The fall in the money stock that precedes price deflation is actually triggered by the previous loose monetary policies of the central bank.
The fall in the money stock that precedes price deflation and an economic slump is actually triggered by the previous loose monetary policies of the central bank and not the liquidation of debt. It is loose monetary policy that provides support for the creation of the unbacked credit necessary for fractional-reserve lending.
A month ago, Zero Hedge readers were stunned to learn that unemployment among Europe's young adults has exploded as a result of the European financial crisis, and peaking anywhere between 46% in the case of Greece all they way to 51% for Spain. Which makes us wonder what the reaction will be to the discovery that when it comes to young adults (18-24) in the US, the employment rate is just barely above half, or 54%, which just happens to be the lowest in 64 years, and 7% worse than when Obama took office promising a whole lot of change 3 years ago.
And while technically this means 46% are unemployed, or the same percentage as in Greece, the US ratio, which comes from Pew, shows the ratio as a % of the total population: a very sensitive topic now that every month we see another 250,000 drop off mysteriously from the total labor force. However, unlike those on the trailing age end, young adults by definition are the labor force in their age group demographic, so it would be difficult to explain away this horrendous number by claiming that ever more 24 year olds are retiring. Although, yes, we agree that some may be dropping out of the labor force in order to go to college, incidentally the locus of the latest credit bubble, where they meet a fate worse even than secular unemployment: they become debt slaves of the Federal System, with non-dischargable debt at that, which even assuming they can get a job would take ages to pay back!
But wait: there's more - of all age groups, this is the one that has actually seen its wages drop the most under the Obama administration.
So not only are they unemployed, young adults are at least poor.
Net result: double the change, zero the hope.
While hardly needing a full-on onslaught by an Austrian thinker, when even some fairly simplistic reductio ad abusrdum thought experiments should suffice (boosting global GDP by a few million percent simply by building a death star comes to mind), Diapason's Sean Corrigan has decided to take MMT, also known as "Modern Monetary Theory", to the woodshed in his latest missive in a grammatical, syntaxic (replete with the usual 200+ word multi-clause sentences) and stylistic juggernaut, that only Corrigan is capable of. So sit back in that easy chair, grab your favorite bottle of rehypothecated Ouzo, and let the monetary hate wash through you.
Money, Macro and Markets
by Sean Corrigan of Diapason Commodities Management, and author of the excellent Santayana's Curse
As regular readers of these scribblings have hopefully come to appreciate, this is not the place to come to slake your thirst for mechanistic ‘models’ and fancy-dan macro-correlation studies (for the technically-minded, this is precluded by the subjectivist, methodological individualism of the Austrian School to which we adhere).
The only exception to this—if, indeed, an exception it is—is to be found in out penchant for mapping out developments in money supply and, in particular, real money supply and relating these to potential changes in the revenue stream percolating through the economic structure and, hence, to their implications for income, returns on invested capital, and the supportability or otherwise of the accumulated debt burden.
To an Austrian, the credit cycle IS the business cycle, while, more generally, the many disruptions to the progressive delivery of greater material satisfaction we suffer —outside of those forcefully visited upon us by the political process—are almost inevitably the result of some unlooked-for departure in the rate of provision of new money from that to which people had become accustomed. Just occasionally it is not the supply itself, but rather some unwonted alteration to the eagerness with which money’s recipients hold on to that which comes their way which brings about these changes. In other words, every once in a while it may be a question of a changed appetite for, rather than a changed helping of, cash-at-hand which occasions a disruption. Such departures are hard to pick up from an inspection of the raw data, making their interpretation both more challenging and more a matter of inference than of brute manipulation of a spreadsheet. Either way, once ‘monetary disequilibrium’ breaks out, look out below!
If there is one incontrovertible thing about monetary matters, it is that they offer a field rich in misunderstandings, obtuseness, half-reasoned suppositions, and outright crankdom—much of it a wearily reworked canon of old fallacies dressed up in (terminologically) new clothes by a profession which has long since decided that mathematical dexterity and political expedience is far more important than an awareness of its own history, meaning it never manages to build cumulatively on past insights, unlike the physical sciences which its practitioners so envy, alas!
