inflation to war

 The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

-- Ernest Hemingway

liquidity to inflation

[T]he problems in the economy today are structural, not liquidity-related. Federal Reserve officials have of course misperceived the problem. The Fed is trying to solve structural problems with liquidity solutions. That will never work, but it might destroy confidence in the dollar in the process.

Fiat money can work but only if money issuance is rule-based and designed to maintain confidence. Today’s Fed has no rules and is on its way to destroying confidence. Based on present policy, a complete loss of confidence in the dollar and a global currency crisis is just a matter of time.

Consumer price inflation has remained persistently low, despite the Fed’s best efforts. This has led many people to ask where the inflation is, because the Fed has created trillions of dollars since the financial crisis.  But there has been inflation. It’s just been in assets like stocks, bonds, real estate, etc. The market’s back to record highs again, in case you haven’t heard.  The bottom line is, we’ve seen asset price inflation, and lots of it, too.

But the question everyone wants to know is when will we finally see consumer price inflation; when will all that money creation catch up at the grocery store and the gas pump?

-- Jim Rickards, The Daily Reckoning (Dec. 9, 2019)

bank regulation

The Board of Governors of the Federal Reserve System recently published their annual Supervision and Regulation Report which measures the financial condition of major U.S. banks, including loan growth and liquidity in the banking system.  Overall, 45% of U.S. banks with more than $100 billion in assets received a supervisory rating of “less than satisfactory.”  That’s not good. As we learned during the 2008 crisis, the stability of these large banks is essential to the health of our banking system.

Furthermore, this rating should not sit well with hardworking Americans who bailed out many banks during that last major crisis.  As bank lobbyists continuously push for more deregulation, it's prudent to remember what happened a decade ago with bank bailouts and a market crash.  We need more regulation, not less, if banks continue to receive less than a “C” grade on their report cards.

-- Nomi Prins, The Daily Reckoning (edited) (Dec. 7, 2019)

Central Bank Experimentation

The grand central bank experiment of the last 10 years has ended in utter and complete failure. The games of cheap money and constant intervention that have brought record global debt to the tune of $250 trillion and record wealth inequality are about to embark on a new round.  All under the banner to “extend the business cycle” at all costs. Never asking whether they should nor considering the consequences.  This is not capitalism, nor does this ongoing farce constitute free market price discovery. It’s politburo based central planning, desperately trying to keep the balls in the air.  

The pretense is gone, it’s all about keeping the illusion alive that the Fed knows what it’s doing, that it’s always there to save markets from any trouble.  But since they are not elected by the people and face zero consequences for failure, they don’t have to consider the collateral damage they inflict.  Everything every central banker has uttered last year was completely wrong. Every projection they made over the last 10 years has been wrong.  Why place confidence in people who are staring at the ruins of the policies they unleashed on the world and are about to unleash again?  We’re all staring at a colossal policy failure with no accountability.  Brace yourselves as no one, absolutely no one, can know how this will turn out.

-- Sven Henrich (Northman Trader) June 7, 2019 (edited)

Too Big to Fail (Again)

In the wake of the 2008 financial crisis, the bank bailouts did not save the economy as their architects advertised. Rather, they bolstered the biggest U.S. banks from an insolvency crisis of their own creation. Those banks were, and remain, too big to fail. Their CEOs are too connected to jail.

The leaders of the major banks oversaw multi-trillion dollar enterprises that committed fraud, lost other people’s money, harassed public service members, and fired thousands of low-level employees. Worst of all, they have put the entire financial system and markets at the edge of ruin again.

Big banks know they have political and Federal Reserve support. Low or negative rates provide banks access to cheap capital if they need it, which encourages greater recklessness than if they had to “pay” more for it. They have taken this as a license to gamble large. By rescuing and supporting the big banks’ dangerous behavior, such recklessness has been not only condoned but encouraged.

The argument big banks make about their mega derivatives positions is that they are “hedged.” In other words, though the total (or “notional”) figure is large, most of the long and short positions net out against each other. The problem with that assessment is that the big banks take long and short positions against each other. They have set themselves up again in domino fashion.

We are heading for another financial crisis at some point. No one can say when for certain, but probably sooner than later. There’s a lot more money supporting the system artificially that the central banks have conjured than we had going into the last crisis. If that subsidy was to go away or be reduced, the money would come draining out of the same financial system that it’s been inflating.

-- Nomi Prins (Daily Reckoning) May 23, 2019 (edited)

Deficits Do Matter... Eventually

"Deficits don’t matter," said Dick Cheney....

If there were no tomorrow, Mr. Cheney would be right. Why not eat tomorrow's "seed corn" today? There would be no reason not to reach for another dessert, or park your car in a handicapped space, or tell your boss exactly what you think of him.

The trouble is -- there is a tomorrow. And tomorrow is when a drinking binge turns into a hangover, a bad marriage turns into a divorce, and your boss fires you. Tomorrow is when deficits DO matter. 

We don't know exactly what will happen or when. But we know the world still turns. Every boom not supported by real savings and real increases in output is phony. Tomorrow is when you find out.

Today's prosperity, such as it is, was built on fake money, fake savings, and fake signals from the Fed. The feds have pumped $37 trillion in "excess credit" -- above and beyond the traditional relationship between debt and GDP -- into the system over the last 30 years.

