Central Banks


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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Don’t Make Us Laugh


1024-DRE-blogStreet of Ottawa, the capital of Canada.

(Screenshot – Stéphane Leclerc)

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QE3 Is Coming to an End

The Federal Reserve’s latest asset purchase program, QE3, is coming to an end.  What was once an $85 billion a month program, one in which at its peak had been goosing the financial markets and economy at an annual rate of $1.0 trillion – and over its 27 month life will have pumped $1.7 trillion of money into the economy – is going to zero. Given the outsized impact QE has had on the growth of U.S. money supply and thus the U.S. economy, we say investors take note, especially those furthest out on the risk curve, because what was once your primary tailwind could soon become your greatest headwind.

Here’s why…


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The Unleashing of Madness


In the mouth-2b


A number of articles have recently discussed the ECB’s quantitative easing program, which entails inter alia the buying of covered bonds. Here is a quote from an article in the Financial Times:


The European Central Bank has started to buy covered bonds, in its latest attempt to to revive lending in the euro zone and stave off a vicious bout of economic stagnation.


It would be more correct to write: “ECB tries its best to revive the credit bubble that thankfully expired in 2008”. This one sentence from the FT above encapsulates already almost everything that is wrong about these currency debasement programs. It is presented as a “given” that central bank meddling with money and credit is necessary to revive, or as it is often put, “jump-start” the economy, which is held to be mired in stagnation for generally mysterious reasons.

And yet, his comment by the FT makes as much sense as the policy, namely zero (a big, fat zero). The ECB will effectively print money, or rather, create digital money ex nihilo, to pay for these purchases. The underlying assumption that creating additional amounts of money can “stave off economic stagnation” is 180 degrees wrong. It will achieve the exact opposite, namely a structural weakening of the economy – even if, or rather, especially if, economic activity as measured by aggregated data seems to “revive” as a result.

Those who have first access to the newly created money can exercise a demand for real goods without first having contributed anything to the economy’s pool of real funding. This makes it more difficult for those people who actually do make such contributions by their productive efforts to create wealth – as they are forced to compete for a shrinking pool of real resources. As Frank Shostak explains in recent article, what happens is that “exchanges of nothing for something” result from the creation of additional money:


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How to Slow Down World Improvers

And how do you like that James Bullard?

Stocks have barely begun to correct (the S&P 500 is down about 7% from its September high) and the St. Louis Fed president is already preparing for QE4. But where is the proof – from logic or experience – that QE pays off?

It is a shame that quack philosophers, politicians and central bankers are not subject to penalty. After all, bridge builders and hedge fund managers suffer shame and ruin when their projects fall to pieces.

Couldn’t some suitable stick be laid on world improvers, too? Preferably before their wacky programs are put into service.

For example, when they make a claim that cannot be supported by rigorous proof, they should lose a year’s worth of income … or have their genitalia cut off. Maybe that would slow them down.


fed pumping

 Is the next avalanche on its way?


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More Back-Pedaling – This Time by a “Hawk”

We already pointed out on Tuesday and again on Wednesday that numerous signs of back-pedaling by Fed officials recently emerged – no doubt in reaction to the sudden wobble in “risk” assets (what else could have been the motivation?). On Wednesday we asked rhetorically whether San Francisco Fed president John Williams was actually serious.

Enter St. Louis Fed president James Bullard on Thursday, who only a few weeks ago was talking about wanting to alter the FOMC statement toward indicating a more hawkish tone. Nothing but a less than 10% dip in the spoos to completely change a monetary bureaucrat’s views these days. According to the FT:


“From the transcript of St Louis Fed president James Bullard’s interview with Bloomberg Television:

“I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December. So… continue with QE at a very low level as we have it right now. And then assess our options going forward. …

My forecast is for rising inflation. That’s why I’m concerned about declining inflation expectations, the five-year TIPS in particular has declined below one and a half percent. The five-year forward is down from its previous levels. And the central bank has to guard against any expectations in the market that would suggest that the central bank is not going to hit its inflation target. So you have to be credible on your inflation target. So a simple – what I’m saying is that a simple step that we may be able to take or maybe the committee might consider at its October meeting would be to just take a pause on the taper, let more data accumulate and see how the U.S. is going to evolve over the rest of the year and into next year. …

I think you should quit numbering the QEs. I’ve been an advocate of having an open-ended program. I do think QE is our most powerful tool when the policy rate is at zero. And I think it’s far more powerful than forward guidance for instance. And I think we saw that during the taper tantrum of 2013. And therefore I think I’ve been for having an open-ended program that reacts to economic data. And so far we’ve been able to taper the program down on the face of really dramatically improving labor markets this year, but maybe this is a juncture where we’d want to invoke that clause about it being data dependent.”

