Is the United States in a Liquidity Trap?

In his New York Times article of January 11, 2012, the Nobel laureate Paul Krugman wrote,

If nothing else, we’ve learned that the liquidity trap is neither a figment of our imaginations nor something that only happens in Japan; it’s a very real threat, and if and when it ends we should nonetheless be guarding against its return — which means that there’s a very strong case both for a higher inflation target, and for aggressive policy when unemployment is high at low inflation.

The bottom line is that the Fed almost surely won’t, and very surely shouldn’t, start raising interest rates any time soon.

But does it make sense that by means of more inflation the US economy could be pulled out of the liquidity trap?   Read more»

Gentlemen, Start Your Printing Presses!

Whoops!…Oh dear!…It looks like Ben fell off the wagon again!

Such a shame. He had been doing so well ever since he put that bottle of “Old Q.E.” back on the shelf last June… and got sober. But a few weeks back, he tripped up on his 12-step program and started nipping at the bottle again. Slowly at first… then to excess.

Yes, it’s true, dear reader, Federal Reserve Chairman Ben Bernanke, is printing money again. That’s bad enough. But this time, after he prints it, he sends it over to Europe. Crazy, but true. The chart below tells the tale. It shows the quantity of currency swaps on the Fed’s balance sheet.   Read more»

Thoughts on the Crisis of Capitalism

“I am convinced that a capitalistic system must have a monetary anchor to be sustainable…It is the pricing mechanism within the  financial sphere that has become so badly out of whack to the point of  posing dire risk to global Capitalism.”

“Policymakers have repeatedly responded to dysfunction and inevitable booms-turned-bust with unprecedented market intervention…What began as tinkering has regressed to the point of policymakers attempting to take virtual command over the pricing of finance. Capitalism now hangs in the balance.”

George Soros’ “The Crisis of Global Capitalism…” was published back in late-1998, following a dreadful period of global instability. Such concerns for the most part dissipated over the years with the resuscitation of global market and economic booms. The market value of global debt, equities and commodities skyrocketed. Bigger booms and busts followed and, not surprisingly, global Capitalism is today under only more intense fire.

Strangely enough, there remains a fine line between a “crisis of global Capitalism” and utter euphoria in the financial markets. The ECB’s $620bn first round Long-Term Refinancing Operation (LTRO) – along with expectations for an even more grandiose 3-year lending facility (LTRO II) next month – has the markets abuzz. Crisis resolved? The unleashing of another global reflationary backdrop on which to capitalize?   Read more»

Auditing the FED’s Gold

I have posted a video of something I thought I would never see: all five of the Republican candidates for the U.S. Senate verbally demanding an audit of the Federal Reserve System. You can see it here.

Bernanke is facing what no Federal Reserve chairman has ever faced: public awareness of the Federal Reserve System. From late December 1913, when an almost deserted Senate voted for the Federal Reserve Act, until 2008, when the recession confirmed Ron Paul’s warning in late 2007, there was almost no public awareness or even a vague understanding of the Federal Reserve System. The genie is now out of the bottle, where it had been corked since 1913. Ron Paul has uncorked it.   Read more»

How Deflationary Forces Will Be Turned into Inflation

The ongoing financial and economic crisis has not only stoked fears that it will end in inflation — as central banks will print up ever-greater amounts of money — but it has also given rise to a diametrically opposed concern: namely, that of deflation.

For instance, in December 2011 Christine Lagarde, head of the International Monetary Fund (IMF), warned that the world might risk sliding into a 1930s-style slump, such as the Great Depression. This episode was characterized by worldwide defaulting banks, a shrinking of the money supply (or, deflation), which in turn led to falling prices across the board, sharply falling production and drastically rising unemployment.