And now, the economy -- especially the parasitic half of it run by the Deep State -- depends on more and more fake money and fake credit. That's the one thing Republicans, Democrats, and Trumpistas agree on -- nothing will be allowed to get in the way of the fake-money flow. With the sluices open, the debt will rise. How much? No one knows. All we know for sure is that, with nothing to stop it, you can expect it to keep going up -- until the whole economy drowns in it.

-- Brian Maher (The Daily Reckoning) Sept. 22, 2017

Russian Distraction

[T]he demonization of Russia [is] a way more idiotic exercise than the McCarthyite Cold War hysteria of the early 1950s since there is no longer any ideological conflict between us, and all the evidence indicates that the current state of bad relations is America’s fault -- in particular, our sponsorship of the state failure in Ukraine and our avid deployment of NATO forces in war games on Russia’s border....

Rather, the Evil Russia meme seems a projection of our country’s own insecurities and contradictions. For instance, we seem to think that keeping Syria viciously destabilized is preferable to allowing its legitimate government to restore some kind of order there. Russia has been on the scene attempting to prop up the Assad government, while we are on the scene there doing everything possible to keep a variety of contestants in a state of incessant war. U.S. policy in Syria has been both incoherent and tragically damaging to the Syrians.

Russians stood aside while the U.S. smashed up Iraq, Afghanistan, and Libya. We demonstrated adequately that shoving sovereign nations into civic failure is not the best way to resolve geopolitical tensions. Why would it be such a bad thing for the U.S. to stand aside in Syria and see if the Russians can rescue that country from failure? Because they might keep a naval base there on the Mediterranean? We have scores of military bases around the region.

It’s actually pretty easy to understand why the Russians might be paranoid about America’s intentions. We use NATO to run threatening military maneuvers near Russia’s borders. We provoked Ukraine — formerly a province of the Soviet state — to become a nearly failed state, and then we complained foolishly about the Russian annexation of Crimea — also a former territory of the Soviet state and of imperial Russia going back centuries. We slapped sanctions on Russia, making it difficult for them to participate in international banking and commerce.

What’s really comical is the idea that Russia is using the Internet to mess with our affairs — as if the USA has no cyber-warfare ambitions or ongoing operations against them (and others, such as hacking Angela Merkel’s personal phone). News flash: every country with access to the Internet is in full hacking mode around the clock against every other country so engaged. Everybody’s doing it.

-- James Howard Kunstler (The Daily Reckoning ) Oct. 29, 2016

inflation deficiency nonsense

For several years now, a small group of Keynesian academics and hacks have seized nearly absolute financial power. They’ve used the Fed’s printing presses to justify the lunacy of unending zero interest rates (ZIRP) and massive quantitative easing (QE) on the grounds that there is too little inflation. This whole consumer inflation-targeting scheme is an inherently preposterous notion. There is not one scrap of evidence that 2% consumer inflation is better for rising living standards and societal wealth gains than is 0.2%. And there is much history and economic logic that points in exactly the opposite direction....

[T]here isn’t an inflation deficiency problem, and there never has been. The whole 2% inflation mantra is just a smoke screen to justify the massive daily intrusion in financial markets by a power-obsessed bunch of monetary central planners. They made it up and then rode it to ever increasing dominance over the financial system.

-- David Stockman (The Daily Reckoning) Feb. 22, 2016

Bubble Financialization

[C]entral bank bubble finance has fostered an existential crisis in what remains of American capitalism....  [A]s the main street economy of work and production has been going nowhere, the financial system has erupted skyward....  How did this massive inflation of the financial sphere happen?  Since the time of Greenspan’s abject panic in the wake of Black Monday in October 1987, the Fed has chronically pegged the money market rate below market-clearing levels.  In doing so, they fueled an embedded carry trade that has mushroomed relentlessly....

In an honest free market, gamblers would have to pay more for their carry funding.  They’d face much greater uncertainty as to its price and availability and dissipate far more of their winnings hedging their portfolios than is required under the current central bank-driven regime of bubble finance....  When debt is priced drastically below its economic cost and receives a deep tax subsidy to boot, a variation of the supply side theorem manifests itself. Namely, when the cost of servicing debt capital is made artificially low, you get a lot more of it -- from the public and private sectors alike....

[T]he debt was overwhelmingly used for financial engineering....  The relentless trading, churning and synthesizing of assets and derivatives within the giant bloated system of finance has almost nothing to do with raising or allocating capital for productive use.  Instead, this giant $95 trillion pool is where honest savings from the household and business sectors go to be scalped, appropriated, and stolen by the hedge funds, dealers, financial engineers, and gamblers which populate the casino....

And the denizens of the Eccles Building keep their heavy foot on the monetary accelerator as they witlessly inflate a $95 trillion financial bubble....  This is a clear and present danger to American capitalism fostered by an unelected monetary politburo in thrall to its own lust for power and mesmerized by its own doctrinaire group think.  The tragedy is that nothing can stop them except the thundering crash of the gargantuan bubble they have single-handedly enabled.

-- David Stockman (The Daily Reckoning) May 14, 2015