Central Banks

 

Addressing the SNB’s Concerns

The Swiss will vote on a referendum on November 30th that would ban the Swiss National Bank (SNB) from selling current and future gold reserves, repatriate foreign stored gold holdings to Switzerland, and mandate that gold must comprise a minimum of 20% of central bank assets. The SNB does not usually comment on political referendums. However, in this case it has done so quite vocally.

Why has the central bank decided to step into the political fray and oppose this initiative? What are its concerns? Are they valid or motivated by other factors?

The SNB’s primary objections to the gold initiative are three fold. 1) It claims that gold is “one of the most volatile and riskiest investments”, 2) that a 20% gold requirement will lower the “distributions to the confederation and the cantons” since gold does not pay interest like bonds and dividend paying stocks, and 3) that the 20% gold holding requirement will interfere with its ability to conduct monetary policy and complicate efforts to maintain “the minimum exchange rate”, the “temporary” policy of pegging the Swiss franc (CHF) to the Euro (EUR) it initiated in 2011 and continues to enforce to this day.

The first two concerns can quickly be addressed and discounted. Gold is indeed a volatile asset at times but so are bonds and equities. In recent years Greek, Spanish, Italian, Irish and other European bonds have been far more volatile than gold. The SMI, the Swiss stock index, lost over 50% of its value on two separate occasions between 2000 and 2009 while gold steadily rose at an annual rate of 8.50% over the same period.

Regarding the second concern, the distribution of proceeds derived from financial speculation and paid to the confederation and cantons, one has to question whether or not it is really appropriate for the SNB to re-brand itself as a hedge fund instead of remaining focused on its core responsibilities as a central bank.

To properly address the third SNB concern requires a historical context and a more detailed analysis. Prior to the change in the Swiss constitution, the CHF was backed by a minimum amount of 40% gold. Despite this constraint, Swiss monetary policy at the SNB was unhindered and functioned properly during the post World War II period.

The SNB is correct in implying that today a partial gold backing, as required by the referendum, would make its policy of weakening the CHF against the EUR more difficult. Although the SNB has raised the currency peg as a reason for voting against the referendum the issue has not been directly addressed by the “YES” camp. Is the peg necessary? Does the population in Switzerland benefit as a whole from a weak EURCHF exchange rate? Why does the SNB feel compelled to continue a policy that it characterized over 3 years ago as “temporary”? How did “the minimum exchange rate” policy come to be? Why hasn’t there been a public debate about it?

 

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Mr. Gono, Are You on the Line?

The Dow is still pushing higher. Gold is back below $1,200 an ounce. The US economy appears stable. The stock market – which is supposed to know all, see all and understand nothing – tells us it is clear sailing ahead. We are fools to believe it; perhaps we are fools if we don’t.

We can almost hear former governor of the Reserve Bank of Zimbabwe Gideon Gono’s phone ringing. He quiets his wives so he can hear. It is a voice with a strange accent … speaking from far away.

 

1121-DRE-blog

 

“Can you come give us some advice?”

Once again, the Japanese economy has slipped into a coma. And once again, the stimulus policies of the central bank… and the Ministry of Finance… have failed to revive it.

New York Times columnist and Nobel laureate economist Paul Krugman has gone to advise Shinzō Abe on how to deal with its latest crisis. Could Abe find anyone worse to give him counsel? That would be the aforementioned Mr. Gono.

 

ZIMBABWE-BANK-ECONOMY-CURRENCYZimbabwe’s former central bank governor Gideon Gono, who eventually printed several hexillion Zimbabwe dollars every week … until the currency ceased to function as a medium of exchange.

(Photo credit: JEKESAI NJIKIZANA / AFP)

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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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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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Worse Off

We’ve been meaning to write about what hasn’t happened yet. Not that we claim any knowledge of tomorrow or the day after. But we can look at the present. And here’s a guess about where it might lead.