In today’s fiat-money regime — which contrasts with the gold-exchange-standard that was in place in many countries at that time — the possibility of deflation appears fairly small indeed.[1] This becomes obvious if one takes a look at the workings of today’s fiat-money system, a system in which the money supply can actually be increased at any point in time in any amount deemed politically desirable.   Read more»

Currency Love Triangle

The ongoing financial crisis in Europe is the biggest financial story in the world today and is covered daily. The stories are filled with doom and gloom and predictions of imminent collapse of the currency and the monetary union. Our view is the euro sovereign bonds are in distress and European banks are mostly insolvent but that does not mean the currency will fail. The bonds, banks and currency are three different things and the failure of the first two does not mean failure of the third. The reasons for this are based on the fact that the U.S., China and Germany are united in their desire for a strong euro. The U.S. and China both need a strong euro so Europeans can buy more of their exported goods to maintain growth. China’s leverage comes from the fact that it can prop up the European bond market with fresh purchases. The U.S. leverage comes from the fact that it provides the dollar liquidity Europe needs via central bank swap lines. Germany has a demonstrated capacity, dating to the 1970’s and earlier, to remain an export powerhouse even with a strong currency and a strong euro all but eliminates intra-European competition. In this sense, the euro is the biggest loser in the currency wars.

The Chinese growth story is so taken for granted that markets and analysts have difficulty imagining anything else. In fact, Chinese growth is on the brink of collapse – something the world and the markets have not fully priced in.     Read more»

Man vs. Machine, a Jobless Recovery

In no other U.S. recovery since World War II have companies been simultaneously faster to boost spending on machines and software, while slower to add people to run them.

Part of this is the old story of substituting capital for labor. But a combination of temporary tax breaks that allowed companies in 2011 to write off 100% of investments in the first year and historically low short- and long-term interest rates [Ed: The unintended consequences of the Fed’s easy money policies…] have pushed that process into overdrive.

Hiring, meanwhile, is too slow to bring the unemployment rate down rapidly. Employers have added workers at a monthly rate of 142,000 for the past six months, half the pace needed to significantly reduce unemployment, which is now at 8.5%.   Read more»

The Fed’s Housing Politics

The central bank compromises its independence with rank electioneering.

These columns have defended the independence of the Federal Reserve from attacks on the right and left, but after last week the central bank is on its own. It’s impossible to defend the Fed’s rank electioneering as it lobbies for more political and taxpayer intervention in the housing market—just in time for the election campaign.

This extraordinary political intrusion came in the form of a 26-page paper that the Fed sent to Capitol Hill last Wednesday, without invitation, graciously offering what Chairman Ben Bernanke called a “framework” for “thinking about certain issues and tradeoffs.” He was underselling his document. The paper is a clear attempt to provide intellectual cover for politicians to spend more taxpayer money to support housing prices.   Read more»

Ponzi Planet: The Danger Debt Poses to the Western World

Countries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable — or unwilling — to do anything about it.  It is a global disaster that threatens the immediate future. But there might be a way out.

[This lengthy article is a valuable look at the West’s dysfunctional monetary system from a German’s perspective.]

When Carlo Ponzi, a dishwasher from Parma, Italy, immigrated to the United States in 1903, he had $2.50 in his pocket and a million-dollar dream in his head. He was able to fulfill that dream, at least temporarily.  Ponzi promised people that he would multiply their money in a miraculous way: by 50 percent in six weeks.

With his carefully parted hair and charming accent, Ponzi beguiled investors and fueled their avarice. The first investors raked in fantastic returns. What they didn’t know was that Ponzi was simply using the next investors’ money to pay them their profits.   Read more»

2011 in Review

Coming into the year, I held to the thesis that 2011 was a “Bubble Year.”  If the Bubble ran uninterrupted, global risk markets would likely turn only more speculative, with an upward “inflationary” bias.  On the other hand, if the Bubble burst the markets might rather abruptly find themselves right back in a de-leveraging-induced crisis.  I have for some time noted the parallels between Greece and U.S. subprime, the first cracks in respective Bubbles whereby the marginal high-risk borrower lost access to cheap finance.  My analytical bias coming into the year was that the Greek situation would worsen, contagion effects would be unleashed and the “Global Government Finance Bubble” would be at risk.  From this analytical perspective, we end the year with as many questions as answers – and the situation anything but resolved.

