Tag: economics

More gasoline

With the flames threatening to die down, Ben Bernanke decides to pour more on the fire:

The Federal Reserve has decided against reducing its stimulus for the
U.S. economy, saying it will continue to buy $85 billion a month in
bonds because it thinks the economy still needs the support. The Fed said in a statement Wednesday that it held off on tapering
because it wants to see more conclusive evidence that the recovery will
be sustained. Stocks spiked after the Fed released the statement at the end of its two-day policy meeting.

(laughs) Apparently the Fed lost their nerve when they saw stocks plunging in anticipation of the end of QE IV. The Fed knows deflation and credit collapse is lurking right around the corner and they are desperately attempting to stave it off. What they think will save them, I don’t know, but we appear to be rapidly approaching a potentially critical nexus with prospective war in Syria, yet another debt ceiling showdown with the Republicans running the risk of looking even more foolish than they usually do when they cave for a third straight year, and the possibility of a Hultgreen-Curie scenario at the Fed.

Why central bankers never learn

Zerohedge reports on India’s central bank digging its hole deeper:

With the value of the rupee plunging to new lows, the current account deficit at an all-time high and inflation running at nearly a ten-percent annual clip, India is in serious economic trouble. Indeed many are beginning to wonder whether the country is edging toward a replay of the events in the summer of 1991. Back then, an acute balance of payments crisis forced New Delhi into the indignity of pawning its gold reserves in order to secure desperately needed international financing.

At a small public event the other week, Duvvuri Subbarao, the outgoing head of the central bank, pointedly referred to a recent book, This Time is Different: Eight Centuries of Financial Folly, and conceded that policymakers rarely learn from their mistakes. He conceded that:

        “… in matters of economics and finance, history repeats itself, not because it is an inherent trait of history, but because we don’t learn from history and let the repeat occur.”

This is a theme that policymakers have been pondering for a while. More than a year ago, at what was ostensibly a celebration of an updated book on the economic reforms catalyzed by the 1991 debacle, Subbarao warned that the dangers sparking that crisis – ballooning fiscal and current account deficits – were once again lurking. At the same time, a high-ranking commerce ministry official told a group of business leaders that economic indicators were provoking “a sense of déjà vu.” Worried that conditions were ripe for a replay of the 1991 crisis, he exclaimed:

        “Why are we dodging these [policy challenges]? In 1991, we were candid enough to take these decisions. The quicker we take these decisions, the better it would be, instead of acting like ostriches.”

The reason is fairly simple. Men have a very difficult time understanding things when their continued financial well-being depends upon them failing to understand them.

Bound by Zero: the Hall paper

Like Karl Denninger, I found the conclusion of Fed economist Robert Hall’s paper to be fascinating, both for what it did and did not say:

4.4 The deflation nightmare

So far, inflation has fallen only slightly and remains in positive territory. Fears in early 2009 that rapid deflation might break out and cause the economy to collapse as in 1929 to 1933 proved unfounded, luckily. I have advanced the hypothesis that rampant price-cutting has failed to appear because businesses are in equilibrium and perceive that price-cutting has bigger costs than benefits. If the hypothesis is wrong and businesses are finally responding to five years of slack by cutting prices, the generally optimistic tone of this section could be quite mistaken. The bottom could fall out of the economy as it did in the Great Depression.

5 Concluding Remarks

The central danger in the next two years is that the Fed will yield to the intensifying pressure to raise interest rates and contract its portfolio well before the economy is back to normal. The worst step the Fed could take would be to raise the interest rate it pays on reserves. The analysis of this paper focusing on the zero lower bound applies equally to a reserve rate above zero. Every percentage point increase in the reserve rate drives the real interest rate up and contracts the economy by the principles discussed here.

With respect to policies that might lower the probability of a repetition of the multi-trillion dollar disaster of the past five years, it is true that a policy of higher chronic inflation would have given monetary policy more headroom for expansion to counteract the decline in output demand and to prevent it from causing a decline in output. But I see that response as distinctly second-best. Much preferable are policies to maintain a robust financial system that responds smoothly to declines in real-estate prices. Requiring more capital in fi nancial institutions is an important part of good policy, but to determine the amount of capital, there is no substitute in a modern financial system for frequent and rigorous stress-testing.

Derivatives create exposures that are not recorded as leverage, but are fully apparent in stress tests. With a stable, bullet-proof fi nancial system, policies of low inflation are quite safe.

I have explained, repeatedly, why we haven’t seen deflation set in yet.  Credit is still expanding, only at a rate insufficient to provide for either economic growth or private sector jobs. Sans the 114% increase in Federal sector debt and the over the last five years, instead of credit disinflation we would have seen actual deflation.   There are no signs that either the 7% decline in Household debt or 20% decline in Financial sector debt are going to change, so the federal government has no choice but to keep doubling its spending every four years just to hold its ground.

