Blog Archives

Skyrocketing Costs Will Pop All the Bubbles

We’ve used a simple trick to keep the status quo from imploding for the past 11 years: borrow whatever it takes to keep paying the skyrocketing costs for housing, healthcare, college, childcare, government, permanent wars and so on.

The trick has worked because central banks pushed interest rates to zero, lowering the costs of borrowing more as costs continued spiraling higher.

But that trick has been used up. The next step–negative interest rates–has failed to spark the “growth” required to pay for insanely overpriced housing, healthcare, college, childcare, government, etc.

We’ve reached the end of the line on lowering interest rates as a way of borrowing more to keep our heads above water. We’ve reached the point where households and enterprises can’t even afford the principle payments, i.e. no interest at all.

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The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

It’s funny how unintended consequences so rarely turn out to be good. The intended consequences of central banks’ unprecedented tsunami of stimulus (quantitative easing, super-low interest rates and easy credit / abundant liquidity) over the past decade were:

1. Save the banks by giving them credit-money at near-zero interest that they could loan out at higher rates. Savers were thrown under the bus by super-low rates (hope you like your $1 in interest on $1,000…) but hey, bankers contribute millions to politicos and savers don’t matter.

2. Bring demand forward by encouraging consumers to buy on credit now.Nothing like 0% financing to incentivize consumers to buy now rather than later. Since a mass-consumption economy depends on “growth,” consumers must be “nudged” to buy more now and do so with credit, since that sluices money to the banks.

3. Goose assets based on interest rates by lowering rates to near-zero. Bonds, stocks and real estate all respond positively to declining interest rates. Corporations that can borrow money very cheaply can buy back their shares, making insiders and owners wealthier. Housing valuations go up because buyers can afford larger mortgages as rates drop, and bonds go up in value with every notch down in yield.

This vast expansion of risk-assets valuations was intended to generate a wealth effect that made households feel wealthier and thus more willing to binge-borrow and spend.

All those intended consequences came to pass: the global economy gorged on cheap credit, inflating asset bubbles from Shanghai to New York to Sydney to London. Credit growth exploded higher as everyone borrowed trillions: nation-states, local governments, corporations and households.

While much of the hot money flooded into assets, some trickled down to the real economy, enabling enough “growth” for everyone to declare victory.

But the unintended consequences also came to pass: 

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Gold & Silver Looking To Rally As The World Moves From “Inflation Expectations” To Plain Old “Inflation”

I’d like to direct your attention to Wednesday and Thursday of this week’s economic events calendar:

On Wednesday we get PPI data and on Thursday we get CPI data.

PPI is the Producers Price Index. That is the change in price of what it costs to produce goods and services. Buying aluminum and turning them into cans would be a good example of the PPI seeing as how the whole “trade wars” mantra is a hot topic right now, even if so far it has been nothing but talk. The point is if the cost of raw aluminum goes up, then the cost to the producer in making those cans is going up too.

CPI data is the Consumer Price Index. That is the change in price of the good and services we as the consumer. In our aluminum example, we don’t particularly care about the cost of aluminum. What we care about is how much a 12 pack of Coca-Cola costs. In other words, the CPI is what we pay for finished goods and services.

Besides, there’s more than aluminum that goes into the cost of a 12 pack of Coca-Cola. There’s the cost of the sugar, the super secret formula, the caffeine, the diesel to transport it to the store, the cost of the card board, the cost of the marketing, etc.

But it all comes down to one word: Inflation.

That’s the topic. (more…)

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Fox in the Hen House: Why Interest Rates Are Rising

The Fed is aggressively raising interest rates, although inflation is contained, private debt is already at 150% of GDP, and rising variable rates could push borrowers into insolvency. So what is driving the Fed’s push to “tighten”?

On March 31st the Federal Reserve raised its benchmark interest rate for the sixth time in 3 years and signaled its intention to raise rates twice more in 2018, aiming for a fed funds target of 3.5% by 2020. LIBOR (the London Interbank Offered Rate) has risen even faster than the fed funds rate, up to 2.3% from just 0.3% 2-1/2 years ago. LIBOR is set in London by private agreement of the biggest banks, and the interest on $3.5 trillion globally is linked to it, including $1.2 trillion in consumer mortgages.

Alarmed commentators warn that global debt levels have reached $233 trillion, more than three times global GDP; and that much of that debt is at variable rates pegged either to the Fed’s interbank lending rate or to LIBOR. Raising rates further could push governments, businesses and homeowners over the edge. In its Global Financial Stability report in April 2017, the International Monetary Fund warned that projected interest rises could throw 22% of US corporations into default. (more…)

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CRACKS IN THE BOND MARKET – Jim Willie Warns US Debt Default DEAD AHEAD

collapseForeign USTreasury Bond dumping continues, and even accelerates.  China and the Saudis are selling USTreasurys in a near panic.  Foreign central banks liquidated a record $375 billion in USGovt debt in the last 12 months. An American disaster lies in the making from debt saturation, debt overload, and debt dumping. It is all denied by the Washington mouthpieces and the Wall Street handlers, as they lie.
The USGovt debt default is within view, dead ahead.

