Via Email, I received an interesting article from Albert Edwards at Societe Generale. Edwards claims citizens will soon turn their rage towards Central Bankers.
In an age of “radical uncertainty” how long will it be before angry citizens tire of blaming an impotent political system for their ills and turn on the main culprits for their poverty – unelected and virtually unaccountable central bankers? I expect central bank independence will be (and should be) the next casualty of the current political turmoil.
Evidence of the impact of monetary madness on assets prices is all around if we care to look. A parking spot in Hong Kong was just sold for record HK$5.18 million ($664,200).
What about the 3.5x oversubscribed 100-year Argentine government bond? Sure, everything has a market clearing price, even one of the most regular defaulters in history. But what concerned me most about the story was it was demand from investors
(“reverse enquiries”) that prompted the issue. Is it just me or can I hear echoes of the mechanics of the CDO crisis? But no one cares when the party is still raging and investors, drunk with the liquor of loose money, are blind to the inevitable catastrophe that lies ahead.In the immediate aftermath of the 2008 financial crisis, politicians skillfully diverted the public’s’ anger away from themselves by scapegoating “the bankers”. After another eight years of economic stagnation that excuse no longer is tenable and politicians themselves are now taking the flak. But citizen revolutionaries will, I think, soon turn their fire on those
who I believe are truly responsible for their plight. We explained back in January 2010 in a note entitled Theft! Were the US & UK central banks complicit in robbing the middle classes? how central banks in the US and UK had deliberately stocked up massive housing bubbles prior to the Global Financial Crisis (GFC) to disguise the rapid rise in income inequality in both countries. Rapidly rising house prices allowed the middle classes to maintain the illusion they were getting richer so that despite stagnant real incomes they could continue to consume by extracting housing equity. We know how that party ended!After the GFC central bankers have collectively spent the last decade stepping up the pace of money printing to new extremes in an attempt to drown the global economy in liquidity, while couching their actions in plausible theories such as “secular stagnation”.
For as the next inevitable economic and financial collapse comes ever nearer – a consequence of yet another global asset bubble bursting – politicians will be looking for the next sacrificial lambs to throw to the wolves. It’s hard to believe Yellen, Draghi and Carney won’t be those bleating lambs. But then the mob will devour the very independence of those institutions with the connivance of a political class willing to do anything to save their own skins.
Secular Stagnation Thesis
Edwards blasts Larry Summers’ secular stagnation thesis much the same as I have many times.
Summers cites five reasons why the Fed may be making a mistake. The one I really take issue with is this “With inflation and inflation expectations below target and declining, there would be little case for preemption even if inflation above target was a serious problem. But as we have seen, there are strong reasons for thinking that the Fed should be consistent with its mandate and let inflation rise above 2 percent.”
This comment shows exactly the same lack of insight that he and most of the economic elite showed in the run-up to the 2008 crisis – for there is loads of inflation. It resides in asset prices but it is ‘wanted’ inflation – the object of QE. The problem though in creating asset bubbles to try and reflate the economy is that when the asset bubble bursts and blows up the
economy, you are more likely to get the very deflation outturn that you were seeking to avoid in the first place. Even after the GFC these dudes simply have not learned that loose money polices to blow asset price bubbles is a catastrophic policy destined to end in failure.
Roots of Secular Stagnation
The seeds of secular stagnation, growing trade imbalances, an explosion of credit, rising income inequality, and a myriad of other problems dates back to August 15, 1971.
Total Credit Market Debt Owed
Following Nixon closing the gold window on August 15, 1971, credit soared out of sight to the benefit of the banks, CEOs, the already wealthy, and the politically connected.
Scapegoating
- Trump blames Mexico and China.
- Larry Summers blames “Secular Stagnation”.
- Ben Bernanke blames a “Savings Glut”.
Scapegoating Mexico and China helped get Trump elected. Scapegoating also allows the Fed and central banks to blame anything and everything but lack of a gold standard.
“Our Currency but Your Problem”
The source of global trading imbalances, soaring debt, declining real wages, and the massive rise of the 1% at the expense of the bottom 90% is Nixon closing the gold window.
At that time, Nixon’s Treasury Secretary John Connally famously told a group of European finance ministers worried about the export of American inflation that the “dollar is our currency, but your problem.”
Balance of trade issues, soaring debt, declining real wages, and the demise of the US middle class are now our problem.
The Fed, ECB, Larry Summers, Paul Krugman, Donald Trump, and economists in general, cannot figure out what caused the problem. Instead, Bernanke, proposes a “savings glut”, and Larry Summers proposes “secular stagnation”.
- My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
2. My challenge to the Secular Stagnation Theory of Summers has also gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced. By creating asset bubbles, central banks bring on the very deflation they strive to prevent.
3. For further discussion of balance of trade issues Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited
Mike “Mish” Shedlock
Most citizens (more commonly and accurately referred to these days as “consumers”) have no clue as to what a Central Bank is, or does.
Most cannot even name their own Congressional representatives, let alone know who Janet Yellen is.
Exactly. The bunch of morons known as the American electorate consistently despise Congress and yet keep electing the exact same representatives. These fools wouldn’t know a Central banker if he ran over them with a steam roller.
Exactly, how does an ignorant populace turn against an institution with all the money and backing of the government. I would love to see how this revolt actually happens.
Stop voting for incumbents. Dems and Repubs that have been in congress for a few years are all owned by the deep state. They get re-elected because they get so much money from lobbyists. We have to stop electing people that have been anointed by the deep state.
term limits!
And to add to that point, the central bank is basically only there to deflect blame from Treasury, and Treasury is basically doing what the legislative and executive branches order it to do.
People ARE directing their anger towards the executive and legislative branches, but as far as I can tell the anger is more along the lines of “we want MORE central bank interference!”
So there is still no incentive for politicians to feel their well-beings threatened. They couldn’t care less that the middle class is shrinking as long as their own personal wealth is protected. This is why nothing gets done in Illinois – the politicians know their pensions and other paper wealth is protected by the Illinois Supreme Court.