Among the latest vogues is the so-called ‘Modern Monetary Theory’ - a truly laughable epithet, given that Mises was deriding its Chartalist-founding father Knapp’s vainglorious use of exactly the same term almost exactly a century ago.
Among its supposed ‘breakthroughs’ is the truism that a government which issues its own fiat currency can never go bankrupt—at least in an accounting sense—and so should never shrink from commandeering ever more resources from its subjects (we shall overlook the mere trifle that it may well be able to set the nominal terms of its actions, but has little control over the real ones; or that there do, in fact, exist limits to its seigniorage, not least of which the one which arises when the mass no longer accepts the money which it has so determinedly debauched, whether or not taxes are to be paid in it!)
One of the classic examples of faux reasoning disported by this soi disant school of innovative thinkers is one which leaps from the tautological observation that a flow-of-funds reckoning of an economy—conveniently, if rudely, carved up into vast, faceless blocs labelled, ’Public’ and ’Private’—must see a net private surplus offset by a net public deficit (ignoring the external ’sector’ for the moment) and hence, that the overspending state is doing all its subjects a favour by living beyond the means honestly voted to it, otherwise their aggregate desire to acquire net new ‘assets’ (i.e. retaxed claims on taxes!) could never be fulfilled!
On this reckoning, the Greeks, far from being the most fiscally benighted and sorely afflicted of peoples, should rejoice in the effulgence of their status as beacons of true MMT enlightenment and prosperity!
Suffice it to say that we can put this canard—one equivalent to saying that we benefit from paying protection money to the Mob if only the Capo holds the monthly dinner party for his lieutenants in our pizza parlour—firmly to rest after carrying out only the most trivial of disaggregations.
Absent the predations of the Provider State, individuals may well, on balance, engage in saving (with a view to better providing for their future needs) by acquiring claims on entrepreneurial endeavours, these latter being happy to put the funds so raised—and, by extension, he resources so spared—to a hopefully profitable, productive use.
Under these circumstances, the consolidated balance sheet of the private sector will certainly still show a zero balance but the twin aggregates which comprise this will show an expanding count of genuine capital accumulation, even without some insistent spendthrift in office to ’remedy’ the associated joint lack by throwing a good war, or an equally useless Olympics!
Moreover, MMTers also bruit about the ludicrous idea that such grossly confiscatory measures as are entailed by government spending and borrowing are easily justified because they ensure that an otherwise elusive medium of exchange is called into existence. In effect, they are asking us to believe that, short of having this paternalistic blessing conferred upon us by our selfless Platonic Guardians, it would be utterly beyond the wit of Acting Men to devise some alternative means of lubricating their frequent, voluntary, and so value-enhancing transactions. Risible!
As part of their insidious idea that no government can be too big, no deficit too wide—saving only that Leviathan has not foolishly ceded control of the printing press to some party beyond the reach of his coercion—the MMTers also insist that the gargantuan programme of monetisation being undertaken as part of the global bank rescue attempt has not and, moreover, cannot, under any circumstances, lead to ‘inflation’ (by which they conventionally mean sustained price rises in goods and services, of course).
Well, let us here quote the words of an early 20th century thinker on such matters, Harry Gunnison Brown, in the slightly different—but still relevant— context of denying that there can ever be such a phantasmagorical creature as a ‘liquidity trap’:
“...it has been argued… [that] it is impossible for banking policy - or any purely monetary policy devoted to increasing the circulating medium - to bring business back near to normal in any reasonable period, once depression has become acute. For, it is contended, the increased money will in any case merely be hoarded. Depression psychology will prevent borrowing from banks for business expansion, however large... reserves become through favourable Federal Reserve policy. Depression psychology will prevent any person or persons from whom the Federal Reserve banks purchase securities, from either investing or spending the money so received! And if the federal government directly supplements Federal Reserve policy, printing billions of dollars of new money which it then pays out to buy back or redeem federal government bonds, this new money will also be hoarded, every dollar of it, and so will have no effect toward increasing the demand for goods and restoring employment! “
“In this view it would appear that if each person in the country, during a period of depression, were put into possession of more money than before whether twice as many dollars or 100 times as many or 10,000 times as many-there would nevertheless be no appreciable increase in spending, no increased demand for goods and no stimulus to business and employment! Instead, production would remain low or even sink lower, spending would remain low or even become less, prices of goods would remain low or fall even lowed All this, of course, is preposterous nonsense but it is to such a conclusion that those economists must inevitably be driven who do not admit that monetary policy can possibly promote recovery from depression.”