Unsurprisingly, lacking any model to account for credit, Paul Krugman isn’t quite sure exactly what to make of it. But I suspect Hall knows better, which is why he admits that if his hypothesis is wrong, “the generally optimistic tone of this section could be quite mistaken”.

It is mistaken. Other than idiot college students who don’t know any better and whose debt servitude is guaranteed by the government, do you know anyone who is increasing their debt?

This problem of the Zero Bound was long predicted by every economist who warned of the impossibility of “pushing on a string”.  Cutting interest rates can stimulate borrowing, and the subsequent creation of credit, until they cannot be cut anymore.  I, and numerous others, pointed this out, but the Krugmans of the world argued that the Zero Bound was not binding.

But eventually, the long run always arrives.  Everyone wants to know exactly when the economy will hit the ground towards which it is falling, but I can’t say because that depends upon how long the Fed and the Federal government are willing to try to keep trying to flap their arms instead of bracing for impact.

I don’t think this bodes well

Zerohedge picks up an unusual report on gold flows:

This is one of those stories about the gold market that almost seems too wild to be true since the numbers are so extraordinary. According to a Reuters article from earlier today, Australian bank Macquarie has reported that gold is flooding out of London and into Switzerland at a mind-boggling rate. Specifically, 240 tons were exported in May alone and 797 tons during the first half of 2013. That means gold is being exported at a annualized run rate of 17x the 92 tons exported for all of 2012. That’s insane.

Moreover, it seems a lot of that gold is being sent to Switzerland so that the 400oz bars can be melted down into different sizes that are more amenable to Asian sensibilities. So, as many of us suspected all along, what has happened is lobotomized Westerners have sent much of their gold to Asia just as the financial system prepares to melt down again.

 This could be an interesting autumn.

Credit and price inflation

Karl Denninger understands the intrinsic connection between the two:

The availability of “cheap credit” has made everything from houses to furniture to TVs to cell phones to cars more expensive.  Virtually everyone shops a “payment” now instead of a price. 

Why else would you hear all the car dealers telling you how they can get you into a new car for “two-ninety-nine!” instead of telling you the price is $24,923? 

That’s simple — everyone buys a payment.

House — same deal.  Do you qualify for a house or for a payment? You know the answer — and the big scam nowdays (and has been for the last decade) is finding ways to get around the down payment — actual cash on the table has been reduced to record lows, with the goal for many being zero.

Then there’s student loans, as Taibbi recently went off on and which I’ve been covering for years.  They are alleged to make college “more accessible.”  Nonsense; what they do is enslave young people who are our most-vulnerable due to lack of life experience and being that these debts cannot be discharged except under extraordinary circumstance they’re one of the worst forms of debt slavery.

The truth is that the basic laws of economics tell you that when there are more buyers willing to pay a given price irrespective of how or why the price of that item will tend to rise.  This is true whether the thing is a car, a house, health care, college tuition or anything else.

Ultimately this forces anyone who wants said thing to use credit to obtain it as the ability to pay cash dwindles away.

And that, ultimately, destroys the middle class by making the true cost of such pulled-forward demand rise so high that it cannot be afforded at all.

So long as the government coerces this behavior for its own benefit so it can hand out money to its favored few, whether those be “poor” people (with iPhones of course) or defense contractors this cycle continues until it is either voluntarily abandoned or it is forced to stop by impact with the zero boundary.

“Impact with the zero boundary” is exactly what I described in my “limits of demand” in which I suggested an alternative mechanism for the Austrian Business Cycle. This points to the core flaw of the inflationista perspective, which is that even if the government prints an unlimited amount of money, it still has to somehow get into the hands of the people who are going to spend it on goods and services.

The federal government does an amount of this through its income transfer programs, which are now better understood as distributed inflation programs. The problem is that the very act of distribution tends to reduce the willingness of the recipients to do anything productive, as could be seen in this Rattlife clip from Fox News.  And the horrified tone of the reporter explains why significantly expanding these programs is politically untenable; keep in mind they would need to increase by a factor of more than TWENTY in order to compensate for five years of credit disinflation.

That leaves expanding the credit base as the other option, which is precisely what the Federal Reserve has been trying to do.  But here it runs into the “pushing on a string” problem due to its inability to print more borrowers.  It’s not so much that the banks won’t lend as the banks can’t find anyone credible to lend to as about 40 percent of the loans they are presently holding are already in default.