The middle classes – aka “the voters” – expressed themselves last week. They have been sorely used and they know it. The biggest money-fabricating program of all time – the Fed’s QE – has done nothing for them. Instead, it has made their lot worse.

Investment in new business output has gone down. Their meager savings produce no revenue. And “bread-winning jobs” are scarce.

For all the talk of an “improving labor market,” there is no sign of it in wages. The typical household has $5,000 less income than it had when the 21st century began.

 

1112-DRE-blog

The Bank of Japan

(Photo via Wikimedia Commons / Author: Fg2)

 

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Arrogance Waiting for Comeuppance

Bloomberg informs us that there is a “Yellen Message to Europeans Divided on QE: Do Whatever It Takes”. The belief that central bank bureaucrats can “rescue” the economy by printing more money evidently remains as firmly ingrained as ever. As Paul Singer, the head of Elliott Management, remarked on this in a recent letter to investors (note that Mr. Singer has an excellent track record as an investor spanning four decades):

 

“Central bank manipulation of prices and risk taking has become the norm over the last six years, because it is so hard for investors to see the downside. QE and ZIRP have been ‘free,’ as far as most people are concerned, in terms of stability, asset price and economic growth, and economic recovery. ‘Free’ in this context means devoid of future countervailing negative consequences. Unfortunately, this particular magic bullet is illusory — the negative consequences are only in their early stages of unveiling…

“Central bankers do not understand that it was their tinkering, manipulation, bailouts and false confidence that encouraged and enabled the insanity that led to the fragility and collapse. Partially as a result of that misunderstanding, the developed world has doubled down on the same policies, feeding the central bankers’ supreme self-confidence. Political leaders have been content to stand aside and watch the central bankers do their seemingly magical and magnificent work.

The believers in the wisdom of this central-banker-centric economic world have been crowing and gloating that those (like us) who have raised concerns about the risks posed by the post-crisis, monetary-dominated policy mix (inflation, distortions, growing inequality, lower growth) are just ‘wrong’ and should apologize for a ‘massive error.’ This, shall we say, ‘Krugmanization’ of a substantial portion of the economics profession and punditocracy is in its triumphalist phase, and whether its smug non-stop ‘victory lap’ ultimately represents an embarrassing high-water mark is for subsequent events to reveal.”

 

(emphasis added)

 

paul singerPaul Singer of Elliott Management – his warnings will of course be ignored.

(Screenshot by FOCUS Online/Wochit)

 

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The ECB is Buying the Drinks This Time

 

[N]othing is more essential than that permanent, inveterate antipathies against particular nations and passionate attachments for others should be excluded, and that in place of them just and amicable feelings toward all should be cultivated. The nation which indulges toward another an habitual hatred or an habitual fondness is in some degree a slave.

 -George Washington’s farewell address

 

QE is dead. Long live QE! This time it was the European Central Bank that bought the drinks. US investors bellied up to the bar and helped themselves; the Dow rose 69 points. Gold kept slipping.

Since the Fed ended its QE program, the Bank of Japan and the ECB have come forward promising more money for stock markets.

Draghi has faced increased pressure to do more to support a slowing euro-zone economy after the Bank of Japan last week unexpectedly announced it would add the equivalent of another $730 billion to its balance sheet.

And at the end of its two-day policy meeting yesterday, the ECB announced a plan to buy another €1 trillion in asset-backed securities. This will bring the ECB’s balance sheet back to 2012 levels.

 

1-ECB assetsThe ECB’s balance sheet over time. The attempt to allow central bank credit to decrease with the repayment of LTRO funds by commercial banks has now been abandoned again – click to enlarge.

 

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Janet Yellen Bemoans “Lack of Fiscal Support”

Fed chair Janet Yellen studied under the Keynesian James Tobin, whose name is nowadays best known for being associated with a tax. It should therefore not come as a big surprise that she supports Keynesian dogma regarding government intervention in what is left of the market economy.

As Reuters reports:

 

“U.S. Federal Reserve Chair Janet Yellen on Friday called on politicians across the globe to get their fiscal houses in order during good times to prop up economies during times of turmoil.