Now it may well be the case that what Brown is here exploding is the nonsense associated more closely with the ineffable Paul Krugman and his fellow-travellers, but the MMTers seem to be even more precariously balanced than he, straddling as they are, the Great Deflationary Abyss— with one foot planted firmly in a land where live those who believe that money can be effective in reigniting a temporarily slackened desire to spend, but with the other dangling in mid-air, well short of the opposite bank where reside those who take this to the logical conclusion that too much money can likewise easily lead to far too much spending, vaulting us headfirst from the frying pan (or the freezer cabinet, as may be the more suitable image) and into the fire of inflation.
Memo to those who espouse this rehashed mumbo-jumbo: inflation is alive and well; central banks have been furiously expanding base (or outside) money and a good deal of that has gone into supporting the addition of new quantities of deposit (or inside) monies, to boot.
Unsurprisingly, this undertaking has seen the prices of bonds, stocks, and commodities increase, even if the usual concomitant of rising property prices has not yet become universal (largely by the happenstance that this was the pre-eminent medium through which the last inflation was given vent and hence its overhang remains largely unliquidated and its components in widespread oversupply in several of the worst offending markets).
Just look at the evidence. Despite the unquestioned disruption of the Crash itself and the fire-in-a-theatre rush for liquidity which it occasioned, the central bank expansion programmes at just six prime exemplars have seen their combined balance sheets doubling in the past four years, with more than half that expansion coming since the first emergency injections began in earnest, in early 2009.
Money supply has risen by a not incomparable amount, even if the efficacy of the marginal bank reserve in generating bank demand deposits has been reduced lately to below unity (partly, one suspects, because the pre-LTRO, pre-Draghi ECB was expanding more by providing its stricken and mutually-distrustful banks and sovereigns with an intermediate, ‘credit-wrapper’ than by a deliberate and very un-German recourse to the money-spigot). As a direct consequence, prices have risen—i.e., whatever temporarily elevated desire there has been to hold more money (whatever reduction in ’velocity’, if you must); whatever difficulty in accessing the credit with which to economise on the stuff itself; an expansion of the money supply has lead inexorably to a rise in prices—fiscal austerity and output gaps and other such Keynesian mental clutter notwithstanding!
To understand why we are here is one thing of course: it is yet another to try to work out where we seem to be heading next. If aggressive monetary easing has pushed the likes of the US Small Cap index to all-time highs and triggered renewed buying of high-yield and emerging markets over the past few months, can we expect yet more largesse—and hence more price gains—ahead?
To answer this we must recognise that the world economy seems to have divided into three camps—a more ebullient US of A, a bemired Europe, and an obscured Asia—so we have a triad of central bank actors to second-guess in each of these if we are to attempt a little divination regarding this question.
In the first of them, the Fed seems to have truly let the dogs out: even without the launch of what seems an increasingly-redundant QEII, the aggregates are surging ahead as domestic banks eat into their excess stockpile of reserves (cash down $135 billion, bank credit up $375 bln to a new high, C&I loans up $100 bln).
We have previously shown that the rate of money creation is currently further above its 30-year real trend than at any time in that sample, but, for the sake of variety—and with a firm injunction not to take the projections as anything other than broadly illustrative—we look instead at money supply per capita. Here, too, a clear pattern emerges.
