8.8%

TMS-2: 1 month: 21.8%,   3 month: 13.8%, year-on-year: 7.8%

 

Euro Area: TMS: 1 month: 28%,  3 month: 19.6%, year-on-year: 9.3%

M3: 1 month: 15%,  3 month: 9.8%,   year-on-year: 4.7%

ECB credit was rising at a 73% annualized rate in December 2014 – a result of the CBPP3 (covered bond) and ABS purchasing programs and TLTROs, but not yet including the new sovereign QE program

 

Japan:   TMS: 1 month: 29.1%,  3 month: 13.7%, year-on-year: 4.5%

M3: 1 month: 12.2%, 3 month: 8.0%, year-on-year: 2.8%

 

As can be seen above, year-on-year growth rates are quite high in the US and the euro area, but not at an exceptional level (yet) compared to previous peaks. It could be that the acceleration in annualized growth rates in the fourth quarter and the month of December has partly to do with seasonal effects, but it seems actually more likely that there is more to it than that.

 全球货币Image credit: Matt Collins

 

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Squirrelly and Subtle

Yes, we were in London, taking care of business. Now, we’re back in Buenos Aires. We’ve tried medication. We’ve tried prayer. We’ve tried heavy drinking – all in an effort to understand how our crazy money system works. And where it leads.

You’d think it would be easy. It’s just Central Banking 101, no? Well, no. It is squirrelly… and diabolically subtle. We doubt anyone understands it – especially those who are supposed to control it.

The basic unit for the system is a kind of money the world has never had before: the post-1971 fiat dollar. It’s paper money – worth as much as people think it is worth … and managed by people who think it should be worth less as time goes by.

one-69528_640

Photo via Pixabay

 

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Receding Tide

Please remember this warning when you go to the ATM to get cash… and there is none! While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us.

Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates. Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared. The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

 

atm

The same thing could happen to the money supply: Cash could evaporate suddenly and disastrously – just before we drown in it.

Photo via toastmagazine.net

 

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Introducing Money

Imagine three men living on a small island. Toni is mining the local salt mine, and apart from him there are Pete the fisherman and Tom the apple grower and their families. They have a barter trading system set up: Toni exchanges his salt for Pete’s fishes and Tom’s apples, who in turn exchange fishes and apples between each other.

One day Pete says: “I have an idea. Instead of fish, I will from now on give you pieces of papyrus with numbers marked on them”. Papyrus grows in great quantities nearby, but has so far not been of practical use to any of the islanders. Pete continues: “One papyrus mark will represent 1 fish or 5 apples or 2 bags of salt (equivalent to current barter exchange rates). This will make it easier for us to trade among ourselves. We won’t have to lug fishes, apples and salt around all the time. Instead, we can simply present the pieces of papyrus to each other for exchange on demand.”

 

John_Law-Casimir_Balthazar_mg_8450

John Law at a young age – the world’s first Keynesian economist

Painting by Casimir Balthazar

 

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The Fed has Provided the Bulk of Money Supply Growth since 2008

We have discussed the topic of money supply growth extensively in these pages over time. Below is a brief recap of how the system works in the US. Note that although fractional reserve banking and central bank-directed and backstopped banking cartels are in place all over the world, there are several “technical” differences between them. So the workings of the US system cannot be transposed 1:1 to e.g. Japan’s system or the euro system.

There are two possibilities of growing the fiat money supply: In “normal” times, commercial banks will extend loans which are partially “backed” by fractional reserves. These loans create new deposit money, which once again can serve as the basis of further credit creation, which again creates new deposit money, and so forth. It can be shown mathematically that based on a hypothetical fractional reserve requirement of 10%, extant deposit money in the system can be grown 10-fold (for a detailed discussion of the “money multiplier”, see here).

 

dollar-stack

 

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Central Bank Madness is Contagious

Lately central banks around the world are busy slashing interest rates (if they still have any to slash), or printing money more or less outright if they have bumped into the much-dreaded zero-bound. In fact, the newest fad is to cut interest rates even if there aren’t any left to cut. The minus sign on the keyboard has turned out to be useful after all!

