Is it true that printing money during a credit crisis is neutral for “inflation”?

In his latest weekly comment, John Hussman writes:

“Value always lives at the intersection between scarcity and usefulness. What determines the overall marginal utility of the dollars in circulation? Well, if there is a great deal of financial uncertainty, so that the dollar is considered a “safe-haven,” each dollar will have a little bit more value than it would otherwise. On the other hand, if the supply of dollars increases significantly, dollars are less scarce, and therefore less valuable. So credit crises tend to increase the marginal utility of dollars (as safe-havens), causing deflationary pressure on prices. Printing money reduces the marginal utility of dollars, causing upward pressure on prices. Printing money during a credit crisis – providing that people actually want to hold that currency as a safe haven – is fairly neutral for inflation.”

We agree with everything in the above quote except the conclusion that printing money during a credit crisis is fairly neutral for “inflation”*. We know what he means, but the statement is misleading nonetheless. Moreover, a lot of today’s economic problems are at least partly due to the mistaken belief that creating new money out of nothing is only problematic when it leads to a large rise in the general price level.   Read more»

Global Contagion

The global Credit crisis took giant leaps forward this week. With even the euro region’s depleted “core” succumbing, crisis dynamics are now anything but isolated to “periphery” markets and economies. German yields rose after Tuesday’s “disastrous” 10-year bund auction failure. Italy struggled to sell short-term debt, with 6-month bills sold today at 6.50%, up dramatically from last month’s 3.54%. Fitch downgraded Portugal, with 10-year Portuguese yields surging 139 bps. As Irish 10-year yields jumped 150 bps to 9.53%, the market had to question the hopeful view that Ireland had endured the worst. Hungary’s 10-year yields spiked 105 bps this week to 9.44% after Moody’s downgraded the country’s debt rating to junk.

In the face of heightened global market instability, German 10-year bund yields actually jumped 30 bps and UK 10-year gilt yields gained 4 bps this week. Japanese 10-year JGB yields rose 4 bps and the yen dropped 1%, as the marketplace appeared to distance itself from another harbor that had been offering sanctuary from the global financial storm.

As euro disintegration fears intensified…,   Read more»

Doug Noland’s Credit Bubble Bulletin

[Selected Notes]

November 22 – Bloomberg (Heidi Przybyla): “The implosion of the congressional supercommittee is likely to delay any major deficit-reduction agreement until after the next presidential election and may pose an immediate threat to the struggling U.S. economy. The committee’s failure to reach a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year… The panel’s inability to agree on $1.2 trillion in budget cuts… also stoked doubts about U.S. lawmakers’ ability to overcome partisan gridlock and safeguard the nation’s fiscal health.”

November 25 – Bloomberg (Emma Ross-Thomas): “Spain and Italy face paying more to borrow for two years than for a decade, echoing shifts that presaged Greece and Portugal seeking aid and suggesting skepticism about their new governments avoiding contagion. Italian two-year bond yields rose to a record today and top those on 10-year debt, while the gap between Spain’s two- and 10-year securities has halved in a month to a three-year low of just 70 bps… ‘Once it’s inverted it’s a sign the market is expecting something quite profound in terms of haircuts or default risk,’ Harvinder Sian, a fixed income strategist at Royal Bank of Scotland Plc said. ‘It’s another dynamic in the fact that these are very distressed markets.’”

[US] Narrow “money” supply increased $4.7bn to a record $9.655 TN. “Narrow money” has expanded at a 10.5% pace y-t-d and 10.1% over the past year.   Read more»

Will on KMED with Bill Meyer on 11/22/2011

Will breaks down the controversy over MF Financial’s bankruptcy.   Are crony capitalists riding again?  And good news could be coming, with a lightening up of regulation for small local investors.

ECB to the Rescue?

“The markets, of course, want the ECB to be more like the Fed, while I suspect the Bundesbank stares across the Atlantic and sees disaster in the making.”

“To anyone willing to see, our central bank’s credibility has been badly damaged, market incentives have been terribly damaged, and    trust in institutions and the markets has been severely damaged.    When it comes to rules and legalities, the Federal Reserve is making things up on the fly, with monetary policy becoming an anchor of  instability.”

Spain paid 6.975% at Thursday’s 10-year debt auction, the highest funding cost since prior to the introduction of the euro. Italian 10-year yields traded above 7.1% yesterday, near the level the market associates with previous EU bailouts for Greece, Portugal and Ireland. At the same time, the spread between French and German 10-year debt widened at one point to an alarming 200 bps. Probably most troubling, two-year funding costs surged across the euro region. French two-year yields rose to 3.80% Thursday (after beginning November at 3.09%), almost 340 bps higher than comparable German yields. After beginning the week at 3.05% (and the month at 2.53%), Belgium two-year yields traded 95 bps higher in four sessions to 4.0%. Austrian two-year sovereign yields jumped 40 bps to trade yesterday as high as 1.82%. Money is on the move, and one is left pondering how the markets would have functioned had the ECB not been there with substantial ongoing support.   Read more»

Doug Noland’s Credit Bubble Bulletin

[Selected Notes]

M2 (narrow) “money” supply jumped $47.9bn to a record $9.649 TN. “Narrow money” has expanded at a 10.7% pace y-t-d and 10.2% over the past year…

November 14 – International Herald Tribune (Jack Ewing): “Euro area banks and their governments are locked in a potentially fatal embrace. Banks usually own huge quantities of their domestic government bonds. As a result, any doubts about a country’s solvency quickly infect its banks, making other banks reluctant to lend to them… The amount that banks have been drawing from the E.C.B. has been rising, an indication that many institutions are having trouble raising money on open markets. Last week, banks took out €195 billion, or $268 billion, in one-week loans.”

November 16 – Bloomberg (Christine Harper and Michael J. Moore): “JPMorgan… and Goldman Sachs…, among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally. Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS. As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default.”   Read more»

The Euro Titanic

They have rearranged the deck chairs, told the band to change their tunes and replaced some of the ship’s officers. But the Titanic of the world’s currency markets is still holed below the waterline and the passengers are all trapped on board.

The replacement of il cavaliere, as the Italians called their inimitable Prime Minister Silvio Berlusconi, is more symbol that substance, a ritual sacrifice to the stern Teutonic gods.   Read more»

A Priori Theory and Sound Money

In 1953, Ludwig von Mises wrote,

The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.[1]

And further,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.[2]

Read more»

Argentina Bank Dollar Deposits Fell $645M After Forex Controls Implemented

Argentines withdrew $645 million in U.S. dollar-denominated deposits from private sector banks in the first week after the government made it harder for individuals and companies to buy dollars.

The numbers, published by the Central Bank of Argentina late Friday, seem to confirm that the new currency controls have made Argentines nervous and led many to do what they typically do during times of crisis–buy dollars or withdraw them from the banking system.   Read more»

Fed’s Fisher Says Regulators Should Break Up ‘Behemoth’ Banks

Federal Reserve Bank of Dallas President Richard Fisher said regulators should break up so- called too-big-to-fail financial institutions to curtail the risk they pose to financial stability.

“I believe that too-big-to-fail banks are too-dangerous- to-permit,” Fisher said in the text of remarks given in New York today.     Read more»