Zero growth in the halcyon days of the 50s and early 60s saw CPI typically around 1.5%. 5.5% compound money growth in the rather less complaisant two decades which followed saw average CPI lurch up to 5.7% before a deceleration to 4.2% per head in money and a coincident 3% rate of typical yearly price increases. Fast forward to the QEra and we have been running at nothing short of 10% per annum—an outpouring which risks—on the showing of the previous regimes—a typical CPI rate somewhere in excess of 7%. If long maintained, it will also acclimatise the economic structure to a level of laxity which cannot indefinitely be sustained, something which therefore sets us up for a nasty setback—and a prematurely renewed stimulus—whenever the Fed finally moves to regain control of the stampede it seems to have unleashed.
As for our second main player, the ECB, this week marks the second great confusion of capital with liquidity comes to its multiple hundreds-of-billions second installment. Expectations are high—as they were ahead of the apparently successful (but yet to be implemented) negotiation of the Greek debt accord. Your author, however, cannot entirely suppress the nagging suspicion that, just as that ostensible landmark brought only grumbling, not relief, perhaps Super Mario will also fail to excite jaded palates and a near-term disappointment might be the result no matter how clear the progress to full Weimarization. We shall see.
Further out in Asia, where the world’s marginal consumer of and producer of stuff has slipped into the statistical Lunar shadows of the New Year holiday, all is meant to be on the up again as the PBOC has unveiled not one, but two successive cuts in reserve requirements.
The act has not exactly been greeted with dancing in the streets, however, one reason for which may be that it has simply addressed a touch of overkill in cranking up the ratios last year. More binding at this stage may be a loan:deposit ratio which seems to have surged to six-year highs. At a point where the average rests only 3 points below the mandatory ceiling, this must leave a sizeable tail of the distribution scrambling to avoid official sanctions and so hardly best placed to swell its constituents’ already engorged loan books.
Here's a chart you won't see anywhere in the mainstream media - not the right, and certainly not the left. According to Rasmussen's 2012 Presidential Election Matchups, which pit Obama against any of the four GOP presidential candidates, while the balance of challengers certainly appear to have no chance of defeating the incumbent (something we touched upon yesterday), today, for the first time, Ron Paul has managed to unseat the standing president, by a thin margin of 43 to 41, for the first time in this series.
Source: Rasmussen Reports (premium subscription required)
On the survey methodology: "Surveys covering three days are of 1,500 Likely Voters and Surveys of Two Days are of 1,000 Likely Voters. All Surveys Have a Margin of Error of +/- 3% ."
Some more from today's Rasmussen blog:
The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty percent (40%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -15 (see trends).
Just 19% favor increased U.S. involvement in Syria. The Obama administration receives mixed reviews for handling that situation to date.
On the energy front, 58% believe that free market competition is the best way to get gas prices down. Just 27% think government regulations are a better approach. However, 67% believe that oil companies are using bad news to gouge customers.
In a possible 2012 matchup, Mitt Romney earns 45% of the vote, while the president attracts 44%. If Rick Santorum is the Republican nominee, the president leads by three, 46% to 43%. Matchup results are updated daily at 9:30 a.m. Eastern
What is oddly missing is that Ron Paul earns 43% of the vote, to Obama's 41%.
So on one hand Ron Paul defeats the president head to head, and on the other, the GOP itself tells us he is a distant third to two frontrunners who frankly make one question the sanity of every American voter?
Submitted by Mark McHugh from Across the Street
And The Douchebag Of The Year Award Goes To……
Unless February 29th is the new April Fool’s Day, I’m pretty sure Alan Dlugash locked up DOTY with this remark:
People who don’t have money don’t understand the stress. Could you imagine what it’s like to say I got three kids in private school, I have to think about pulling them out? How do you do that?”
Dluglash is describing the horror of scraping by on $350,000 a year. Really. How could you lucky bastards ever understand?
Ordinary Americans, with their fancy foodstamps and foreclosure notices, are increasingly turning a blind eye to the plight of the people who outsourced their jobs. You just don’t get it, do you? These people are light years smarter than you, and they work really hard. Now things are so dire, some are actually considering sending their kids to school with your germy kids. It’s bad.