Correct. The Central Bank is tasked with an impossible task. How does one maintain a rational monetary policy in the face of irrational Fiscal policy? It can’t be done. I know some would rather they just quit trying to keep all the balls in the air, and let things implode, but they are doing the best they an under the circumstances.
Oh yes, poor central bankers, desperately trying to do the right thing under such difficult circumstances. If only us poor, unwashed masses understood the pressure they must be under.
Good point and 100% accurate. How does a bunch of morons turn against central bankers unless told by some celebrity yahoo who they know and trust?
Much of the reason for not knowing who your Representative is has to do with the irrelevance of them. I couldn’t name my Representative right now, but I know that he’s a Republican. The party is more important than the man at this point in history.
Good article and true. There is a bubble being created and the loose money policy will have an ending that is not so favorable
The debt problems go back to 1980, reagan, and 2000, bush. The 70’s and 90’s were relatively benign.
Obama adding more to the national debt than every other administration COMBINED and accounting for inflation didn’t make your list?
No, because you are talking about federal government debt. Total credit market debt is public + private. Obama happened to preside over a period where private debt went down, so the total credit market debt % GDP ratio actually went down a bit during the Obama years.
Sure, if you ignore total credit market debt which spiralled out of control and compare with GDP instead (which handily happened to be inflated by the very increase in the aforementioned debt). Numerator inflates denominator and, bingo, problem solved.
I’d skeptical of whatever source/s you’re using as the math just doesn’t add up. Sure, household debt has declined a bit (mainly as result of mass mortgage defaults during the GFC), but Obama added $10trn to the federal debt and corporate sector debt is currently at record levels …. while GDP added only $4trn during the Obama reign. How that adds up to a lower TCMD/GDP ratio beats me.
In any event, from here on out debt will always grow faster than GDP or, if in reverse, GDP will decline faster than debt, so that ratio is unlikely to to be sustained.
Because debt to gdp is around 350, so for every trillion in GDP growth you could add 3.5T in debt and keep the ration the same. Based on your numbers of 4T in gdp growth debt could have increased by $14T and remained the same, and Obama only added $10T.
http://www.economagic.com/em-cgi/data.exe/var/togdp-totalcreditdebt
Good heavens, don’t forget the original big bubble of the 90s, the dot.com bubble. That ended in March, 2000.
Mish,
Question. Because I really don’t know. What was the mechanism used by the Central Bank to keep credit creation in check during the Bretton-Wood period? Did the Fed maintain an exceptionally high federal funds rate? A much higher reserve requirement? Some regulations that it has since abandoned?
Keeping credit in check was a near requirement. France demanded gold for dollars. To stop gold flight, central banks had to raise rates. This had the effect of a natural economic brake.
Yes, I saw them triumphantly bringing it in escorted par la Garde Republicaine down the Champs Elysées but never sending it back out under cover of darkness via la Gare du Nord…
Isn’t the fact that the gold standard acts as an artificial economic brake one of the criticisms of the gold standard? Doesn’t seem like a currency should slow the economy.
A gold based dollar stops a central bank from cranking the printing press. You never know when the citizens might want to be paid out in gold instead of greenbacks.
Problem is, and always has been, that those who decide to back their currency with gold can always decide to stop.
It doesn’t act as an “economic” brake. Just as a credit expansion brake.
Which, even much more so than today than in the 60s, is completely orthogonal to economic growth. As all credit does when it as overused as now, is push up asset prices. Driving up the input costs for economic actors, to the point where the easier access to funds the added credit affords, is entirely zeroed out by higher rents paid to the idle leeching classes.
So, even in the short run, all you get is a transfer of wealth to those who own idle assets. No added economic growth. While in the slightly longer run, the dislocations resulting from this massive redistribution, kills of whatever little growth there may still have been.
A gold standard isn’t an “artificial” brake, it’s the proverbial canary in the coalmine warning you that you’re making promises that cost more and more to keep or can’t be kept. When Nixon slammed the gold window shut, he basically said “We’re defaulting. We’re not keeping our promise to pay. But here’s a bunch of fancy paper in various denominations that every other sucker is required to accept as payment.” Of course, every other country had already done the same thing over the prior 100 years so they really had no place to cry foul about it, although it is part of the reason that Saudi Arabia seized the Arabian assets of private oil companies. (At the very least Nixon should have seized Saudi Aramco in response but he cowered in fear instead.)
Also, gold is not currency, it is specie. A “promise to pay” is currency, gold is the actual physical payment. Our current system is one of paying off promises to pay with other promises to pay. An artificial payment system needs an artificial brake – central banks are the artificial brake. The criticism of brakes – artificial or otherwise – is that they require paying off promises to pay when the brakes are applied.
@ Shamrock. The economic brake mentioned is one that slows economic activity based on future pledges vs. current balance of account between two nations. Otherwise you end up with politicians and finance pledging the country, and then either defaulting or enslaving the country etc. . The imbalances created this way may be very disruptive.
Ah yes. I can see interest rates drop to 1.75% during the 1961 recession. Then throughout the 1960’s, interest rates stair step up to 10.5% in 1969 kicking off the 1969 recession.
I’m guessing having to jam the federal funds rate up to 10.5% to meet the requirements of Bretton-Wood and throwing millions of people out of work wasn’t considered politically palatable by Mr. Nixon.
Millions of people were “thrown out of work” not due to having to meet the Bretton Woods standards in 1970, but rather due to not bothering with meeting them prior. In a hard money economy, prices fall in lockstep with efficiency improvements. Which puts the onus on owners of firms in sectors where productivity is not improving as fast as the average firm (that’d be about half of firms or thereabouts), to explain this to their employees, while cutting their nominal compensation.
No doubt it is more comfortable for the weak kneed and clueless amongst the managerial classes, to have someone debase the currency. While hiding behind pseudo-economics like “wages being sticky downwards.” That way, managers can preen around playing generous and pretend to offer people an annual “raise,” as was the ritual in the 60s.