Click Here For Jim Willie’s Full Hat Trick Letter On US Debt Default DEAD AHEAD:

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TRUMP DESTROYS ESTABLISHMENT, ELITES STUNNED, Markets Crash, Then Rebound| Rob Kirby

Donald J. Trumptrumpcrushesestablishment has STUNNED the world.  Will Cuffs and Nooses Be Next?
The media and political establishment are SHELL-SHOCKED As Globalism Has Been Set Back 50 Years!
When the results came in, Dow futures collapsed LIMIT DOWN and gold skyrocketed.
But now the markets have reversed dramatically.
Rob Kirby says the ONLY explanation for market reversal is market interference.
Trump will not allow this kind of market manipulation..

Click Here For Full In Depth Coverage & Market Analysis: 

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Revealing the Real Rate of Inflation Would Crash the System

This week, I’ve noted that Consumer Prices Have Soared 160% Since 2001 while under-the-radar declines in value, quantity and quality are forms of Inflation Hidden in Plain Sight.

What would happen if the real rate of inflation was revealed? The entire status quo would immediately implode. Consider the immediate consequences to Social Security, interest rates and the cost of refinancing government debt.

Unbiased private-sector efforts to calculate the real rate of inflation have yielded a rate of around 7% to 13% per year, depending on the locale–many multiples of the official rate of around 1% per year.

So what happens if the status quo accepted the reality of 7+% inflation? Here are a few of the consequences:

1. Social Security beneficiaries would demand annual increases of 7+% instead of zero or near-zero annual increases. The Social Security system, which is already distributing more benefit payments that it is receiving in payroll tax revenues, would immediately go deep in the red.

(Please don’t claim the SSA Trust Fund will be solvent for decades. I’ve dismissed the fraud of the illusory Trust Fund many times. The reality is the federal government has to borrow every dollar of deficit spending by Social Security by selling more Treasury bonds, just as it borrows every other dollar of deficit spending.)

The Fraud at the Heart of Social Security (January 17, 2011)

The Problem with Social Security and Medicare (July 17, 2013)

The Social Security system would be revealed as unsustainable if real inflation (7+% annually) were made public.

2. Global investors might start demanding yields on Treasury bonds that are above the real rate of inflation. If inflation is running at 7%, then bond buyers would need to earn 8% per year just to earn a real return of 1%.

Central states are only able to sustain their enormous deficit spending because interest rates and bond yields are near-zero or even below zero. If the federal government suddenly had to pay 8% to roll over maturing government bonds, the cost of servicing the existing debt–never mind the cost of borrowing an additional $400 billion or more every year–would skyrocket, squeezing out all other government spending and triggering massive deficits just to pay the ballooning interest on existing debt.

Bond yields of 8+% would collapse the status quo of massive government deficit spending.

3. Private-sector interest rates would also rise, crushing private borrowing.How many autos, trucks and homes would sell if buyers had to pay 8% interest on new loans? A lot less than are being sold at 1% interest auto loans or 3.5% mortgages.

4. Any serious decline in private and state borrowing would implode the entire system. Recall that a very modest drop in new borrowing very nearly collapsed the global financial system in 2008-09, as the whole system depends on a permanently monstrous expansion of new borrowing to fund consumption, student loans, taxes, etc.

How many billions of dollars will be siphoned off the debt-serfs, oops, I mean students, should student loans be issued at interest rates north of 8%? (Some private student loans are already in the range of 8%; where will those go if inflation is recognized as running at 7% per year?)

The grim reality is that real inflation is 7+% per year, and this reality must be hidden behind bogus official calculations of inflation as this reality would collapse the entire status quo. Super-wealthy elites earning 10+% yields on stock, bond and real estate portfolios aren’t particularly impacted by 7% inflation; their real wealth continues to expand nicely.

Who’s being destroyed by 7+% real inflation? Everyone whose income has stagnated and everyone who depends on wages rather than assets to get by–in other words, the bottom 95%.

My new book is #7 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.

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Bernanke Blew It Big-Time: He Should Have Raised Rates Three Years Ago

It is now painfully obvious that Ben Bernanke blew it big-time by not raising rates three years ago when the economy and markets enjoyed tailwinds. The former Federal Reserve chairperson, who has claimed the mantle of savior of the global economy, foolishly kept rates at zero until tailwinds turned to headwinds, at which point he handed Janet Yellen the unenviable task of raising rates as the headwinds are strengthening.