About the only thing the federal government can do at this point is expand its student loan guarantees to the home mortgage and credit card markets. However, that terrifies Fed officials, who are already looking at the fact that only 10.8 million of the 28 million federal student loan borrowers in the US are making any payments on their student loans.

Which points to the quasi-Soviet nature of the problem where the federal government pretends to give money to banks to lend out to borrowers and the borrowers pretend they are going to pay it back. Expanding the sham to mortgages and credit cards may buy a little more time, but it’s not going to fix anything. It is certainly not a credible basis for economic growth.

The financial idiocracy

Keep in mind that this woman is widely considered to be the most credible candidate to succeed Ben Bernanke at the Federal Reserve:

“For my own part,” Ms. Yellen said, “I did not see and did not
appreciate what the risks were with securitization, the credit ratings
agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of
that coming until it happened.” Her startled interviewers noted that
almost none of the officials who testified had offered a similar
acknowledgment of an almost universal failure.

Meanwhile,
I was publicly warning about the dangerous risks facing the global
financial system from 2002 to the spring of 2008. And it wasn’t even my
job to pay attention to those things.  I see no chance, none, that these
maleducated academic idiots even posses the conceptual tools to
understand the current situation, let alone have the ability to do
anything about it.

It’s like watching monkeys try to
repair a space shuttle.  Which wouldn’t be so bad if we weren’t all out
in space inside the shuttle.

I used to wonder why people like this would take an impossible job knowing that they would likely be considered responsible for the incipient disaster. Now I realize that it’s not that they’re not totally indifferent to their historical legacy, they’re just completely clueless about the situation facing them.

The Japanese experiment has failed

The impotence of Abenomics demonstrates that Karl Denninger and others were right, Paul Krugman was wrong, and quantitative easing does not magically produce economic growth.

In April 2013, Japan announced a QE program of $1.4 trillion, an
amount equal to roughly 25% of the Japanese GDP. To put this into
perspective, the US’s QE1, QE 2, QE 3, and QE 4 programs which were spaced out over four years are an amount equal to roughly 16% of US GDP.

Japan announced a larger program relative to its economy all at once.
The idea was that by throwing around a big enough amount of money,
Japan’s economy would finally waken from its 20-year slumber and take
off.

This effort has been an abysmal failure. Japan’s second quarter GDP
grew at just 0.6% quarter over quarter, registering the single biggest
growth MISS in a year (economists were expecting 0.9% which, by the way had already been revised lower).

Put in plain terms, Japan announced the single largest QE effort in
history, and not only did its economic growth projections have to be
lowered, but it is failing to even meet these lowered growth projections.

The failure of Abe’s daring plan to print Japan back into prosperity should suffice to explode the inflationista argument.  The US equivalent would be a $4 trillion spending program that barely managed to keep GDP from turning negative. And in directly related news, it is absolutely fascinating to see Paul Krugman complaining that Milton Friedman is no longer a hero on the economic right:

Friedman, who used to be the ultimate avatar of conservative economics, has essentially disappeared from right-wing discourse. Oh, he gets name-checked now and then — but only for his political polemics, never for his monetary theories. Instead, Rand Paul turns to the “Austrian” view of thinkers like Friedrich Hayek — a view Friedman once described as an “atrophied and rigid caricature” — while Paul Ryan, the G.O.P.’s de facto intellectual leader, gets his monetary economics from Ayn Rand, or more precisely from fictional characters in “Atlas Shrugged.”

How did that happen? Friedman, it turns out, was too nuanced and realist a figure for the modern right, which doesn’t do nuance and rejects reality, which has a well-known liberal bias…. He was willing to give a little ground, and admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve. In particular, he argued that the Fed could have prevented the Great Depression — with no need for new government programs — if only it had acted to save failing banks and pumped enough reserves into the banking system to prevent a sharp decline in the money supply.

Krugman fails to realize that the right wing is putting one of John Maynard Keynes’s few legitimate ideas into action.

“When the facts change, I change my mind.”

Friedman was a Keynesian, albeit a Keynesian heretic who rejected the use of fiscal policy in favor of monetary policy.  And, more importantly, he was completely wrong.  Ben Bernanke has followed an almost flawlessly Friedmanite policy, bailed out the banks, pumped massive reserves into the banking system, and prevented a sharp decline in the money supply.

And yet, it hasn’t worked, because Friedman’s monetarist theory failed to account for the fact that it is credit money that is the larger and more important factor with regards to prices and the limits of demand, and, as Abe has shown in Japan, even an unprecedented increase in the money supply is not enough to make up for the deflationary forces at work in the various credit sectors.  One cannot push on a string and one cannot print borrowers.

Ideology or cash-credit decoupling?