While having the Fed take back that raise, and more, through printing behind the employee’s back. But then, once the game’s up and De Gaulle got increasingly insistent on getting settlements in something other than empty promises…. Something has to give. Either you take a nominal paycut and stick to sound money. Or you can keep getting a nominal raise, just get it in some banksters toilet paper.
The West, led by Nixon, went whole hog down the toilet paper route. Leading to it becoming no more than the latest in a long line of mythical once-were places, that the citizens of the Caliphate get to use as horror stories to their children, about what happens with those who don’t follow the straight, narrow and true. Kind of like Sodom and Gomorrah.
It is more complex, a real geo-political intrigue where you have to study decades ( at least) in advance to get an idea.
Look at what was going on in Europe at the window close, for example the BoE was already headed towards open rates management May ’71
http://www.bankofengland.co.uk/archive/Documents/historicpubs/qb/1971/qb71q2189193.pdf
Or UK EEC membership discussions centering on EMU, giving wider common legal issues a brush over, try pgs. 65 to 73 at
https://books.google.pt/books?id=8luCDAAAQBAJ&pg=PA66&lpg=PA66&dq=white+paper+british+entry+eec&source=bl&ots=tTQ2cH55hs&sig=NOgrANSsV2_mniF_kECA5vT6v3c&hl=en&sa=X&ved=0ahUKEwj1haCe5tLUAhVD2BoKHWq5BKgQ6AEIJzAE#v=onepage&q=white paper british entry eec&f=false
There is more ( much more) to this chapter of history than meets the eye, from nationality status and commonwealth through to global geostrategy.
In short it was largely planned , and well outside the scrutiny of the common person.
The underlying economics is never particularly complex. Economics at the macro level never is, as most detail is swept under the rug by massive aggregation.
The “complexity” virtually always arises from the layercake of obfuscation built on top of it. Solely to allow some to attempt to get away with things they wouldn’t even dream of (plain theft), if things weren’t obfuscated.
Exactly as today, just on a smaller scale; the imbalances that came to the fore in the 60s, were due to promises (in Gold backed currencies) being made, that if delivered on, would exceed the amount of Gold backed dollars in circulation. So, either, promises takes an aggregate haircut; or you relax the gold backing, allowing you to just print willy nilly. Of course, the weak kneed, clueless and self centered ruling class put in place by way of babykissing popularity contests and fellating banksters for campaign funds, chose the latter. As it, assuming similar cluelessness on behalf of their captive subjects, allowed them to pretend that the promises they made, were somehow still being delivered on.
Jettisoning Gold convertibility, solved what was a short term discomfort. But, obviously, doing so by relaxing whatever tiny sliver of strictures were previously in place to limit the ability to overpromise; inevitably results in you then getting even more overpromises in the future. Which, duh, we did. Until you reach the largely society ending farce that is today,
And now, just to double down on dumb yet again, the same sort of yahoos are now babbling about “debt jubilees.” Yet again pretending you can somehow get around underlying economic impossibilities by, in classic newspeakian manner, simply “define” them away by mindless babble. Mindless babble that always, every time, without fail; results in those who are most connected, ending up stealing from those who are less so.
The average Joe/Jolene has as much culpability in this mess as the Feds and Bankers…No one forces a person to go into debt for a new vehicle every 2-3 years…No one compels a person to overspend on housing, vacations etc…Debt to fuel consumption falls squarely on the individual…Play the victim, but choices have consequences.
isn’t the “consumer” doing just what they’ve been programmed to do? who created the “consumer”?
No one forces a person to go into debt for a new vehicle every 2-3 years
You aren’t wrong, but aggregate consumer debt is chump change compared to aggregate government debt. The government debt clearly came before the consumer debt.
Did the chicken clearly come before or after the egg? Methinks this is Foghorn Leghorn economic theory at its best :-}
Actually, we are very much forced to finance automobiles:
https://ericpetersautos.com/2013/06/04/gms-9800-car-the-one-were-not-allowed-to-buy/
There are many of us who, absent a car payment, could probably manage to save up $10,000 every few years to buy a new basic point-a-to-point-b car. But we either end up having to seek out a used vehicle that hits the sweet spot of age, resale price and repairability or go down the financing route. And even the used market is plenty inflated thanks to easy credit. Then along comes the government forcing dubious extras on the back end and increasing the price. Now I don’t want to go back to the smog filled 1970s and drivers should be accountable for what comes out of their tailpipe, but if I want to live “on the edge” with no airbags or rollover/side impact/crumple zones on my vehicle to save a few bucks (and maybe use that savings to take a safe driver course), what’s the problem?
We always have recessions. He’ll be right eventually.
Here is what Albert said in 2009.
http://www.businessinsider.com/albert-edwards-the-market-will-hit-new-lows-next-year-2009-11
Here is what he said in 2013.
http://www.cnbc.com/2013/11/28/us-recession-is-nighand-the-fed-cant-stop-it-socgens-edwards.html
I could go on and on with this guy. But hey, SocGen keeps him around so he may be bringing in business.
akiddy10 – he would have been right, if not for all of the bailouts.
…so he was wrong.
wrldtrst – no, the bailouts were wrong. He was right.
Well in that case, anyone who went long in 2009, against his opinion, must be a feelin’ a mighty bit silly ’bout now..
… so he was wrong
So far.
But the game ain’t over yet. We’re only in the 4th inning.
Yeah, but your margin call was in the 3rd.
So tell me. You ride a short from 1100 to 2400, then if it goes to 1,000 you scream you were right after riding a 1,300 point loser to get a 100 point gain.
That’s a system can’t work out well over time.
You can’t simply point the finger at the FED. Everything the FED has done has been blessed by our elected officials. They’re in cahoots.
And the elected officials have been blessed by the bankers (and every other interest in cahoots with them.)
And the elected officials have been sanctioned by the voting retards.
Dimwitocracy is the best form of government – just like all the others.
In my experience , your typical citizen thinks the central bank is the one in the middle of town.