Ben Bernanke is not the savior who rescued the global economy; he is the clueless fool who plunged a poisoned knife in its back. After weathering the spot of bother in Euroland in 2011-2012, the global economy had multiple tailwinds in 2013–tailwinds that enabled Bernanke and the Fed to raise rates in a series of measured steps.

Tailwind #1: the Fed’s binge-buying of assets (QE3) was still ramping up in 2013:

Tailwind #2: the yield curve spread had bounced off its 2012 low:

Tailwind #3: market speculative positions and sentiment were solidly positive:

Tailwind #4: China’s economy and appreciation of the yuan had not yet weakened:

In April 2013, the market’s “recovery” had already been running for four years.By mid-2013, the S&P 500 had soared from 667 in March 2009 to 1,600, exceeding its previous all-time highs around 1,574–a gain of 930 points or 140% off the 2009 lows.

What else did The Bernank want in mid-2013–an infinite line of credit with the Central Bank of Mars? He had literally every tailwind a central banker could want to support higher interest rates–especially rates that could have clicked higher by tiny .25% increments.

Instead, Bernanke blew it big-time, letting the “recovery” run seven years without any significant increase in rates. Now that the “recovery” is in its eighth year, it’s starting to roll over. All those tailwinds have reversed into headwinds, especially China, which has seen the RMB (yuan) strengthen by 20% as its currency peg to the U.S. dollar has dragged it higher.

The 20% appreciation in the yuan makes China’s exports increasingly costly and thus less competitive globally.

As I explained in Why the Fed Has to Raise Rates (December 4, 2015), the U.S. dollar serves two sets of users: the domestic U.S. economy and the international economy that uses the USD as a reserve currency.

While the Fed poo-bahs are constantly spewing propaganda about how the Fed serves Main Street (well, it does serve Main Street in a manner of speaking–as a tasty snack to Wall Street), the one absolutely critical mission of the Fed in the Imperial Project is maintaining U.S. dollar hegemony.

No nation ever achieved global hegemony by weakening its currency. Hegemony requires a strong currency, for the ultimate competitive advantage is trading fiat currency that has been created out of thin air for real commodities and goods.

Generating currency out of thin air and trading it for tangible goods is the definition of hegemony. Is there is any greater magic power than that?

In essence, the Fed must raise rates to maintain the U.S. dollar hegemony and keep commodities such as oil cheap for American consumers. The most direct way to keep commodities cheap is to strengthen one’s currency, which makes commodities extracted in other nations cheaper by raising the purchasing power of the domestic economy on the global stage.

Another critical element of U.S. hegemony is to be the dumping ground for exports of our trading partners. By strengthening the dollar, the Fed increases the purchasing power of everyone who holds USD. This lowers the cost of goods imported from nations with weakening currencies, who are more than willing to trade their commodities and goods for fiat USD.

The loser as the USD strengthens is China, which must devalue its currency or de-peg its currency from the USD to preserve its export-sector competitiveness. Anything that could disrupt China’s fragile economy, credit expansion and capital flows is a global worry, and Bernanke blew it big-time by not raising rates when global growth was still a tailwind.

Now that the tailwinds have become headwinds, the global economy is like a cracked glass teetering on a fence post in a rising storm. Every move in interest rates has immediate consequences in currencies, bond yields and capital flows, and each of these winds has the potential to topple the increasingly fragile global economy into recession–or worse.

Ben Bernanke blew it big-time, not just for America, but for the world. This reality cannot be dismissed as the luxury of hindsight; it was clear to many observers that after four years of recovery, it was time to start raising rates in 2013. Leaders must lead; if the Fed chair is so weak-kneed that he/she must ask the market’s permission for every decision, that’s not leading–it’s following a short-term profit-obsessed liquidity junkie off the cliff.

A Radically Beneficial World: Automation, Technology and Creating Jobs for All is now available as an Audible audio book.

My new book is #3 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.

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The Coming War of Central Banks

History has shifted, and we’re leaving the era of central bank convergence and entering the era of central bank divergence, i.e. open conflict. In the good old days circa 2009-2014, central banks acted in concert to flood the global banking system with easy low-cost credit and push the U.S. dollar down, effectively boosting China (whose currency the RMB/yuan is pegged to the USD), commodities, emerging markets and global risk appetite.

That convergence trade blew up in mid-2014, and the global central banks have been unable to reverse history. In a mere seven months, the U.S. dollar soared from 80 to 100 on the USD Index (DXY), a gain of 25%–an enormous move in foreign exchange markets in which gains and losses are typically registered in 100ths of a percent.

This reversal blew up all the positive trades engineered by central banks:suddenly the yuan soared along with the dollar, crushing China’s competitiveness and capital flows; commodities tanked destroying the exports, currencies and economies of commodity-dependent nations; carry trades in which financiers borrowed cheap USD to invest in high-yielding emerging markets blew up as currency losses negated the higher returns, and global risk appetite vanished like mist in the Sahara.