Not only are the Keynesian dunderheads running the SNB at it (there is absolutely no reason to elevate them to quasi-sainthood just because they kicked an untenable peg out from under the euro), but lately also Denmark’s central bank. Note here that Denmark is home to one of the biggest household and mortgage debtbergs on the planet, relative to economic output. We somehow doubt that the credit bubble will be kept in check by slashing interest rates to minus 75 basis points.

 

1-Denmark, Household debt to GDP-annThe Danish situation – Denmark’s household debt to GDP ratio and the central bank’s crazy negative benchmark interest rate. Note how two tiny baby-step rate increases were enough to send the credit bubble into wobble mode – click to enlartge.

 

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Adios, Toxic Trash Debt from the Hellenic Province

The ECB continues to play the role of “bad cop” in the current back and forth between the Syriza-led government of Greece and the EU. The latest salvo entailed the ECB suddenly rescinding the waiver that made junk-rated Greek debt eligible for refinancing operations with the central bank. Here is the wording of its statement:

 

Eligibility of Greek bonds used as collateral in euro system monetary policy operations

The Governing Council of the European Central Bank (ECB) today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic. The waiver allowed these instruments to be used in euro system monetary policy operations despite the fact that they did not fulfill minimum credit rating requirements. The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing euro system rules.

This decision does not bear consequences for the counterparty status of Greek financial institutions in monetary policy operations. Liquidity needs of euro system counterparties, for counterparties that do not have sufficient alternative collateral, can be satisfied by the relevant national central bank, by means of emergency liquidity assistance (ELA) within the existing euro system rules.

The instruments in question will cease to be eligible as collateral as of the maturity of the current main refinancing operation (11 February 2015).

 

(emphasis added)

 

toxic_waste

Photo credit: Jonas de Ruytter

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No More Dancing Naked in the Streets …

When the BoJ’s board last voted in favor of enlarging its “QQE” (qualitative and quantitative easing) program even further, from already enormous amounts to nothing short of gigantic amounts, the board’s vote was 5:4 in favor, with outgoing board member Ryuzo Miyao considered to have cast the “swing vote”.

As Chris Woods of CLSA remarked at the time, in a society like Japan’s with its strong focus on consensus, “they might as well have been dancing naked in the streets”. Indeed, something like this has never happened before, although some resistance to Kuroda’s plans already reared its head previously. At most though there would be one or two members voting against further inflationary measures, but never nearly half of the board.

As Reuters reports, this problem is about to be dealt with this year. The newest nominee to the BoJ’s board is Yutaka Harada, reportedly a “committed reflation supporter”. That should actually read “inflation supporter”, because “reflation” is really just a euphemism for “inflation”. While he replaces another inflationist, the government will soon have the oipportunity to tilt the balance on the board more permanently toward loose monetary policy with the next appointment, as one of those who voted against further easing will leave the board in June. At this point one can probably be fairly certain that no suspected “hawk” stands a chance of being nominated by Shinzo Abe’s government anytime soon.

 

hamada4
Inflation proponents Koichi Hamada (the Tuntex Professor Emeritus of Economics at Yale University), left and Yutaka Harada, right (as an aside, another well-known Yale-educated inflationist is former Argentine central bank governor and serial money printer Mercedes Marco Del Pont)

Photo credit: tokyofoundation.org

 

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Still “Patient”, but too Upbeat for the Stock Market

As a look at the WSJ’s FOMC statement tracker reveals, the Fed currently sounds quite upbeat about the US economy. Given that organs of the State are usually the last to recognize a trend (in this case the trend of a subdued, but better than elsewhere US economic performance), this should be taken as a warning sign that the trend may be close to reversing.

There was only one word for liquidity junkies in the statement: the term “patient”, in the context of the widely anticipated, but continually postponed, rate hike. While the Fed ponders rate hikes, US macro data have begun to weaken rather noticeably of late. Not to an extent yet that would be worrisome, but they offer a strange contrast to the upbeat FOMC statement. Also, the Fed keeps stressing that it sees the recent collapse in inflation expectations as “transitory” (it may well turn out to be), again removing a reason for waiting much longer with a rate hike. Meanwhile, central banks from Canada to Singapore are cutting their administered interest rates, or are adopting a dovish stance (New Zealand, Australia), or are engaging in outright money printing (ECB, BoJ). Bond yields keep plummeting all over the show, including those on treasuries, which benefit from still offering a sizable spread pick-up in today’s world of ZIRP, NIRP and negative yields on government bonds.