Good article – one question though. Was it going off the gold standard or was it Johnson’s Great Society, the Vietnam War and the attendant inflation that brought us to where we are? I always figured Nixon’s decision had more to do with his predecessor’s policies than anything else.
The decision to “temporarily” close the gold window was due to the fact that the US became a net oil importer in 1970. Kissinger and Nixon decided it would not be good idea for the US to pay for its imported oil with real money (gold).
One could argue that domestic oil use exploded due to the incredible increase in size of the Defense Department and the Great Society programs forcing people to travel greater distances daily to escape the outrageous tax increases.
+1000
The most amazing thing is that Societe Generale still employs this guy and allows him to speak publicly. Since forever this guy has talked about imminent crack. He got it right in 2008 and terribly wrong the nine years since.
He is competing with John Hussmann in doing small investors really bad advices.
yeah … Edwards is one of those I just tune out.
Oyvind and Tony – he was and is right. Only bailouts stopped a calamity. But you keep on ignoring him and tuning out. You can’t make this stuff up!
The whole mess can be summed up in a simple equation:
fake money == fake economy
Yep. And when the tide goes out those swimming naked are exposed.
(and nobody wants their shrinkage exposed.)
But as we have seen, there are strong reasons for thinking that the Fed should be consistent with its mandate and let inflation rise above 2 percent.”
…
“rise”?
Natural trend is deflation as productivity increases.
And what inflation we have is due to financialization and fedgov allowing crony / cartel capitalism to thrive … and backstopping losses in student loans / GSEs.
I predict that the next “boom” wil be fuelled by another financial revolution. the revolution will be that home equity and all other property equity will be converted to a source of funds to be used for consumption. we already have home equity loans and health care secured on home equity, so the extension into using home equity for anything you like is natural.
of course, the biggest imepdiment is another government cartel in providing housing finance, that is fraudie and funny .. umm.. freddie and fannie.
but.. to boost consumption and unleash “money” that is sedentary into the “economy” the new “credit card” is the house ATM, in a much more marketable way than is available today.
central banks have no control over this at all, other than in making sure that house prices are perpetually ramped up, supported by the normal population explosions and migrant flows.
I don’t know if I agree with you, but certainly those squawking about “the mortgage interest deduction” better realize that changing the tax code to eliminate it is a deflationary act. Yet few of them do. (Certainly the NAR knows it.)
Been done a few times in history, most notably in France by John Law and later by the French Revolution. The resulting increase in the money supply is very inflationary, and the monetization of assets is never enough. Hence, these “financial revolutions” tend to be short-lived, sometimes bloody and then collapse.
The problem is what it has always been – the political class debase the Coinage. ‘Twas ever thus. Now ever since Greenspan thought he was cleverer than God we have been creating a huge problem which instead of them trying to solve they make worse. We will all end up paying for it because they will destroy our savings.
Andrew – yep, debasing the coinage.
Mish said: “My Challenge to Keynesians – ‘Prove Rising Prices Provide an Overall Economic Benefit’ – has gone unanswered. The BIS did a study and found routine deflation was not any problem at all.”
The BIS said: “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
Of course deflation boosts output; you have more money to spend. BUT helping ordinary people was NOT what motivated them. The banks were sitting on tons of upside down mortgages and they needed to be bailed out. THAT is what motivated them. They needed to bail out the insolvent banks by getting asset prices back up; the homeowners just went along for the ride.
Deflation did not boost output in the great depression nor the great recession.
Asset busts unlikely to.
Normal price falling scenarios – yes – and it’s a good thing falling prices mean more affordability and improved standards of living
Mish – thank you for your reply. Had the Fed not intervened after the Great Recession of 2008, had they let asset prices decline naturally (let the free market dictate prices), there would have been a big thud, I realize.
The big banks would have been insolvent and bankrupt (as they should have been for taking on too much risk). The mortgages the banks held would have been bought up (by someone) and things would have started to pick back up again.
Instead, the banks were bailed out, and essentially so were the homeowners. The losers became winners.
If there is a big crash again, do you advocate the Fed repeat what it did in 2008, bail out the banks again? Is this the way forward – never to let asset prices fall again?
Consumption, over the long term, can be sustained only by periods of deflation. It keeps purchasing power in the now, rather than stealing it from future generations.
Never got an answer and at this point I don’t think I ever will. How exactly does the fact that the Central Bank lowers interest rate cause ‘asset bubbles’?
Whether interest rates are low or high, fact is you still have to pay back any loan you take. If you are borrowing money to buy an asset, whether it’s a Hong Kong parking space or a house, you will try to negotiate the best price possible. Mortgages may have indeed gone down from 5% to 4%, I’m still not going to agree to pay $350K for a house I think is worth $300K.
The problem with the asset bubble theory is that it assumes the market must be irrational in some way. What is stopping the market from saying “let’s short Hong Kong parking spots and spread the money into numerous other investments that are more worthy of expected returns?”. The ‘story’ here seems to be if the Fed adds money to the economy, that money bunches up into one or two particular types of assets (dot coms, real estate, whatever) rather than going into many different types of assets or just increasing general consumption. But what would cause money to bunch up into one or two ‘bubbles’? It sounds like this is not a problem of printing money but a feature of markets in general. Whether or not money is being printed the market is prone to buy into narratives that this or that asset type is the next great thing and everyone needs to get in it now.
It doesn’t. I don’t use the word “bubble” but for as long as I can remember, at high or low rates, some market is always being called a bubble. Of course those that are long it never call it a bubble.
Now any asset with a defined forward cash flow will increase in value as at lower rates those future cash flows are less discounted=worth more. Interestingly though, in my experience, when rates drop so do expected forward cash flows, therefore offsetting the NPV effect and leaving little change in the value of the asset.
…and don’t feel bad, I keep asking about who gets this new money at better rates/spreads than were available to them yesterday.