In remarks to a symposium in Paris, Yellen blamed part of the slow global economic recovery on weak government support.

She took aim at both U.S. political gridlock after the 2007-2009 financial crisis and the austere policies across Europe as the region struggles with persistently low inflation.

The crisis led major central banks to deploy unconventional tools to spur recovery. For its part, the Fed cut interest rates to zero and more than quadrupled its balance sheet to $4.4 trillion through three rounds of bond buying, eliciting howls of protest from some politicians who feared the monetary largesse would spark an unwanted inflation. It announced an end to its latest asset purchase program just last week.

While the unconventional tools helped support domestic recovery and global economic growth, more action from fiscal authorities would have strengthened the recovery, Yellen said.

“In the United States, fiscal policy has been much less supportive relative to previous recoveries,” she said during a panel discussion at the Bank of France. Yellen cited data that compared the large increase in U.S. government payrolls after the 2001 recession to the decline of 650,000 government jobs after 2008.

AS central banks seek to promote healthy economies, she said a sharpened focus on financial stability would play a key role. Yellen did not comment on U.S. monetary policy, specifically, but said central banks globally would need to normalize policy as economic activity and inflation return to normal. The timing and speed of policy normalization will vary across countries, Yellen added, and could lead to financial volatility.”

 

(emphasis added)

 

Meeting of the Board of Governors of the Federal Reserve

(Photo credit: Jim La Scalzo—EPA/Corbis)

 

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Follow the Money

If Mr. Market is afraid, he is putting on a brave face. The Fed’s QE ended on Wednesday. On Thursday, the Dow rose 221 points.

This is good news for Janet Yellen. She must think she has made a clean getaway. She has fled the scene of the biggest financial heist in history with no cops in sight. They’re not even aware a crime has been committed!

This grand larceny involved $3.6 trillion. Counterfeit – every dollar of it. Not a penny of it was ever honestly earned or earnestly saved … or dug out of the dirt and turned into coins.

No … We’re talking about the crime of the century … committed in broad daylight… with millions of witnesses. But hardly a single soul understood what was going on.

We begin by asking: How many TVs, luxury apartments, spaghetti dinners and parking places are there?

Answer: We have no idea. But it’s not an infinite number. And every one of them has a price. Who gets them? The people with the money.

Next question: Who has the money? We don’t know that either. But the Fed fabricated $3.6 trillion over the last five years … and every penny ended up in someone’s hands. Follow the money. You will find out what happened.

 

1-FollowTheMoneyFollowing the money isn’t so easy. We believe that at least one of the reasons for the complexity of the monetary central planning system is to make it difficult for the average citizen to understand its workings. Readers may be aware that the mainstream media never supply anything but the most superficial “explanations”. This is largely due to the fact that most journalists don’t really understand how the system actually works either, although it is actually simple enough if one focuses on its most important basic features. A very long time ago, public debates over the nation’s monetary dispensation were quite commonplace. These days it is assumed as a matter of course, without any corroborating evidence being provided, that Soviet-style central planning of money is the best possible foundation of an allegedly “capitalist” system! – click to enlarge.

 

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The BoJ Goes Even Crazier

It has been clear for a while now that the lunatics are running the asylum in Japan, so perhaps one shouldn’t be too surprised by what happened overnight. Bloomberg informs us that Kuroda Jolts Markets With Assault on Deflation Mindset.

The policy hasn’t worked so far, in fact, it demonstrably hasn’t worked in Japan in a quarter of a century. Therefore, according to the Keynesian mindset, we need more of it. Mr. Kuroda therefore delivered a surprise spiking of the punchbowl that immediately impoverished Japan’s consumers further by causing a sharp decline in the yen:

 

“Today’s decision to expand Japan’s monetary stimulus may be regarded as shock treatment in the central bank’s effort to affect confidence levels. Bank of Japan Governor Haruhiko Kuroda’s remedy to reflate the world’s third-largest economy through influencing expectations saw the yen sliding and stocks climbing.

