Central Banks

     

 

 

Economic Nirvana

“Inflation is always and everywhere a monetary phenomenon,” economist and Nobel Prize recipient Milton Friedman once remarked.  He likely meant that inflation is the more rapid increase in the supply of money relative to the output of goods and services which money is traded for.

 

Famous Monetarist School representative Milton Friedman thought the US should adopt a constitutional amendment limiting monetary inflation to 3% – 5% per year, putting inflation so to speak on autopilot. But why should there be any central bank-directed inflation at all? To his credit, in 1968 Friedman wrote the following in the American Economic Review: “[M]onetary action takes a longer time to affect the price level than to affect the monetary totals and both the time lag and the magnitude of effect vary with circumstances. As a result, we cannot predict at all accurately just what effect a monetary action will have on the price level and, equally important, just when it will have that effect. Attempting to control directly the price level is therefore likely to make monetary policy itself a source of economic disturbance because of false stops and starts.” This is quite correct and was the reason why he thought discretionary central bank policy should be replaced with some fixed rule, while naively adding thatPerhaps, as our understanding of monetary phenomena advances, the situation will change.” Of course the situation will never change – the failure of the bureaucracy to centrally plan money is simply a special case of the socialist calculation problem, which cannot be overcome (as an aside, it is not all clear why students of economic history should accept that central banks have been established for anything other than nefarious reasons). The most elegant solution would of course consist of simply replacing central planning with a truly free market in money. But that would mean abandoning a major tool of political and economic control that benefits the State and its cronies. Moreover, a great many economists would have little to do in such a free market, as central banks have essentially bought the entire profession. Naturally, most economists know better than to bite the hand that feeds them.

Photo via mises.ca

 

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Early Warning Signals in a Fragile System

[ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning]

We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 – 24 months were quite large, even if their absolute levels remain historically low.

 

Sizable moves higher in short term interest rates were recorded over the past two years. 2 year note yields only started moving up in mid 2016, but the surge in t-bill discount rates has been in train since late 2015 already. The moves in short term rates come from extremely low levels, but they are nevertheless quite noteworthy – click to enlarge.

 

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Incrementum Advisory Board Meeting Q4 2017 –  Special Guest Ben Hunt, Author and Editor of Epsilon Theory

The quarterly meeting of the Incrementum Fund’s Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is available for download below.

 

Ben Hunt, author of Epsilon Theory and chief risk officer of Salient Partners

 

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A Date with Dracula

The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.

 

“Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver’s seat it was evidently hard to understand what was said over the racket made by the team of horses that drew their carriage over the Transylvanian collection of pot holes the natives quite audaciously referred to as a “road”. In fact, the thunderous clackety-clack of their hooves was slightly unnerving, not to mention the unsafe speed at which they were moving. “I said, who lives in yonder castle?”, Harker repeated, shouting this time. “Oh!”, Igor said, nodding (Igor was their coachman). “Why Sire, is castle of Count Orlok, of course”. Of course. Good thing we are about to visit Count Dracula and not Count Orlok, Harker thought. “Better known as Count Dracula”, Igor continued, still nodding, as though it needed to be emphasized. Crap. “So which is his real name?” Harker inquired, still shouting. “Depends on who you ask, Sire”, Igor informed him, “Murnau says…” Suddenly, a piercing sound rang in Harker’s ears. It was the howl of a wolf, coming from somewhere in the woods to their left. It could hardly have been louder if the wolf had been sitting in the coach right next to him. Good grief. What’s next?  To Igor he said, “Do you have lots of wolves here?” “Wolves?” Igor repeated, his tone of voice indicating mild concern. “Where wolves?” Why am I not surprised. “You have werewolves? Are there any horrors you don’t have in this shit-hole of a country?” And so it went… [PT]

 

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Big Crunch or Big Chill

Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.

 

OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in which the expansion not only stops, but reverses as it is overcome by gravity, is no longer deemed likely. Observation of distant supernovas and their red-shifts in the late 1990s pointed clearly to an accelerating expansion; this was the meantime confirmed by other data as well, such as those on fluctuations in the density of baryonic matter (baryon acoustic oscillations), which are evident in the large scale structures visible in the universe (ever larger structures are discovered, the record is currently held by the Hercules–Corona Borealis Great Wall, which measures an estimated ~3 gigaparsecs or roughly 10 billion light years across). The precise shape of the universe remains open to question, but recent evidence strongly suggests that it is a flat, Euclidian universe (thus, dark energy is assumed to be driving the acceleration of the expansion – a hyperbolic or saddle-shaped universe with a matter density below the critical value would expand forever anyway). The second and third image above show the current ideas about the timeline of the universe since the big bang. It is held that the current era of accelerating expansion started about 7.5 billion years ago. Ever since, all galaxies  – indeed all objects in the universe – are flying apart at continually increasing speed. The last image shows the size of the observable universe, which has a diameter of 28.5 gigaparsecs, or 93 billion light years (i.e., we can “see” 46.5 billion light years in every direction). Readers will notice that this is much larger than the age of the universe would suggest. Shouldn’t the size of the observable universe be limited by the speed of light, and hence correlate roughly with the age of the universe? Actually, on account of the ongoing expansion of space-time, the light from the oldest, most distant galaxies we can currently see comes from objects that have moved much farther away from us in the meantime (a process referred to as “co-movement”). Over time, we will see more rather than fewer galaxies, as light will have had more time to travel and the light from even more distant galaxies will begin to reach us. The observable universe will grow, but there is a strict limit to this. The effect will reverse at an estimated threshold radius of 62 billion light years (compared to the current 46.5 billion), i.e., the maximum diameter of the observable universe will be capped at 124 billion light for all observers, regardless of where in the universe they are (note: all observers subjectively believe that they are at the center of the universe, as all of them can “see” a spherical volume of the same size surrounding them). Once this threshold is reached more galaxies will begin to red-shift out of visibility than will become newly visible, and eventually, darkness will descend on us, or rather, our descendants (trivia: the most remote quasar so far recorded by the Hubble telescope is a dark red blotch 31 billion light years from here). What is there beyond the boundary of  the observable universe? Estimates of the size of the “causally disconnected” part of the universe (which we will never be able to see or interact with) range from 3×1023 times the size of the observable universe, up to a volume 101010122 times larger than what is visible to us. Both the “big rip”, in which the universe becomes cold and dark in a mere 22-50 billion years as the expansion accelerates to such an extent that every shred of matter is literally torn apart, or the “big freeze”, a slow heat death, in which maximum entropy is reached about 100 trillion years from now, remain possible alternatives for the end of everything. As the big freeze approaches its end, the last remains of baryonic matter will begin to degrade at temperatures a mere sliver above absolute zero, with protons and neutrons decaying into electrons and positrons that may form bizarre atoms light years in size (a.k.a. “positronium”), which will orbit each other at the ultimate snail’s pace, moving just one centimeter in a million years – in complete darkness, natch. All of this could still turn out to be wrong: our measurements may well be flawed; misled by effects caused by a relatively low matter density in our own sector of the universe and the nearby voids, which only make it appear as though the entire universe was expanding at an accelerating pace. It is also possible that as result of an unusually inhomogeneous distribution of matter (differences >20%), denser regions are actually already collapsing inward, but their contraction looks similar to an expansion from our perspective, due to the differences in the curvature of space in regions with varying matter density. Note that no “dark energy” would have to be invoked if that were the case. [PT, end of astronomy lesson]  – click to enlarge.

 

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The True Believer

How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.

 

Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT]

Photo credit: Linda Davidson / The Washington Post

 

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Bleeding the Patient to Health

There’s something alluring about cure-alls and quick fixes. Who doesn’t want a magic panacea to make every illness or discomfort disappear? Such a yearning once compelled the best and the brightest minds to believe the impossible for over two thousand years.

 

Instantaneous relief! No matter what your affliction is, snake oil cures them all. [PT]

 

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Past the Point of No Return

Adventures in depravity are nearly always confronted with the unpleasant reality that stopping the degeneracy is much more difficult than starting it.  This realization, and the unsettling feeling that comes with it, usually surfaces just after passing the point of no return.  That’s when the cucumber has pickled over and the prospect of turning back is no longer an option.

 

Depravity and bedlam through the ages. The blue barge of perdition in the lower middle ferries the depraved and degenerate to their final destination, a small slice of which can be glimpsed above… [PT]

 

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Anecdotal Flags are Waved

 

“If a shoeshine boy can predict where this market is going to go, then it’s no place for a man with a lot of money to lose.”

– Joseph Kennedy

 

It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if he wanted a few stock tips. Kennedy was amused and intrigued and encouraged him to go ahead. Bologna wrote a few ticker symbols on a piece of paper, and when Kennedy later that day compared the list to the ticker tape, he realized that all the stocks on Bologna’s list had made strong gains. This happened a few months before the crash of 1929.

 

Joseph Kennedy in 1914, at age 25 – at the time reportedly “the youngest ever bank president in the US”

Photo credit: John F. Kennedy Presidential Library and Museum, Boston.

 

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Lasting Debt

“Rule one: Never allow a crisis to go to waste,” said President Obama’s Chief of Staff Rahm Emanuel in November of 2008.  “They are opportunities to do big things.”

 

Rahm Emanuel looks happy. He should be – he is the mayor of Chicago, which is best described as crisis incarnate. Or maybe the proper term is perma-crisis? Anyway, it undoubtedly looks like a giant opportunity from his perspective, a gift that keeps on giving, so to speak. [PT]

Photo credit: Ashlee Rezin / Sun-Times

 

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Preventing the Last Crisis

Clear thinking and discerning rigor when it comes to the twisted state of present economic policy matters brings with it many physical ailments.  A permanent state of disbelief, for instance, manifests in dry eyes and droopy shoulders.  So, too, a curious skepticism produces etched forehead lines and nighttime bruxism.

 

The terrible scourge of bruxism and its potentially terrifying consequences. Curious skepticism can lead to the darnedest things, which is why Big Brother strongly recommends that citizens remain in a medication and cable TV-induced apathetic stupor. To make this happy outcome easier to achieve, stagnation in real wages was successfully introduced a number of moons ago; forced to work to exhaustion just to keep their heads above water, citizens tend to be more docile in their shrinking free time. [PT]

 

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Mathematical Certainties

Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70 years.

 

Growing wrinkle coefficient… as the global population increasingly ages, the “pay-as-you-go” social security and pension Ponzi schemes of developed welfare states are inexorably careening toward insolvency. [PT]

 

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