The net result of this reversal is global markets have struggled since mid-2015, when the headwinds of the stronger dollar finally hit the global economy with full force.

In one last gasp of unified policy convergence, G20 nations agreed to crush the USD again in early March 2016, to save China from the consequences of a stronger yuan and the commodity markets (and lenders who over-extended loans to commodity producers).

That Shanghai Accord lasted all of two months. The engineered collapse has already reversed, and the USD is gaining ground, reversing the gains in risk assets, commodities and China’s export-dependent, debt-based stability.

The problem is there is no win-win solution to this foreign exchange battle.Japan and the Eurozone benefit from a stronger USD as the euro and yen weaken, but China loses as the USD soars.

Commodities lose when the USD gains, but the domestic U.S. consumer’s purchasing power increases as the USD strengthens.

It’s Triffin’s Paradox writ large: As the primary global reserve currency, The USD plays both a domestic and an international role, and each set of users has a different set of priorities.

No matter what policy the Federal Reserve pursues, there will be powerful winners and losers.

This sets up a war between central banks everywhere in which winning may be as disastrous as losing. The conventional central bank policy is to lower interest rates to weaken their currency, as a means of boosting exports.

But the unintended consequence of lowering rates is capital flight, as capital flees devaluation and negative returns and seeks higher returns elsewhere.This is a self-reinforcing process, as capital flight causes the currency to lose value, reducing the purchasing power and wealth of all who hold the currency. This motivates everyone who anticipates this devaluation to get their money out of the depreciating currency, which further weakens the currency which then triggers even more capital flight, and so on.

The only way to avoid the devaluation is to pull your cash out of that currency and put it into a currency that’s strengthening. For many, that currency will be the USD, due to its ubiquity and the liquidity of its capital markets.

Nations such as China are boxed into a lose-lose choice. If they lower rates to weaken their currency (to maintain a competitive export sector), they trigger capital flight, which weakens the domestic economy and creates a self-reinforcing feedback loop.

If they do nothing and their currency rises as other nations aggressively devalue their currencies, their export sectors whither as competing exporters take market share.

Any central bank that dares to raise rates will make their nation a magnet for capital seeking a higher return–both in yield and in currency appreciation.

The Fed is boxed in, too: if the Fed can’t raise rates after seven years of “growth,” then its credibility suffers. If it raises rates, that accelerates the capital flow into USD and the U.S., pushing the dollar higher, which then triggers mayhem in China, emerging markets, commodity markets and U.S. corporate profits earned overseas.

Welcome to a currency war in which victory depends on your perspective. If the USD continues strengthening, the winners will be those holding USD, as their currency will increase its purchasing power as other currencies devalue.

As I always note: no nation ever devalued its way to hegemony or empire.

My new book is #3 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.

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Why the Fed Has to Raise Rates

A great many insightful commentators have made the case for why the Fed shouldn’t raise rates this month–or indeed, any other month. The basic idea is that the Fed blew it by waiting until the economy is weakening to raise rates. More specifically, former Fed Chair Ben Bernanke–self-hailed as a “hero that saved the global economy”–blew it by keeping rates at zero and overfeeding the stock market bubble baby with quantitative easing (QE).

Now that the Fed isn’t feeding the baby QE, it’s throwing a tantrum.

On the other side of the ledger is the argument that the Fed must raise rates to maintain its rapidly thinning credibility. I have made both of these arguments: that the Bernanke Fed blew it big-time, and that the Fed has to raise rates lest its credibility as the caretaker not just of the stock market but of the real economy implodes.

But there is another even more persuasive reason why the Fed must raise rates.

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The Federal Reserve, Interest Rates and Triffin’s Paradox

One result of the global dependence on central bank interventions is a unhealthy fixation on the slightest changes in those interventions, oops I meant policies.

Since the slightest pull-back in central bank inflation of asset bubbles could spell doom for the global economy and everyone holding those assets, the world now hangs on every pronouncement of the Federal Reserve in a state of extreme anxiety.

Why the extreme anxiety? Because any change in Fed intervention creates both winners and losers. There is no way Fed policy can be win-win-win for all participants, and to understand why we turn to Triffin’s Paradox, a.k.a. Triffin’s Dilemma.

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China: Doomed If You Do, Doomed If You Don’t

Many commentators have ably explained the double-bind the central banks of the world find themselves in. Doing more of what’s failed is, well, failing to generate the desired results, but doing nothing also presents risks.

China’s double-bind is especially instructive. While there an abundance of complexity in China’s financial system and economy, we can boil down China’s doomed if you do, doomed if you don’t double-bind to this simple dilemma:

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