Kuroda led a divided board in Tokyo in a surprise decision to expand unprecedented monetary stimulus. Bank officials hadn’t provided any hints in recent weeks that additional easing was on the cards to help reach the BOJ’s inflation goal. Kuroda, 70, repeatedly indicated confidence this month that Japan was on a path to reaching his 2 percent target in the coming fiscal year. Just three of 32 economists surveyed by Bloomberg News predicted extra easing.

“We have to admit that this is sort of a second shock — after we had the first shock in April last year,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, referring to the first round of stimulus rolled out by Kuroda in 2013. Kanno, who used to work at the BOJ, said “this is very effective,” especially because it comes the same day as the government pension fund said it will buy more of the nation’s stocks.

 

(emphasis added)

So why is there allegedly a “need to combat the deflation mindset”? Below is a chart of the recent increases in Japan’s CPI.

In actual practice, it matters little how they have come about – the fact that CPI was inter alia boosted by a hike in consumption taxes does not alter the fact that every consumer in Japan is now getting fewer goods and services for his income and savings than before. No consumer is going to a shop and saying to himself “the fact that things are now vastly more expensive than before somehow shows we are still in deflation, because it has happened for transitory reasons”. All he knows is that he is getting less for his hard-earned money. Mr. Kuroda is evidently not moved by such considerations.

  1-japan-inflation-cpiJapan’s CPI is recently growing at a 3.2% annual rate. Obviously, this means one must “combat the deflation mindset” – click to enlarge.

 

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Premature Victory Laps R Us

Seasoned Kremlinologists are advised to closely study the differences between Wednesday’s statement and that of the previous month (the WSJ’s trusty statement tracker is helpful in this regard). You may notice something peculiar. On the one hand, the October statement exudes a lot of optimism – everything is apparently perfectly fine (shortly before the bottom falls out things usually seem to look fine as well, note though that this is not a comment on timing). The economy is humming! Inflation expectations, though “somewhat lower” than desired, remain “well anchored”. Hurrah!

And yet, the federal funds rate needs to be kept at zilch “for a considerable period of time”. Not only that, once it is actually hiked, it will need to remain “below the level normally considered normal” for a long time as well. And although QE was laid into this ornate coffin of wonderful things happening (like a vampire, it is likely just biding its time, awaiting resurrection), the Fed’s bloated balance sheet is not going to be allowed to shrink. The reinvestment of maturing MBS and treasury debt will continue as before.

Mind, we are not in the least surprised by this particular decision. We don’t think the Fed’s balance sheet has ever been allowed to shrink. Excuse us for not making the effort to confirm this beyond a shadow of doubt, but considering that the Fed’s securities holdings exploded by more than 400% even during the genuine money supply deflation of 1929 to 1933 (so much for “they didn’t do anything” at the time), we think we are on fairly safe ground with this assertion.

So what we have here is a victory lap, combined with a noticeable degree of apprehension. What are they afraid of? Only one thing comes to mind right away: the possible implosion of the bubble they have created. The whole statement sounds a lot like a wink-wink, nudge-nudge to stock market speculators actually.

 

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QE Departs

QE, we hardly knew ye …

Hang the black crepe. Get out the whiskey. Say goodbye. And try to keep the tears from your eyes.

The Dow rose back above 17,000 points on Tuesday, near its all-time high. Higher stock prices should settle nerves at the Fed’s FOMC meeting. It should leave the central bankers free to let their emergency bond-buying program die in peace [indeed, it did die in peace, ed.].

The Financial Times announced the end even before it happened. On Monday, its headline read: “RIP QE: The quiet death of a radical US monetary policy.”

But the Fed has to be careful. If it announces that QE is truly dead, it is likely to set off some untoward scenes of wailing and keening in the stock market. Investors will feel a deep sense of loss.

