(Increasingly Unwieldy) Monetary Disorder

Doug Noland, www.prudentbear.com, 02/25/2011

The Federal Reserve’s balance sheet has expanded almost $225bn over the past 16 weeks.  International (global central bank) “reserve assets” have jumped $1.5 TN in 12 months.  In just two years, “reserve assets” have ballooned an incredible $2.6 TN, or about 40%, to $9.3 TN (reserves were about $3.0 TN to begin 2004).  There’s been nothing comparable to this in the history of central banking – in the history of “money.”  The resulting liquidity onslaught has inflated global securities and commodity prices, distorted market perceptions of risk and liquidity, depressed global yields and fomented speculative excess in any market that trades.

I have referred to this backdrop as one of “Monetary Disorder.”??Monetary Disorder can certainly fester for some time under the façade of a seemingly healthy environment.  As we have witnessed, global equities prices have been a prime beneficiary of global reflationary dynamics.  And there is nothing like the tonic of inflating stock prices to bolster confidence and embolden the risk-takers.  Ebullient markets, then, lead economic expansion and provide seeming confirmation of the bullish point of view.  Read more»

What’s Behind the Currency War?

Antony P. Mueller, mises.org, 02/23/2011

In September 2010, a short time before the international financial summit of the Group of Twenty (G20) took place in South Korea, Brazilian finance minister Guido Mantega declared that the world is experiencing a “currency war” where “devaluing currencies artificially is a global strategy.”

By announcing the outbreak of a “currency war,” Mantega wanted to draw attention to the problems caused by the ongoing exchange-rate manipulations that governments put in place in order to gain economic advantages. In this sense, “currency war” denotes the conflict among nations that arises from the deliberate manipulation of the exchange rate in order to gain international competitiveness by way of currency devaluation.

Competitive Devaluation
Calling competitive devaluation a “war” may seem like a gross exaggeration. Yet in terms of its potential of destruction, the current global financial conflict may well rank at a level similar to that of a real war. Read more»

Adjusted Monetary Base Goes Vertical

Tyler Durden, www.zerohedge.com, 02/24/2001
Just in case there was any confusion in the interpretation of the M2 chart, here is the latest just released Adjusted Monetary Base.

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QE2 Fuels a Global Fury

Mark Thorton, www.mises.com, 02/17/2011
The Federal Reserve has been busy the last three month pumping up the money supply by $300 billion dollars, with much more promised in the months ahead. Some of the results have been painfully predictable, others less so.
Fed chairman Ben Bernanke said he did this to stimulate housing and employment. The unemployment rate has fallen in recent months, but most market analysts are skeptical that the statistical improvement is real or lasting.
The headline numbers on housing also appear good, with building permits increasing 16.7 percent in December. However, units actually “currently under construction” came down by the same amount, 16.7 percent. Housing starts decreased in December by 4 percent and starts of single-family homes were down by 9 percent. Read more»

Geithner Quietly Tells Obama Debt Expense to Increase to Record

Kruger and Capo-McCormick, www.bloomberg.com, 02/14/2011

Barack Obama may lose the advantage of low borrowing costs as the U.S. Treasury Department says what it pays to service the national debt is poised to triple amid record budget deficits.

Interest expense will rise to 3.1 percent of gross domestic product by 2016, from 1.3 percent in 2010 with the government forecast to run cumulative deficits of more than $4 trillion through the end of 2015, according to page 23 of a 24-page presentation made to a 13-member committee of bond dealers and investors that meet quarterly with Treasury officials.

While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.

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No Exits

Doug Noland, www.prudentbear.com, 02/11/2011

The surprising resignations today of Egypt’s Hosni Mubarak and Bundesbank president Axel Weber are reminders of how quickly events and circumstances can change.  At the same time, we witnessed further indication of the snail’s pace of U.S. financial reform.

We’re now into 2011.  The Fannie and Freddie accounting scandal emerged in 2004.  The mortgage crisis erupted in 2007.  But Fannie and Freddie, along with the ballooning obligations of the Federal Housing Administration (FHA), today dominate the mortgage marketplace like never before.  The Administration today released its “white paper” on GSE reform that will surely have little impact for some number of years to come.  Democrats and Republicans remain united in their determination to talk the obvious need for reform and then do nothing.  At best, everyone is stalling. Read more»

Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 02/11/2011

For a thorough review of last week’s important market and financial news, see: http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10503,.