Some have even been forced to shop for discount Salmon. How could people who enjoy cat food ever understand that kind of humiliation? If someone doesn’t halt this death spiral soon they may have to settle for Microsoft products (which even poor people hate).
This is all a joke, right? Cause if it’s not, wait ’til they find out about Walmart….
UK Parliament Member Lord James of Blackheath Alleges 15 Trillion Dollar Fraud Involving the Fed and Imaginary Gold
British Parliament member Lord James of Blackheath has alleged in a speech before Parliament an elaborate fraud involving the US government lying about hundreds of thousands of tons of imaginary gold, illegal wire transfers and loans totaling $15 trillion:
We have no idea whether Lord James is onto something big ... or has fallen prey to the equivalent of a Nigerian internet scam.
As the Independent notes:
The House of Lords was treated to a 10-minute speech last week by Lord James of Blackheath, from whom we have not heard much since he announced in 2010 that he was in touch with Foundation X, a "genuine and sincere" secret organisation that wanted to lend the British government £75bn.
David James was a City businessman commissioned by the Tories, in opposition, to report on ways of eliminating government waste. Last week, the 74-year-old peer was exercised about a story he has picked up that $15trn – that is $15,000,000,000,000 – belonging to "the richest man in the world", Yohannes Riyadi, was deposited in 2009 in the Royal Bank of Scotland. Lord James said he remains baffled after a two-year pursuit of the story, but has all the information on a memory stick, which he is offering to hand over to the Government.
His documents include a letter from the Bank of Indonesia telling him the whole story is a "complete fabrication". He took his concerns to the Treasury minister, Lord Sassoon, who said: "This is rubbish. It is far too much money. It'd stick out like a sore thumb and you can't see it in the RBS accounts."
And an alert Financial Times blogger said that had Lord James googled "Yohannes Riyadi", the first item to come up would be a warning from the Federal Reserve Bank of New York that the name is part of an internet scam designed to get money from the gullible. Two agents are trying to trace who is behind it. Perhaps Lord James should offer his memory stick.
There are those who voraciously, and blindly, read any and all hedge fund reports, allowing the already useless information to enter one brain hemisphere and exit the other, just so they can brag that they read such and such's monthly or year end letter. Frankly, we pity them, especially when in their attempt to ape success they confuse luck (which is responsible for 99% of hedge fund outliers) for skill, and in doing so constrain their minds even more. At least hopefully they don't spend money on self-improvement books. As for trading recommendations, by the time an idea is in writing, the time to implement it is long gone. Anyway, for precisely this subet of people we provide the Paulson 2011 year end letter. Which is 102 pages. It is amazing how when one is printing money, one can get away with two paragraphs of year end ruminations and the LPs will be delighted. When, however one has brought AUM from $32 billion to under $20 billion net of redemptions, much more reading material is required to justify the 2 and 20, especially if the proceeds are used to invest in AAPL (and speaking of Apple, we wonder how long before the company starts charging a fee of 2 and 20 from all of its shareholders). We won't spend much time dissecting the letter of a fund which blindly invested nearly half a billion in a company that two kids with an office exposed as fraud, suffice to copy and paste the following gem: "We believe this outperformance demonstrates our superior security analysis and selection due to our research edge." Yup, mmmhmmm. All this and much more in the enclosed paperweight.
Incidentally, when we said 10 days ago that we have "Horrible News For Goldbugs - Paulson Is Bullish On Gold Again", we were not kidding:
And so the Paulson overhang is back. Couldn't Paulson just go ahead and buy Bank of America or some other worthless biohazard again? All that remains is for Roubini to say he prefers gold over spam (and always has, he was merely "misunderstood") and the crash will be imminent.
Or perhaps we will learn following the next $1000 up move in gold that Gartman will have been long gold in Vietnamese Dong.
Well, at least cheap entry points will be available.
So far the thesis is playing out, and the cheap entry points are here again.