The way I see it, the decision of the New York Times to sell the Boston Globe for a 93 percent loss – or rather, a 103% loss if the pension liabilities are considered, indicates one of two things:

After purchasing the Boston Globe in 1993 for a then-record $1.1 billion, the financially troubled New York Times just announced that it sold the 141-year-old paper to Boston Red Sox owner John Henry for a mere $70 million. That’s a straight 93% loss. Figuring in two decades of inflation would only make it worse — as does the fact that the Times retains the Globe’s pension liabilities, estimated at over $100 million.

The Times announced in February that it was putting the Globe up for sale. News reports claimed that bids had been as high as $100 million. What might have sweetened the lower offer for the Times is that Henry offered a straight cash deal, which is expected to close sometime in September or October.

In 2011, the Times turned down a $300 million offer from Aaron Kushner, CEO of Freedom Communications, Inc., publisher of the Orange County Register and other newspapers in California. This offer even included the assumption of pension liabilities, which are currently estimated at $110 million. 

Either it was worth $340 million to the owners of the New York Times to keep the Boston Globe out of the conservative-leaning hands of Freedom Communications or the value of $70 million in cash trumped $410 million in non-cash.  If the real reason was not ideological, this tends to indicate that we are proceeding faster into the deflationary scenario than even most deflationists understand.

In inflationary environments, stock is worth more than cash and credit is fully exchangeable with cash.  In deflationary environments, cash is worth more than stock or credit due to the expectation that the former will decline and the latter will be worth less than its nominal value.

Carlos Danger for Fed Chairman

As far as I can tell, there are three requirements for being appointed Federal Reserve Chairman:

  • He must be a Jew.  There hasn’t been a Gentile at the helm in nearly three decades.
  • He must be of the political elite. 
  • He must be a man.

There has been a lot of talk about Larry Summers or Janet Yellen being appointed to succeed Helicopter Ben by Barack Obama.  While Summers and Yellen are both Jewish, and therefore ethnically eligible, Summers is handicapped by being completely wrong about the housing crisis and Yellen is ineligible by virtue of being female.

Also, Yellen is the current Vice Chairman of the Board of Governors of the Federal Reserve System, so how likely is it that she can fix what she helped break in the first place?

While there are no shortage of economists who did foresee the housing crisis, unfortunately, only Peter Schiff is Jewish and he is observably not of the political elite. Neither is the corpse of Murray Rothbard, which despite being dead for 18 years, would make for a better Fed Chairman than either Summers or Yellen.

So, where can we find a Jewish man who is of the political elite who will not be inclined to simply continue Helicopter Ben’s dysfunctional strategy?  My suggestion? Anthony Weiner aka Carlos Danger.

Carlos Danger would be the perfect Fed Chairman.  Set him up with a webcam, and internet connection and a Twitter account called @bigphatmoneymaker and he’ll happily spend his time at the office sending inflationary pictures to starstruck land whales instead of sending trillions of inflationary credit dollars to undercapitalized European banks. The global economy will be saved, the Lizard Queen’s reputation will no longer be sullied by association, and the women’s magazines will devote cover after cover to “The Glamorous Woman Behind the Fed”.

The bi-factional ruling party is happy. The media is happy. Hoi polloi is happy. Everybody wins.

18 similarities with 2008

Tyler Durden sees it happening again:

#1 According to the Bank of America Merrill Lynch equity strategy team, their big institutional clients are selling stock at a rate not seen “since 2008”.

#2 In 2008, stock prices had wildly diverged from where the economic fundamentals said that they should be.  Now it has happened again.

#3 In early 2008, the average price of a gallon of gasoline rose substantially.  It is starting to happen again.  And remember, whenever the average price of a gallon of gasoline in the U.S. has risen above $3.80 during the past three years, a stock market decline has always followed.

#4 New home prices just experienced their largest two month drop since Lehman Brothers collapsed.

#5 During the last financial crisis, the mortgage delinquency rate rose dramatically.  It is starting to happen again.

#6 Prior to the financial crisis of 2008, there was a spike in the number of adjustable rate mortgages.  It is happening again.

#7 Just before the last financial crisis, unemployment claims started skyrocketing.  Well, initial claims for unemployment benefits are rising again.  Once we hit the 400,000 level, we will officially be in the danger zone.

#8 Continuing claims for unemployment benefits just spiked to the highest level since early 2009.

#9 The yield on 10 year Treasuries is now up to 2.60 percent.  We also saw the yield on 10 year U.S. Treasuries rise significantly during the first half of 2008.

It’s just a matter of time.  Of course, that’s been true since I published RGD in 2009 due to the mathematical inevitabilities involved.  The difference is that it’s a matter of considerably less time now.