 

FOMC

 

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The Swiss Franc Will Collapse

 

I have worked to keep this piece readable, and as brief as possible. My grave diagnosis demands the evidence and reasoning to support it. One cannot explain the collapse of this currency with the conventional view. “They will print money to infinity,” may be popular but it’s not accurate. The coming destruction has nothing to do with the quantity of money. It is a story of what happens when interest rates fall into a black hole.

 

swiss tattered flag

 

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Falling Prices are “Really Bad” for You

It is quite comical how the idea that falling prices are somehow bad for society is continually pushed by the establishment and its mouthpieces. We imagine it is not easy to create propaganda in support of such an obvious absurdity. No doubt every consumer in the world would love nothing more than genuine price deflation. After all, what can possibly be bad about one’s income and savings stretching further and buying more, rather than fewer goods and services?

Consumers and savers all over the world must surely be scratching their heads by now after hearing for the umpteenth time that it will be somehow “good” for them if their real incomes decline and the value of their savings is eroded by rising prices. What exactly is the justification for this nonsense?

Bloomberg has a strongly pro-interventionist, pro-central planning editorial line. This is possibly the case because its owner is a well-known champagne socialist and nannycrat. However, the statist quo is actually supported by a great many prominent financial publications, including the Financial Times, the Economist, and several others. As far as we are aware, there are no major mainstream financial media supporting genuine free market capitalism.

 

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Image credit: Dreamstime

 

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The Utterly Absurd Becomes the “New Normal”

 

“Bankers at the World Economic Forum in Davos are applauding the European Central Bank’s announcement of quantitative easing. Some said they were pleased the ECB’s plan, to buy about €60 billion a month in government bonds, is larger than expected. “It was positive and it was needed,” said Francisco Gonzalez, chairman of Spain’s BBVA. “Having said that, governments have to keep with reforms for the plan to meet its purpose,” he added.”

 

The ECB surprised markets today by unveiling a slightly larger than expected “QE” program. Yesterday’s leak of the decision referred to money printing to the tune of €50 billion per month, so the actual announcement of a €60 billion per month program was seen as a “positive surprise”. Just think about this for a moment. The charlatans running the central bank announce that they will make a grandiose effort to debase their confetti currency even further by printing a huge amount of additional money every month, and this is greeted as a “positive surprise” and is “applauded by bankers”. It should be glaringly obvious by now that the lunatics are running the asylum.

 

draghis-bazooka

This time it will work! Mr. Draghi unwraps the chief weapon of the John Law School of Economics, which has been failing with unwavering regularity since at least the times of Roman Emperor Diocletian.

Image author unknown

 

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Swiss Franc Revaluation Repercussions – Swiss, Polish and Austrian Banks in the Crosshairs

The SNB’s unexpected suspension of the EURCHF minimum exchange rate continues to claim victims. There have been a number of spontaneous combustion events striking forex brokers and hedge funds, but there are also effects that will only play out over a longer time period.

As Coveredbondreport.com reports, the credit rating agencies feel compelled to reevaluate their ratings of a number of European banks and their covered bond issues, i.e., European-style mortage-backed securities. Contrary to “normal” MBS or ABS, the assets backing covered bonds remain on the balance sheets of the issuing banks. This makes them safer for investors, as e.g. non-performing assets are usually replaced with performing ones, and other safety-enhancing measures are often taken; at the same time, it means that banks issuing these bonds are exposed to risks that in US style MBS are borne by investors. According to the report:

 

“Noting that while the move is credit positive for the Swiss sovereign, Moody’s said that the removal of the peg is credit negative for Austrian, Polish and Swiss banks and to covered bonds exposed to euro/Swiss franc exchange rate risk”

 

Most affected are apparently Austrian banks, with 17% of their mortgage covered bond assets denominated in CHF and Austrian households exposed to the tune of €25 bn. to CHF denominated mortgage loans. The “bad bank” that is administering the wind-down of the assets of Hypo Alpe Adria, an Austrian bank that fell victim to the 2008 crisis and has turned into a major headache for the country’s taxpayers, has taken a hit as well. 21% of its public sector covered bonds are denominated in CHF, which is so to speak adding insult to injury, as it makes the already horrendously expensive wind-down even more so.