If the ECB buys crappy Italian sovereign debt that bids the price of same up. If bond price climbs interest rate falls thus explaining how CB policy affects rates. Now the Italian bank that sold the bond has Euros. Do they buy another crappy Italian sovereign bond? Maybe. More likely they buy safer assets like US equities thus explaining our asset price bubble. Note that this behavior is the same world wide. Right now total printing by CBs is 300 $Billion per month. Only a few months ago this number was 200$Billion. Clearly we are entering a blow off phase of a crack up boom world wide.
Does it? Let’s think about it…. You own a bunch of crappy Italian bonds. The ECB comes along and says “we just printed 1M Euros, can we have your bonds?” You say yes. Do interest rates fall or even the price of bonds change? No.
If you turn around and say “I just got 1M Euros, let me go buy more Italian bonds” then yes the interest rate might fall. You could just as easily say “Hot dam, those fools at the ECB just got me off the hook since I was sure I was going to get screwed on those bonds. Now I have 1M Euros I’m buying a yacht!”.
In that case interest rates won’t move at all…or maybe they will even rise since the yacht manufacturer might need to borrow or the additional yacht orders might end up fueling fears of general inflation coming down.
There’s a purposeful decision here made by investors who sell their bonds to the central bank that the best use of newly created money is buying more bonds. If that decision is a ‘bubble’ it isn’t created by the Central Bank.
What has changed is today CBs have trading desks. They reach into the markets and buy both bonds and equities. This is market manipulation pure and simple. When they buy long bonds yields on same go down. When they buy equities P/E multiples go up. Right now the BOJ owns more than half of ETF in Japan. If you think of this as a form of price support when is the last time you saw price supports for anything work?
Take mortgage payments as an example. When you lower interest rates, the same mortgage payment buys a more expensive house. Or you can sell the same house for more money.
Banks always have and always will prefer to lend money against property based assets. Because the very act of making the loans tends to drive up the price of the asset. And a higher priced asset creates more equity to use as collateral against an even bigger loan. Over time, bubbles in equity values can grow to magnificent proportions.
So it isn’t that lower interest rates cause the bubbles, they set in motion a natural feature of bank lending. Works the same with the stock market.
This used to be widely understood. And in the old days, the FNMA had strict regulations on what mortgages they would buy. The owner had to have 20% down and the loan couldn’t be more than 3x income. That was a natural break on bubble formation in housing. In the ’90’s, private banks started to create their own mortgage backed securities and didn’t have to follow FNMA rules anymore. And Congress has chosen to not apply adequate regulation to the private market.
So, in the end, it is low interest rates + natural features of banking + deregulation. Fix any one of them and the bubbles go away. But bubbles are obviously in the interest of some.
Banks always have and always will prefer to lend money against property based assets.
Not entirely correct. Banks always have and always will prefer to lend money against PRODUCTIVE property based assets. AKA “live gage.” It took craploads of cronyism to get banks to lend against non-productive property (houses mainly) aka “Dead gage” (hence “mort gage”).
And this isn’t just true of the U.S; the U.S. was the last country to establish a central bank so don’t fool yourself into thinking this is some special sort of corruption invented here. If it wasn’t for the Fed buying all the crap mortgages, banks would be issuing less than half the number of mortgages they did 10 years ago. But CalPERS and all the other corrupt government pension schemes would be bankrupt if the volume of mortgages suddenly dropped because not one of them reduced their annual earnings expectations to a realistic 1% figure. It doesn’t take a genius to realize that if you fall 6% short every year for 10 years you are currently 60% short.
“:It doesn’t take a genius to realize that if you fall 6% short every year for 10 years you are currently 60% short.”
Definitely does not take a genius to come to that answer.
But it takes a certain genius, perhaps of a pathological sort, to be in denial of the economic facts and get away with it for 10 years. But that’s their job, right? For which they are hopefully well-compensated, and ready to parachute out with a golden package ahead of the collapse.
I just thought it was funny that he got the math wrong. Guess no one else noticed.
It is rather humorous.
“Take mortgage payments as an example. When you lower interest rates, the same mortgage payment buys a more expensive house. Or you can sell the same house for more money.”
Or you can buy the same house for the same price but enjoy a lower mortgage payment and go out to eat more often for the next 30 years.
Again this is a purposeful decision. If rates are lower you can use the savings to get into bidding wars on property OR do just about anything else under the sun.
The process is so self-evident that I thought everyone understood it already. Let’s say interest rates start at 10% and you buy an asset using a loan. If rates drop to 9% someone can buy that asset from you at a higher price but still have the same payment you were making. And if rates drop to 8% someone can buy that asset from him at a still higher price while still making the same monthly payment. If you continue this process down to 1% I hope you can see the bubble forming. The kicker is that the interest rate curve, while appearing to be linear, is in fact exponential since the 1 percentage point drop from 10% to 9% is a ten percent drop in the rate while the 1 percentage-point drop from 2% to 1% is a fifty percent drop in the interest rate, thus enabling the asset price to rise parabolically near the interest rate bottom. The kick-ass kicker is when human psychology kicks in and people start bidding up the asset at a feverish pace in order to flip it for a quick profit.
Is the bubble big enough for you to see now?
If you think the $350K home is only worth $300K and so you won’t buy it, you are now officially out of the housing market for a really long time. If you want to buy a home, buy it using a fixed-rate loan and then refinance it at lower rates to reduce your monthly payment; this is easy to qualify for since the home has increased in price.
Shorting that $600K parking spot is a great idea, if you happen to hit the top of the market. But think about it. If your parking spot bubble market pushes it up to $1 million faster than those reasonably priced assets you bought with the proceeds go up by $400K (which is certainly the case, by definition), you are seriously underwater and will take a loss or go bankrupt when you receive your parking spot margin call.
Very similar to taxi medallions.
gainingclarity said
“The kicker is that the interest rate curve, while appearing to be linear, is in fact exponential since the 1 percentage point drop from 10% to 9% is a ten percent drop in the rate while the 1 percentage-point drop from 2% to 1% is a fifty percent drop in the interest rate, thus enabling the asset price to rise parabolically near the interest rate bottom.”