The remarks follow the comments earlier this week by John Williams of the San Francisco Fed, who signaled his willingness to consider a new round of asset purchases if “a sustained, disinflationary forecast” emerges.


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You Can’t Be Serious …

Yesterday we came across this brief note on Marketwatch about an interview San Francisco Fed president John Williams gave to Reuters. We already pointed out in our market update on Monday that a whiff of back-pedaling by Fed officials was in the air, but it is getting utterly ridiculous now:


“San Francisco Fed President John Williams said that more bond buying could be needed if the economy faltered, according to a report. “If we really get a sustained, disinflationary forecast … then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider,” Williams told Reuters.

Williams said he’s “worried” the European Central Bank response will be as timely and aggressive as needed. Williams told the publication he still expects the first rate hike in the middle of 2015. The Fed is expected to announce it will stop bond purchases at its October meetings.”


(emphasis added)

Say what? The ECB “won’t be as aggressive as needed”? A planned € 1 trillion ECB balance sheet expansion is not enough? We would also like to know – needed for what?

In the make-believe world of these ivory tower bureaucrats the economy can be “improved” by printing money, but in the real world it is actually severely undermined. If an economy is seen to be recovering in tandem with money printing, it is doing so in spite, and not because of it. In fact, chances are that the observed “recovery” is naught but an inflationary illusion anyway.


WilliamsSan Francisco Fed president John Williams

(Photo credit: Tony Avelar | Bloomberg | Getty Images)

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How do you like that Dow? Down 272 on Tuesday. Then back up almost exactly as much on Wednesday. As we predicted, volatility is rising. Investors are beginning to squirm. Why?

The Fed is ending QE. And it could hike short-term interest rates as soon as next year. The EZ money is getting scarce.

“We are trapped in a cycle of credit booms,” writes Martin Wolf in the Financial Times. Wolf is wrong about most things. But he is not wrong about this. “On the whole,” he writes, “there has been no aggregate deleveraging since 2008.”

He does not mention his supporting role in this failure. When the financial world went into a tailspin, caused by too much debt, in 2008, he joined the panic – urging the authorities to take action!

As a faithful and long-suffering reader of the FT, we recall how Wolf howled against “austerity” in all its forms. His solution to the debt crisis?

Bailouts! Stimulus! Deficits! In short, more debt!



Martin Wolf pleading for more money printing in 2010 …


Wolf-2… and again in 2011 – now he wonders how it comes that we’re trapped in credit boom-bust cycles?

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An Absurd Claim

Last week, a story broke about Fed whistleblower Carmen Segarra. I wrote an article on Forbes about it, Disgruntled Fed Lawyer Blows Whistle on Regulatory Capture. Segarra is a former Fed regulator assigned to supervise Goldman Sachs. She secretly recorded 46 hours of audio from her meetings, during her short stint on site at Goldman as a Fed employee.

This story does not come in a vacuum. There is an ongoing narrative, which is simple, even facile. We had a crisis in 2008, and therefore banks caused it. Because, greed. This is the backdrop for her story, and the story presented by This American Life and ProPublica. It is how every article I have read about that story, except this one by David Stockman, spins it.

Banks suffocate under a full-time, on-site team of government minders. In Sagerra’s words, “The Fed has both the power to get the information [i.e. whatever it demands] and the ability to punish the bank if it chooses to withhold it. And some of these powers involve criminal action.” The banks are monitored, controlled, regulated, and supervised. So how is it possible that they got away with crime on such a scale as to nearly collapse the monetary system?



Ex-Federal Reserve lawyer Carmen Segarra

(Photo credit: Nabil Rahman for ProPublica)


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Dreaded October

The Dow fell 238 points on Wednesday. And Treasury debt rallied. The yield on the 10-year T-note fell the most in nine months – to 2.4%. News reports blamed “geopolitical challenges” in Hong Kong, the Middle East, Ukraine and elsewhere.

That may be part of it. But this is also October – the month QE is expected to end. Between 2009 and 2014, the Fed bought $3.6 trillion of US government and mortgage-related notes and bonds. During that time $5 trillion has been added to the value of the US stock market. And the price of the average house has risen by $60,000.

This was achieved largely by holding Mr. Market’s head underwater until he stopped squirming.



(Photo via Deviantart)

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