Central Banks

 

December FOMC Decree

Prior to the announcement of the FOMC decision on Wednesday, it was widely expected that the verbiage in the statement would be changed so as to convey an increasingly hawkish stance. Specifically, it was expected that the following phrase, which has been a mainstay of FOMC statements for many moons, would finally be given the boot and no longer appear:

 

“…it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time”  

 

It is inter alia this bizarre focus on little turns of phrase in the FOMC statement that has caused us to compare the analysis of the actions of the monetary bureaucracy with the art of “Kremlinology” of yore. The Committee is indeed reminiscent of the Soviet Politbureau in many respects. It is unelected, it is engaged in central planning, and its pronouncements are cloaked in an aura of mysticism, akin to decrees handed down from Olympus.

While it is fairly easy (and in our opinion, absolutely necessary) to make fun of this, it is unfortunately affecting the lives of nearly everyone on the planet. The only exceptions that come to mind are Indian tribes in remote areas of the rain forest, since they don’t use money and possess no capitalistic production structure.

 

yellen

Fed chair Janet Yellen: “A couple. You know, a pair. What the Russians call “dva”, although I hear the Russians are no longer as familiar with such low numbers as they once used to be. My dictionary says it means “two”. One less than the number one is supposed to count to before throwing the holy hand grenade of Antioch after its pin has been removed. Not one, definitely not five, absolutely not four and not three either. Two.”

Photo credit: Agence France-Presse / Getty Images

 

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Weidmann the Strict

BuBa chief Jens Weidmann is complaining about the EU Commission’s decision to eschew confrontation with France over its repeated inability to deliver on its debt and deficit targets, and rightly so.

Some people may argue that the French government’s recent willingness to implement some long-overdue, if halfhearted reforms, should be taken into account as a sign of goodwill. Perhaps, but it was precisely the “original Maastricht sin” of 2002-2003, when neither France nor Germany were taken to task for violating the treaty with their deficit overshoots that created the preconditions that later made it seem normal for many others to violate these limits as well (admittedly, this has to be brought into context with the artificial boom of 2002-2007 and the subsequent bust).

Nevertheless, the fiscal compact strikes as one of the more sensible EU regulations (although it is obviously difficult to enforce it against a big member nation). Not only because the euro’s survival essentially depends on it, but also because keeping government spending under control is good for the economy at large in any event.

If we have a gripe in this context, it is mainly that European governments are often inclined to raise taxes rather than cutting their spending. Both France and Italy currently stand as monuments to the folly of this approach.

 

weidmannJens Weidmann shortly after learning that France’s government will get away with a slap on the wrist.

Photo credit: Eric Piermont / AFP 

 

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Malinvestment vs. Overinvestment

Recently we have come across a very interesting article by Lee Adler, which discusses the connection between the Fed’s money printing activities and the shale oil boom. In this context the possibility is mentioned that QE may actually contribute to “creating deflation”.

Obviously, we agree with many, in fact with the vast majority of the points made by Lee Adler in his article. Money printing always diverts investment into lines that later on turn out to be unprofitable, precisely because it distorts relative prices in the economy. Lee Adler should also be commended for drawing attention to the fact that the money relation – i.e., the purchasing power of money – depends not only the money side of things, but also on the goods side.

In an unhampered market economy in which a market-chosen money is employed, it would be reasonable to expect that prices will tend to gently decline over time, as productivity increases will as a rule exceed whatever additions to the money supply occur (for instance, if gold were still used as money, its supply would increase by roughly 1.4% per year and it is a very good bet that economic productivity would be rising at a faster pace).

Thus, a mild, persistent decline in the prices of most or all goods and services is a hallmark of a progressing economy. Needless to say, anyone who has observed the computer industry in the wider sense over recent decades – the productivity growth of which has been so large it actually outpaced the effect of money printing on prices – will realize that no business needs rising consumer prices to thrive, and that consumers do not “postpone their purchases” due to falling prices. The entire idea that a “deflationary spiral” could somehow harm the economy is erroneous (however there is a reason why today’s policymakers are afraid of falling prices, which we will briefly discuss below).

There is of course already an issue with the definition of the terms “inflation” and “deflation”: in their original usage, these terms were employed to designate changes in the supply of money and were not just describing one of their possible effects (i.e., a rising or falling “general price level”).

For the discussion at hand readers need to be aware that Lee Adler uses the terms inflation and deflation in their current definition, this is to say to designate a decrease or increase in money’s purchasing power, not an increase or decrease in its supply. In terms of the original definition of these expressions, there is definitely no deflation in sight anywhere on the planet, least of all in the US:

 

TMS-2-annUS money supply inflation has been especially large since 2008, running at about twice the pace of euro area money supply inflation and more than three times that of Japan – click to enlarge.

 

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Central Planners and Displeased Value Investors

The Dow fell 51 points on Monday. Gold surged $37.10 – or 3.1% – to settle at $1,232 an ounce. The US stock market is “hideously expensive,” says value investor James Montier at Boston-based investment firm GMO.

He’s not wrong about that. But we have a feeling it’s going to be even more hideous before this story reaches its end. When it is so hideous that to look upon it sends us running to a public toilet and retching, that is when it will be most loved by everyone.

This is the story of human hubris (a classic in Greek drama), wherein man oversteps his boundaries and brings down upon himself the fury of wrathful gods.

Yellen, Draghi, Kuroda, Carney, Zhou – the protagonists think they are “wiser than God.”

They think they know that people would be better off spending their money rather than saving it… that prices should be rising not falling… and that, by propping up the price of financial assets with credit easing, they will cause real growth and real prosperity.

 

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Photo credit: Evan-Amos

 

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Mr. Market Shall Prevail

New York is filling up with holiday shoppers and tourists. On Saturday, we went to the Broadway show Jersey Boys. It was not an especially complex or subtle storyline. But the music, of Frankie Valli and The Four Seasons, was lively and agreeable. It took us back to the early 1960s. Those were the days!

Back then people had jobs … prices were fairly stable … and the GDP was growing at twice or three times today’s rates (and so were personal incomes). How was it possible?

Back then, under chairman William McChesney Martin Jr., the Fed ran much tighter monetary policy. So America’s savers could earn a decent return on their money. And the Fed wouldn’t have even dreamed… let alone dared… to target higher stock market prices. What about quantitative easing?

It was probably illegal. And certainly would have been considered immoral or insane. But there are fads in music… and in central banking, too.

The music industry has given us “twerking.” (Google it.) And in central banking, we have multitrillion-dollar asset price manipulation programs. Both are obscene. But both are popular. And almost nobody wants to see them stop.

But in the end Mr. Market… nature… and the gods… will prevail. Thy will be done. It always is.

 

Miley Cyrus Bangerz Tour In Miami

Miley Cyrus, the gal that made “twerking” popular. Quite harmless compared to money printing, although it’s kind of embarrassing …

Photo: Larry Marano / Getty Images

 

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Social Engineers Pleading for Helicopter Money

Apparently the mainstream government propaganda organs are on a mission to spread the worst economic ideas possible, so as to bring down what little is left of the free market economy even faster. Recently they are employing an ages old trick: promise people they will get something for “free”.

The latest author to take up the baton is one aptly named Vincent Crook at Bloomberg (anyone who has followed the Bloomberg editorial line in recent years should by now be aware that it is an even worse socialistic and statist rag than the Financial Times. The latter at least allows opposing voices to have an occasional say).

Mr. Crook has graced us with a screed entitled: “ECB Should Fire Up Its Helicopters”.

 

heli moneyThe ECB’s magical money helicopter

Image via adamsmith.org / Author unknown

 

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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.

 

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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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