A few of the more important items:

Money Market Notes:

Freddie Mac 30-year fixed mortgage rates surged 24 bps last week to a 40-week high 5.05% (up 8bps y-o-y). Fifteen-year fixed rates jumped 21 bps to 4.29% (down 5bps y-o-y).  One-year ARMs were 9 bps higher to 3.35% (down 98bps y-o-y).

Federal Reserve Credit jumped $30.9bn to a record $2.469 TN (14-wk gain of $189bn).  Fed Credit was up $236bn from a year ago, or 10.6%…

M2 (narrow) “money” supply surged $39.5bn to a record $8.868 TN. Over the past year, “narrow money” grew 4.4%.  For the week…Global central bank “international reserve assets” (excluding gold) – as tallied by Bloomberg – were up $1.471 TN y-o-y, or 18.8%, to a record $9.291 TN.

Commodities and Food Watch:

February 8 – Bloomberg:  “Shandong province, one of China’s major grain producers, is facing its worst drought in 200 years if the eastern region doesn’t receive more precipitation by the end of this month, the official Xinhua News Agency reported… Shandong, which has received only 12 millimeters of rain since last September, is one of eight drought-ravaged provinces where the government has started a ‘grade II emergency response’ including 24-hour weather monitoring and daily damage reports… The four-month drought affected 35% of wheat in the eight regions…”

Central Banking Watch:

February 7 – Bloomberg (Cordell Eddings and Daniel Kruger):  “The Federal Reserve’s Treasury purchases already have succeeded in driving investors to junk bonds and stocks. Now, policy makers are focusing on benchmark government securities, helping contain rising yields that set rates on everything from corporate debt to mortgages.  More than 40% of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20% in December and 15% in November, according to Bank of America Merrill Lynch.  The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009.”

Bernanke’s Free Ride Is Over

Dr. Gary North, www.lewrockwell.com, 02/14/2011

Ben Bernanke took over as Chairman of the Board of Governors of the Federal Reserve System on February 1, 2006. On February 9, 2011, his free ride ended. On that day, Paul Ryan’s House Budget Committee grilled him.

Bernanke has yet to appear before Ron Paul’s Subcommittee on Monetary Policy. Whether Bernanke will ever agree to testify before that subcommittee remains an open question. If the House does not compel him to show up, he may be able to escape stiff cross-examining. If the House refuses to compel him to testify, then the House once again has capitulated on a bipartisan basis. We shall see.

Bernanke is not used to tough questions. Some of the questioning wound up on YouTube within hours. Read more»

How the Fed Fuels Unemployment

Thomas DiLorenzo, www.lewrockwell.com, 02/10/2011

Testimony of Dr. Thomas DiLorenzo
Professor of Economics, Loyola University Maryland
Committee on Financial Services, Subcommittee on Domestic Monetary Policy and Technology
Wednesday, February 9, 2011, 2128 Rayburn House Office Building

Mr. Chairman and members of the committee, I thank you for the opportunity to address the issue of today’s hearing: “Can Monetary Policy Really Create Jobs?” Since I am an academic economist, you will not be surprised to learn that I believe that the correct answer to this question is: “yes and no.” Monetary policy under the direction of the Federal Reserve has a history of creating and destroying jobs. The reason for this is that the Fed, like all other central banks, has always been a generator of boom-and-bust cycles in the economy. Why this is so is explained in three classic treatises in economics: Theory of Money and Credit by Ludwig von Mises, and two treatises by Nobel laureate economist F.A. Hayek: Monetary Theory and the Trade Cycle and Prices and Production. Hayek was awarded the Nobel Prize in Economic Science in 1974 for this work. I will summarize the essence of this theory of the business cycle as plainly as I can. Read more»

IMF Calls for Dollar Alternative

Ben Rooney, Staff Reporter, money.cnn.com, 02/10/2001

The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world’s reserve currency.

The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.

SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs Read more»