Global Credit, policymaking and market dynamics are extraordinarily complex.  I believe we are at a critical juncture in financial history.  A multi-decade global Credit Bubble and Financial Mania has reached the point of serious fragility.  With stakes that seemingly couldn’t be higher, increasingly desperate policymakers can be counted on to do everything possible to try to sustain the Credit and asset markets.     Read more»

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India To Buy Iran Oil in Gold not Dollars

“…[T]he vast sums involved in these transactions are expected to boost the price of gold and depress the value of the dollar on world markets.”

India has agreed to pay the price of crude oil it imports from Iran in gold, which makes it the first country to drop the US dollar for purchasing the Iranian oil. According to a report published by DEBKAfile news website, unnamed sources have stressed that China is also expected to follow suit.

India and China take about one million barrels per day (bpd), or 40 percent of Iran’s total exports of 2.5 million bpd and both of them have huge reserves of gold.   Read more»

Doug Noland’s Credit Bubble Bulletin

Selected Notes

January 17 – Bloomberg (Leslie Patton and Lauren Coleman-Lochner): “Supermarkets that had been adding Starbucks Corp. cafes and olive bars to draw wealthy shoppers are now catering to a different audience: food-stamp recipients. Stores are moving their opening hours, adding products and revamping merchandise assortments as persistent joblessness pushes more shoppers to government support in buying groceries. Distributions from the federal Supplemental Nutrition Assistance Program rose 11% to a record $71.8 billion in fiscal 2011…”

January 19 – Bloomberg (Charles R. Babcock and Frank Bass): “Almost 15,000 federal retirees, including former leaders of Congress, a university president and a banker, are receiving six-figure pensions from a system that faces a $674.2 billion shortfall. About one of every 125 retired federal civilian workers collects more than $100,000 in benefits annually… ‘We don’t want to bash federal employees,’ said Jim Kessler, vice president for policy at Third Way… ‘Still, when you have today’s economy, public sector jobs look better and better. And there are some pensions that make you question the system as a whole.’”

M2 (narrow) “money” supply jumped $22.3bn to a record $9.756 TN. “Narrow money” has expanded 10.7% from a year ago…   Read more»

“Audit the FED,” Say All Texas Republican Candidates for the Senate

Here is a video of something that I thought I would never see. All five Republican candidates for the U.S. Senate in Texas have come out in favor of a government audit the Federal Reserve System.

That someone in the audience even asked the question would have been unthinkable four years ago.

Ron Paul\’s Spirit Visits the Texas Republican Senatorial Debate

Read more»

Central Banks Curb Their Appetite for Treasuries

Anxious investors are buying, so is the Federal Reserve. But many of the world’s central banks are doing the opposite – offloading US Treasury bonds, and at a record pace.

A closely watched gauge of foreign appetite for US sovereign debt – the Treasury International Capital or Tic flow report, which includes private and official flows – on Wednesday showed solid demand for Treasuries in November.   Read more»

Why Zombie Banks Hate to Write Off Bad Loans

There’s a simple explanation for why the world’s zombie banks remain so reluctant to write off worthless assets and tap the equity markets for fresh capital. They don’t want to end up like UniCredit SpA. (UCG)

This month has been a nightmare for the Italian bank’s shareholders. Since embarking last week on a 7.5 billion euro ($9.7 billion) stock sale at a steep discount to its Jan. 3 closing price, UniCredit shares have fallen 39 percent to 2.56 euros. It seems no good deed goes unpunished when it comes to lenders besieged by Europe’s debt crisis. A little bit of candor about the true state of a company’s finances can hurt a lot.   Read more»

The Unprecedented Behaviour of the Central Banks

In economic policy nowadays, the unthinkable suddenly becomes the inevitable, without pausing for long in the realm of the improbable…Nowhere has this been more true than in central banking, where the recent huge expansion in the size of balance sheets would have seemed inconceivable as recently as 4 years ago.