– – – – – – – – – – – – – – – – –
NO – it is not exponential. A 1 point reduction in the interest will always have the same impact. It will reduce the interest cost by the same amount because it is applied to the principle of the loan. 1% of say $120,000 is always $1,200 and so an extra $100 of the monthly payment can be applied to the asset price causing asset inflation. But it is linear, with the same impact for an interest rate change from 10% to 9% or 2% to 1%.
Furthermore, your “Bubble” is created only because you assume interest rates will return to a higher level. If they stay low, there is no bubble. In fact, if you assume interest rates will remain low, the stock market is also undervalued by a large amount.
The problem with bubbles is that it is very difficult to recognize them when they are occurring, but with 20/20 hindsight, you wonder why every fool didn’t see it.
You are indeed right about the short play. If I think it’s absurd to have a $600K parking spot, it might still make sense to buy and hold it if I think a bidding war is going to cause prices to zoom up to $1.5M. Bubbles create their own narrative so even the smart people end up falling into them.
But interest rates have little to do with this. If I really think the parking spot that is $600K today will be $1.5M by December, then I should borrow money today to buy it. If my interest rate is 9% rather than 10%, that doesn’t really matter. The bubble has me looking at returns of 500% per year. If I really believe that I’m not going to be deterred by higher interest rates. You could, I suppose, kill bubbles with higher interest rates but you’d have to kill the entire economy first and induce a recession to try to break the bubble’s back.
fact is you still have to pay back any loan you take
I think I see your mistake – you think government is held to the same moral standard as its subjects.
– The guys at the BIS are a bunch of nutters. Even they seem to fail to understand that “Falling Prices” and “Deflation” are 2 seperate things. Falling prices are REQUIRED to get Deflation. Rising prices are needed to get Inflation.
I didn’t research this so it won’t be perfectly accurate. In 2010 they passed the Dodd Frank bill that was supposed to protect not just bank depositors but the American people from banker greed with new kinds of regulation that went way overboard which is what I think the bankers wanted since they knew they could get it changed because of what I call the “golden rule” meaning he who has the gold makes the rules. What person in congress wants to upset the bankers? Anyway Paul Volcker, the only central banker I ever liked or trusted had inserted in this bill the Volcker Rule which more or less gave the bankers a good number of years, maybe 5, to unwind their exposure to trillion dollar derivative bets, and stopped them from gambling with leveraged products like credit default swaps or CDO’s using taxpayer money. I remember the first time I heard a bunch of bankers scream about the liquidity problems this would cause so yada yada yada here we go again, the Volcker rule had to go!
For those, who have been listening for the past few years, they’ve already named the next scapegoat… “The Deep State”.
It appears the central banks would be happiest when there is scarcity.
Not at all sure there will be rage.
More like politicians needing to get the electorate off their back and the best way next will be direct political influence of central bank activity. Therefore kick rock star central bankers out of the way and take control “in the name of the people.”
That’s why Bernie Sanders suggested allowing the UPS take on banking functions. Just a few steps away from nationalizing banking.
I would be more than happy to see the UPS open accounts for anyone who wanted so that people could borrow at the same rate as the big banks.
But don’t nationalize the rest of the banks. Just make them hold 100% reserves so that they can’t print money themselves.
Sorry I meant USPS.
Amazon might be the better choice, as you could make withdrawals in goods and groceries.
I’d be fine with a UPS bank. A USPS bank not so much.
UPS opening accounts for what? Did you mean the USPS? And so what? As I recall one could buy savings bonds at the post office. Perhaps the idea that we should use the post office much as it has been and is still used in parts of Europe as a “free” bank where fees for savings and checking s accounts are waived is laudable. But to what end? someone must pay for these “free services” so who is the mark, the patsy, the pigeon?
But back to Mish. Standard text books in introduction to economics have always stated that 2% inflation is good for GDP growth and yet I have seen no evidence cited by such authors or the economic community. So the real question is not whether inflation is good for the economy, but why isn’t 10% or inflation good, Why would 100% inflation be really great? If one can’t prove that 2% is good, then we must assume that inflation is not a good thing for any economy.
Why is consumer price deflation a bad thing? If the price of gasoline goes down do I not have a greater incentive to use more gasoline? if I can purchase four gallons of gasoline at twenty five cents a gallon and my vehicle will get 20 miles to the gallon, then why would I not want gasoline prices to drop to twenty cents a gallon? Instead of driving eighty miles I can now drive 100 miles for the same expense. I may even be encouraged to splurge and drive 120 miles on six gallons, thus buying more gasoline. I think this is called propensity to consume. when the prices are lower my propensity to consume is greater.
Now we may see that deflation has a negative effect on profits. Understandable, but the point is that those producers who cannot afford lower prices for their goods or services will go out of business since they may not be able to sell at or below the cost of goods sold. This is not a bad thing for it eliminates those companies who are unable to compete at the lower prices. Pure and simple. Few businesses will compete at a loss for long. Larry summers is an idiot.
“Why is consumer price deflation a bad thing? If the price of gasoline goes down do I not have a greater incentive to use more gasoline?”
If you are a business that would mean you could do more work, and hence earn more income per gallon of gasoline. At higher prices, you might conserve gasoline by doing less work, thereby earning less income and contributing to economic contraction. All depends on the context or circumstances of the price inflation or deflation. Deflation from lack of demand is different from simple price deflation.
With supply and demand, when demand for whatever reason, supply doers not suddenly reduce itself. Usually there is a lag time. The same applies to demand. when demand goes up there is a lag time before supply meets the new demand. this is true all other factors being equal.