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Stingy Usurers at IMF Won’t Lend SDRs at Negative Rates

No negative rates for the putative Bancor … Keynes must surely be rotating in his grave. It turns out the IMF is not going to lend SDRs for less than nothing, thus breaking ranks with some well-known central banks out there (no need to name names), and even the central bank-manipulated “market” in which investors accept negative rates on certain government bonds as if that made any sense.

Instead, the IMF has decided to set a floor for its SDR interest rate to maintain its role as a profit center…it will be at what is nowadays a downright usurious height of 0.05%. So at least at the IMF, there will be no pretense that time preferences can actually turn negative.

 

christine-lagardeThere will be no funny money for nothing from me, busters!

(Photo credit: REUTERS / Fahad Shadeed)

 

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25 Banks Failed, Sort of …

We noted on the eve of the publication of the ECB’s “comprehensive assessment” of European banks (here is the ECB’s complete report, pdf) that the central bank’s review would likely be more stringent than the EBA’s stress tests during the euro area crisis, because the central bank will become their supervisor.

However, it would also not be too harsh in its assessments, as it probably wants to avoid unnerving the markets. Apparently, this is precisely what happened. For instance, the WSJ informs us that “ECB Says Most Banks Are Healthy”. 25 banks failed the test technically, but only 13 of them actually need to come up with additional capital. A similar feelgood article appeared at Reuters, entitled ECB fails 25 banks in health check but problems largely solved”.

The WSJ writes:

 

“Hoping to quell years of anxiety about Europe’s financial health, regulators said Sunday that all but 13 of the continent’s leading banks have enough capital to ride out another economic storm.

The European Central Bank and the European Banking Authority announced the results of a nearly yearlong effort to assess the finances of 150 banks, identifying 13 that still need to come up with a total of €9.5 billion ($12 billion) in extra capital. Overall, 25 banks technically failed the so-called stress tests, facing a cumulative shortfall of €24.6 billion. But most have already taken steps to solve their problems since the end of 2013, the cutoff date for the exercise.

To pass the tests, banks had to show that they had ample capital to survive a crisis that would cause Europe’s economy to fall 7% below current forecasts and the unemployment rate to rise to 13%.

The exams are part of an effort to reassure investors and the public that, following years of destabilizing banking meltdowns and long after the U.S. defused its financial crisis, Europe’s lenders are back on solid footing. Restoring that confidence is a top priority, because the continent’s sluggish economy needs healthy banks to provide loans to households and businesses.

For the ECB, Sunday’s results are the final milestone before it takes over supervision of major eurozone banks on Nov. 4. Turning the ECB into the currency union’s bank watchdog is a key step to setting up a so-called eurozone banking union. The hope is that moving control over important banks out of national hands will prevent the kind of banking crises that rocked Ireland, Spain and Cyprus in recent years.

Investors and analysts mostly applauded the tests, saying they appeared to be much more rigorous than previous years’ versions. But some expressed disappointment that European Union supervisors didn’t take the opportunity to get more banks to thicken their capital cushions.

Philippe Bodereau, global head of financial research at Pimco, said the regulators’ strictures were a step in the right direction. But “I would have preferred they be a bit tougher and force more [banks] to raise capital,” he said.

 

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Fans of Central Banking Have an Achilles Heel

Most of my writing about the gold standard is about how it works, and how the paper dollar standard doesn’t. A casual conversation I had with someone recently underscored that there is an even stronger argument.

Our opponents, those who support central banking and irredeemable paper money, have to make two cases. One is to defend the theory and practice of central banking, that central bankers are wise and honest and that their debt-based paper money works. They have to argue that the dollar does everything you want money to do, such as hold its value, enable proper accounting, encourage savings, support a stable economy, etc. Well, they can go through the motions and fool the ignorant.

The other is that they have to defend the use of force against innocent people.

 

five year plan in four

Full speed ahead for the fourth and final year of the five year plan! (this poster was made when Stalin decided the 5 year plan had to be fulfilled in four years)

 

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