 

fat+lady+sings-feature

When this happens, it’s all over.

Photo via grassvalley.com

 

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Central Planners Alleged to Have Higher Tolerance for Market Volatility

Bloomberg informs us that the new broom at the Fed, Janet Yellen, won’t immediately rush to the stock market’s aid when the next downturn comes. Could it be that an article from the Onion has been smuggled in while they were not looking? Lately, Fed doves have been wheeled out at every market dip exceeding 3%. The shrinking contingent of haws (such as Charles Plosser) is usually only allowed to hold forth on weekends.

A few excerpts from the Bloomberg fantasy on the miraculous change in central planner focus:

 

Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility.

The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations. To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad — just as a put option protects against a drop in stock prices.

“The succession of Fed puts over the years has led to a wide range of distortions in financial markets,” said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. “There have been swollen asset values followed by sharp declines. This is a very good time for the Fed to move away.”

When Fed officials met in October, two weeks after the Standard and Poor’s 500 Index (SPX) wiped out all of its gains for the year, they discussed adding a reference to market turmoil in their statement. They rejected the idea to avoid the “misimpression that monetary policy was likely to respond to increases in volatility,” according to minutes of the meeting.

“Let me be clear, there is no Fed equity market put,” William C. Dudley, president of the New York Fed, the central bank’s watchdog on financial markets, said in a Dec. 1 speech in New York. “Because financial-market conditions affect economic activity only slowly over time, this suggests that we should look through short-term volatility.”

 

(emphasis added)

 

dudleyNY Fed chief William Dudley: there’s no Fed put, honest injun.

Photo credit: Mark Lennihan, AP

 

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Communication Breakdown

This morning the Swiss National Bank did what central banks supposedly don’t do anymore nowadays: it surprised the socks off the markets. After still solemnly insisting in its most recent monetary policy assessment that it would “defend the minimum exchange rate of the Swiss franc against the euro with the utmost determination”, the SNB’s planners finally got cold feet and decided to abandon the policy without warning overnight (not that a warning would have done any good).

 

1-EURCHF, peg dropped, dailyThe market swiftly reassesses the EUR/CHF exchange rate – click to enlarge.

 

In so doing, the SNB’s board members have not only violated modern-day central bank etiquette, but have presented us with a reminder of how wonderfully stable today’s fiat currencies are. Bloomberg adopts a miffed tone of voice in its report on the matter:

 

“The Swiss National Bank unexpectedly scrapped its three-year policy of capping the Swiss franc against the euro in a U-turn that may change the perception of a century-old institution known for reliability.

In a surprise statement that sent shock waves through equities and currency markets, the central bank ended its cap of 1.20 franc per euro and reduced the interest rate on sight deposits, deepening a cut announced less than a month ago.

The shift marks an attempt by the SNB to reinforce its defenses of the economy before government bond purchases by the European Central Bank that could crumple the franc cap. The currency surged after the announcement, Swiss stocks including UBS AG tumbled and the chief executive of watchmaker Swatch Group AG said the policy shift would hurt exports. SNB President Thomas Jordan defended the move, saying surprise was necessary.

“It’s amazing that such a stoic central bank could end up abandoning such a long held policy with such short shrift,” said George Buckley, an economist at Deutsche Bank AG in London. “I thought we were out of the situation where central banks surprise so significantly as this.”

With reverberations hitting everyone from currency traders in London to mortgage holders in Poland, economists responded to the SNB announcement with comments including “surprise” and “seismic.” Coming from a nation that has attracted investors for its stability, the change captures the scale of the battle policy makers have repeatedly faced going back decades to rein in a currency popular with investors at times of crisis.”

 

(emphasis added)

 

surpriseFX trader Margo Spreadbottom upon hearing the news

Youtube screenshot

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