We may say that deflation in an economy is a reduction of demand caused by one or more factors. Since all suppliers wish to maximize their profits they have little incentive to reduce price unless by doing so they can increase their total profits. Case in point: long distance telephone calls were very expensive as a rule in the US. AT&T wanted an increase in their long line profit so one weekend they introduced the “Friends and Family calling weekend”. The results were that when the price of the long distance tariffs were reduced long line usage went up and the profit from the increased usage. This is consumer price deflation, if you like, but what really happened, according to the Supply and Demand Curve is that a new equilibrium point was discovered. There was a trade off of course. AT&T was willing to accept a lower profit margin per call for an increase in the number of calls and thus an increase in total profits. The general public, the demand, was willing to actually spend more of their discretionary income for a service they had seen previously as too expensive to use except on special occasions. What started as a “sale”, price deflation, became the everyday price.
If we look at the general prices of collectible automobiles, there is a price deflation. It is not that demand has fallen off since every one of those vehicles will sell at the right price. These is no lack of buyers. What has happened is there is a reduction of prospective buyer bidding up the prices at auction and other venues. There is lack of sufficient demand for the higher prices. the supply of vehicles has not changed, only the number of buyers willing to compete for each vehicle. Thus the curve moves to that point of equilibrium.
Now understand, we talk about supply and demand and all the wonderful curves and the points and so forth. In fact, we talk about representation data as if it were the reality in life when such a thing is not true. The curves are anything but smooth in real life, the discovery points are multiple, (look at the price of gasoline at stations around your town), there is nothing uniform about the “Numbers” until we smooth it all out and draw our nice lines and say, “See, this is how the real economy is.” The morel of the story is know what you are looking at and why.
“We may say that deflation in an economy is a reduction of demand…”
Your examples show exactly the opposite. Namely price deflation leading to increased demand for the lower-priced items (e.g. long distance phone calls, collectible automobiles). This of course presumes people have money to spend. With QE and the FED engaged in an infinite money supply expansion, lower prices (price deflation) should thus mean more demand and a brisker economy than higher prices (price inflation). Though asset bubbles can work the opposite way (more demand at higher prices for periods of time, and then price deflation and low demand for periods of time). Easily testable for commodity items: Tariffs on steel and building lumber leading to higher prices for these items should reduce sales (though profits to the protected industry will increase, as this is a state-managed income redistribution). It gets complicated with government interventions in the economy, such as health insurance mandates forcing purchases (via police state powers and penalties) even when prices are in an inflationary mode. With government intervention and sufficient police state force (gunpoint), a different set of economic principles than in a free market. The more government force exerted, the more irrelevant the price. Central planning, totalitarian states, fiat currencies and forced economies are birds of a feather.
So which comes first, price deflation or the low demand? and what caused the price inflation and high demand in the asset bubble? You talk all these nice terms and yet we are still talking the basic concept of supply and demand. Now it should be noted that while there is a law of supply and demand, it is not a perfect law such as the law of motion in physics. One can have supply without demand and one can have demand without supply. With that said, how does one determine price deflation? Is it simply the lessening of demand that drives price down. That is, where I might have had ten customers for every apple I had for sale, hence the demand pulled the price of my apples up to an inflated price (this being a moral judgment since we all feel that inflated prices are usually unjust), whereby more of my customers and would be customers (those who could not or would not pay the inflated price) have not switched to buying more pears than apples. If I have a one to one correspondence or customer to apple then I need not reduce my price. Why should I? But if that customer to apple ratio changes so that it is less than one to one, meaning I am not selling all my apples at the inflated price, then I may feel that I should drop my price to attract more customers so as to achieve at least that one to one ratio. Notice that merely dropping the price does not mean I will attract more customers, I have no such guarantee, one of the reasons why the “Law of supply and Demand” has limitations and imperfections.
Of course you never addressed why asset bubbles occur. And is it price that is inflated only or is it demand that is inflated only or both? One would believe that the increase in demand leads to the increase in price, not the other way round. Demand has its reasons for being, price has demand for its reason for being. Supply exists because there exist a demand for it. if supply decreases while demand remains the same then price will rise to allocate that reduced supply to those who demand that supply and are willing to pay that higher price. I grow apples and my production is twenty apples a season. I have twenty customers who will pay my going rate for each apple. If next year I have the same number of apples but now I have thirty individuals who wish to purchase an apple, then I may charge what ever amount that will sell all my apples even if that price is 25% higher than last year. You may call that an inflated price but remember, in supply and demand we have price discovery and the clearing of the market. sometimes it is best to get back to basic to understand what is going on.
Now the third year my crop, through the use of miracle grow is now forty apples. I had thirty individuals who wanted my apples last year but only twenty became customers, the other ten went away empty handed. Assuming that I will have at least twenty customers this year and I need twenty more to buy at the higher price, I may decide not to chance fate and reduce the price of my apples. Assuming my production costs are equal, I could drop the price to half of what it was in the first year. Or I could start sliding the cost down to some discovery point where I might be able to sell all my apples or at least recover my first year;s profit by selling only half of them.
But what if only fifteen individuals are willing to pay last year’s inflated price? will they buy more apples per individual at the first year’s price or will I have to lower my price even further. and if I do lower my price will that guarantee that the price of each apple will cause buyers to believe there is utility (another term rears its ugly head) in buying at least two apples at the lowered price?
So, can we say that price deflation is really market price discovery? If not, why? According to the law of supply and demand where there exists a supply and its existing demand, price discovery is that equilibrium in the market. Inflated prices, deflated prices, it’s all the same, price discovery, clearing of the market.
Of course you now what to confuse the issue with interventions in the market that make price discovery difficult. Yes, fiat money tends to interfere with the markets since its value is based on the confidence in its value as perceived by both buyer and seller. As an aside, this is one of the problems with crypto currencies, the lack of stable value. but what we have seen in a good many countries around the globe is a reliance of credit. Yes, credit isn’t money per se but I can buy a house with credit and not money down using the GI loan (I did that in 2013). Yep, credit sure does spend like money. Well, people say that credit, unlike fiat money becomes debt. Is that a fact? By definition, isn’t fiat money merely a promise to pay according to a fictional value? So fiat money is really credit, isn’t it? the fun part of it is that while only the government can issue fiat money, anyone can issue credit, create more “money”. What does this do to supply and demand? It skews the hell out of the demand side by using inflation on demand that create inflated prices, and so on. Remember, what credit giveth credit and taketh away.