Markets have not only accepted this use of the printing press with equanimity, they have become increasingly dependent upon it. Most economists are also very relaxed about it, frequently describing it either as inconsequential, or even as entirely irrelevant. But how can a policy intervention which has underwritten the liquidity of the entire western banking system be described as irrelevant?

I do not share the alarmist view that an explosion in central bank liabilities must inevitably lead to higher inflation. That basic monetarist link has already been shown to be invalid, at least over short periods, and at least when a liquidity trap is in operation. However, the recent use of central bank balance sheets has been so unusual and potentially so profound that the underlying economics deserves much more careful examination than it has been receiving lately. I intend to do this in a series of blogs in coming weeks. In this, the first in the series, I will ask how we reached the current predicament.   Read more»

Doug Noland’s Credit Bubble Bulletin

Selected Notes:

December 28 – Bloomberg (Ilan Kolet and Bob Willis):  “Workers in the U.S. earning the minimum wage are worse off now than they were four decades ago.  …Adjusting for inflation, the federal minimum wage dropped 20% from 1967 to 2010, even as the nominal figure climbed to $7.25 an hour from $1.40, a 418% gain.”

Fiscal Watch:

December 28 – Bloomberg (Mike Dorning):  “The war in Iraq is officially over.  The costs will go on.  Eight years of dodging improvised explosive devices, repelling insurgent ambushes and quelling sectarian strife already has drained the U.S. of more treasure than any conflict in the nation’s history except World War II.  Even though the last U.S. combat troops have left Iraq, American taxpayers will face decades of additional expenses, from veterans’ health care and disability benefits to interest on the debt accumulated to finance the war… Spending so far on the war and related interest payments make up about a tenth of the U.S. Treasury’s $10.4 trillion in publicly held debt.  Direct federal spending on the war through 2012 will reach $823 billion…  Not counted in that is the interest of more than $200 billion the federal government has already had to pay on the resulting debt…”   Read more»

Foreigners Dump Record Amount Of US Treasurys In Past Month

With year end fund flows making absolutely no sense for the most part, thank you global central planning, as the euro plunges and the market refuses to follow, with risk assets rising on speculation the ECB (and/or Fed) are about to restart printing yet gold collapsing (on one or two hedge funds liquidating, yet econ PhDs already rewriting their theses on why the “gold bubble has popped”), and finally with Treasurys soaring to near all time highs (10 Year under 1.9% yesterday even as stocks surged on data from the National Advertisers of Realtors, aka NAR, of all fraudulent and corrupt entities), here is the latest observation to make the confusion complete. As the Fed’s critical H.4.1 weekly update shows (which is leaps and bounds more accurate than the Treasury’s TIC international fund flow data), in the week ended December 28, foreign investors sold the second highest amount of  US bonds in history, or $23 billion, bringing total UST custodial holdings to $2.67 trillion, a level first crossed to the upside back in April. This number peaked at $2.75 trillion in mid-August, and as the chart below shows the foreign holdings of US paper have been virtually flat in all of 2011, something which is in stark contrast with what the price of the 10 Year would indicate vis-a-vis investor demand. And going back further, the last week is merely the latest in a series of Custodial account outflows.     Read more»

World’s Biggest Economies Face $7.6T Debt

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the U.S. struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.   Read more»

Doug Noland’s Credit Bubble Bulletin

Selected Notes:

M2 (narrow) “money” supply jumped $32.3bn to a record $9.672 TN. “Narrow money” has expanded at a 9.9% pace y-t-d…

December 20 – Bloomberg (Bob Willis and Alex Tanzi): “More than two years after the U.S. recession ended in June 2009, construction of single-family homes is heading for its worst year on record …While total housing starts bottomed in 2009, construction of one-family houses will probably post a new low this year at around 419,100, about 11% less than in 2010…”

December 21 – Bloomberg (Fabio Benedetti-Valentini): “BNP Paribas SA, Societe Generale SA, Credit Agricole SA and Groupe BPCE, France’s biggest banks, are struggling to fund about 37 billion euros ($48bn) of debt payments due in the first quarter.”   Read more»