Fiat does indeed having some similarities to debt and credit. Default or cancellation are also built into the fiat model.
very true
Our ancestors found that a gold standard was the only way to protect themselves from bankers. Bankers never run out of excuses to confiscate people’s stuff via printing. Bankers simply can’t be trusted to rein themselves in. Conflict of interest.
Deflation does not provide the illusion that inflation. This is the illusion that the rascals we call central bankers use to screw people in the guise of helping them. Take 2 situations:
1. you have a deflationary environment and income remains the same.
2. you have an inflationary environment of 6% and your income has gone up 4%
We are actually better off in the first situation and worse off in the second but it will be perceived as second is better since income has gone up. This is because inflation is invisible.
Also you cannot portray a perpetual growth machine month on month, in a deflationary environment, as corporate and the Fed want to portray.
Thus basically these CBs have been able to pull wool over people’s eyes by portraying themselves as Gods and have not been hauled up till date despite having screwed up so many times. In fact they seem to have emerged stronger. But I expect the day of reckoning will arrive when these guys will be shown up for the charlatans they are… showering money on banksters, screwing savers, retirees and pension funds, making saving unfashionable, enabling people to be imprudent and take on debts, and generally encouraging malinvestment.
I hope by the end of this cycle the central banksters are shown up for what they are… a bunch of wolves in sheep clothing and skinned alive for their actions.
The inherent destructiveness of our current monetary system is that not only does it preclude private property but, it divests you of your wealth.
At the behest of the owner of the currency, the political construct forces everyone to make use of a specific vehicle of exchange under penalty of law.
But whereas society is mandated to make use of the vehicle of exchange, from the legal point of view individuals do not acquire ownership of it. The money you earn in exchange for your labour does not belong to you. Physically it does not belong to you.
The money and credit you accept to reward your effort does not become your property. Thus, in accepting money for your work, you are exchanging something you own for something you do not own.
Worse still. Not only do you not acquire ownership of the money you accept in exchange for your work, but, you also owe interest on it and, of course, taxes.
Since the owner of the currency has no reciprocal legal obligation to guarantee the value of the vehicle of exchange, society is at an arithmetical disadvantage vis-a-vis the owner of the medium of exchange.
In fact, the owner of the medium of exchange always and everywhere increases the quantity of money and credit in circulation. This is done at the ostensible request of the political construct. It is in fact, at least initially, a symbiotic relationship.
The economy is expanding? The central bank increases the monetary base and credit.
The economy is contracting? The central bank increases the monetary base and credit, only, in spades.
This monetary system is designed to channel profit towards the owner of the currency. Hence it is designed to gradually divest the majority of its wealth.
As a member of society, think of this monetary system as if you were playing Monopoly against the owner of the factory that produces the game. As the owner of the factory arrogates the privilege to always be the bank and to be constantly supplied with money from the factory floor, you don’t stand a chance.
The crux of our current predicament, revolves around property rights.
This monetary system precludes property rights. As the political construct runs perpetual deficits, the diminishing marginal utility of debt guarantees that everyone will be made dependent on the owner of the currency and wealth will concentrate in its hands
Impotent rage. The sheeple really went after the criminal bankers, didn’t they?
I don’t recall GWB blaming the banksters.
Closing the gold window was the response to the need for more credit to finance the Vietnam War and the Great Society into the future. Thank LBJ. The warfare/welfare society, as any Socialist ( or is this Fascist since it seems to be big banks and business i cahoots with the Socialists ) enterprise can’t run on it’s own merits. Fed policy and the closing of the gold window were needed to finance the scam. And not just in the US, the whole of the Western World drank the same something-for-nothing Kool Aid.
I still say that one should not simply fault Nixon without also acknowledging the predicament that Kennedy and Johnson had put him in under the tutelage of Samuelson and Heller (who finally broke with Johnson, too late). Had Nixon defended the dollar (as he should have) he would have triggered a deep recession in an overstimulated economy with the repudiation of the Republicans at the polls. That is asking too much of a politician.
See the chapter “Keynes Redux” for one perspective.
https://books.google.com/books?id=iuZEFu2MobEC&pg=PA75&lpg=PA75&dq=William+McChesney+martin+1961+John+Kennedy&source=bl&ots=c-XoLABggM&sig=xgWK3d_lkTXBi7EQqhTft16qJqU&hl=en&sa=X&ved=0CCgQ6AEwAzgKahUKEwiP-sCZi4bHAhWFlx4KHbOcBdk#v=onepage&q&f=false
Also, the number of small farms and businesses destroyed in this country by allowing migrants in to work the fields of the “agribusinesses” has done untold damage to the foundations of the society. Farmers were rough people, but they were more self sufficient and able to ride out hard times with less “stimulus” than our modern economic structure.
The “Keynesians” have transformed our society into one that is wholly dependent on economic expansion. The lack of expansion will end democracy in this country.
Nixon could have and should have ended the war in Vietnam sooner – by walking away
That ultimately is what this was about – Stupid wars
Reblogged this on World Peace Forum.
Reblogged this on John Barleycorn and commented:
This is long over due
A central banker is a person with a product to sell. If customers want a gold backed currency, then central bankers will create a gold standard. The planet has doubled the number of monetary customers in the last 100 years.
The problem with gold is there isn’t enough of it to create an economy of scale. To that purpose lowering interest rates will do for gold what it did for oil, bring more of it to market and lower the price. True monetary inflation requires more gold, and that requires accommodative policies and easy credit. Now CBs will enact policies to bring the amount of gold in reserve (see IMF policy on SDR) into line with the inflated pace of paper securities to offset the demographic rise in demand.
The problem with gold is there isn’t enough of it to create an economy of scale.
Totally absurd comment
Gold in nearly infinitely divisible physically and digitally it is infinitely divisible
There is no benefit to an increase in money supply