Sunday, August 9, 2015

ZIRPED! BERNANKE AND NOW YELLEN HAVE FELLED CAPITALISM. VOLKER WAS RIGHT ON HOW TO DO IT.

Today, the Telegraph UK published a work by Liam Halligan, Raising rates is trickier now that QE is a lifestyle choice.

"Since the financial crisis, QE has morphed from a just-about-justifiable emergency medicine, into a grotesque, self-serving lifestyle choice of our financial and political classes ... for many years now, QE has been less about crisis management than about pumping up equity and government bond prices to levels that belie underlying economic and fiscal realities.
QE, and the closely related policy of keeping interest rates nailed to the floor, has sent stocks to repeated all-time highs despite the lack of truly convincing recovery either here or in the US. It has allowed busted “zombie” banks that should have been thoroughly audited, rendered insolvent, then closed down and broken up, to keep trading."

Central bankers (CBs) have backed themselves into corners. In effect, through their near-ZIRP, CBs have severely harmed capitalism, if not mortally wounding capitalism for all time.

If CBs raise rates, there can be few new entrants in markets. How can would-be enterprisers compete? At higher rates, would-be new entrants would pay more for their capital relative to enterprisers operating with capital bought on credit at lower rates. Without new entrants, what will cause job growth?

CBs aren't smart enough to know what rates should be for millions of borrowers making many times more decisions about their daily lives. If central bankers knew what rates should be, never would there be banking crises such as the 2008 Banking Crisis.

The time to have raised rates long since passed — 2008 to 2009 — when speculation ran rampant. Rates should have been pushed high, blisteringly high between 2008 and 2009 to force many into bankruptcy. Such a policy — the right policy — would have bankrupted all of the shakiest of firms, culling the herd  while at the same time, protecting extant capital bought at higher rates of credit.

Instead, CBs Ben Bernanke and Janet Yellen have kept alive a sickly herd of bad enterprisers who have built edifices of bad businesses upon low interest rates during the Greenspan-Bernanke Great Inflation (1994 to 2008), the biggest credit bubble in the history of mankind.



The results of the Bernanke-Yellen near-ZIRP should surprise no one. Near-ZIRP has led to massive job cuts as enterprisers reduced their expenses to restore ROI on extant capital structures. Near-ZIRP has led to little borrowing and few new entrants since few can foresee expected future profits forthcoming from high true unemployment (7.57% as of today).

Worst of all, Bernanke-Yellen near-ZIRP has led to a massive decline in the economy, a decline that has gone unabated more or less since peak GDP of Q4 2007.



First under Bernanke and now under Yellen, CBs have engaged in an exercise of academic stupidity. Their beliefs run counter to real-world commerce driven by actual capitalism.

Paul Volker had it right between October 1979, and October 1982. When bankers ran amuck with bank credit, rates need to be pushed to the ceiling. Volker did that exactly by targeting the quantity of bank credit rather than the price of bank credit. Targeting bank credit, the federal funds rate reached a record high of 20% in late 1980. Consumer prices growth rate (wrongly called "inflation" by many) peaked at 11.6% in March of 1980.

William Poole, the eleventh chief executive of the Federal Reserve Bank of St. Louis (March 23, 1998 to March 31, 2008) had this to say, Volker's action:

How bad was the period of the Great Inflation? The inflation rate, a mere 1 percent in 1965, hit 14 percent by 1980. Unemployment trended up from a low of 3.5 percent (annual average) in 1969 to 9.7 percent in 1982. The stock market was in the dumps. Oil prices jumped off the charts. Presidents Richard Nixon and Jimmy Carter became desperate enough to tinker with price controls, the results being disastrous.
Volcker, in office only two months, took the radical step of switching Fed policy from targeting interest rates to targeting the money supply. The days of "easy credit" turned into the days of "very expensive credit." The prime lending rate exceeded 21 percent. Unemployment reached double digits in some months. The dollar depreciated significantly in world foreign exchange markets. Volcker's tough medicine led to not one, but two, recessions before prices finally stabilized.
Before Volker, the meddlers of Congress mandated that Federal Reserve CBs set targeted growth rates for circulating bank credit (wrongly said as "the money supply") and report on their success or failure. To try to meet the foolish mandate, using an unscientific approach, Fed Res CBs kept the federal funds rate within a narrow range.

And contrary to popular belief, incoming President Reagan and his treasury secretary Donald Regan did not like Volker's policy. Regan said, “What I am suggesting is that if (bank credit growth) stays here, you’re going to have a severe recession.”

By the summer of 1982, the recession hit bottom even though the active job seekers rate as a percent of workers and job seekers, the so-called unemployment rate, hit a peak of 10.8% in late 1982.  By 1983, the CPI had fallen to 3.7%. It had taken Volker three years to fix the economy on a sustained path of growth.

Raising rates to heights rapidly kills off bad business while protecting the capital structures of enterprisers who have built firms upon firm ground. Near-ZIRP destroys returns to capital bought on credit borrowed at higher rates for existing firms.

Interest rates ought to be set in futures markets by many players. In the abstract, futures markets are risk-reducing mechanisms, which curtail glut and prevent shortages.

Interest rates set by futures markets would see rates fall when the economy can handle the creative destruction forces of new entrants with superior technology pushing out the inefficient while at the same time producing sufficient returns to capital





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Saturday, November 1, 2014

OBAMA AND HIS CONGRESSES HAVE STEERED AMERICA INTO A 1975 FORD ERA ECONOMY




Back in March 2009, former commercial banker cheerleader-in-chief, Federal Reserve chairman Ben Bernanke sat before the cameras of the propaganda arm of the establishment, the CBS Television show 60 Minutes. Looking into the cameras, Bernanke said, "I think all of our efforts, so far, have produced results...And I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back...I do. I do see green shoots."



Some mocked Bernanke, but green shoots came. Those green shoots sprouted for three-fourths of a year between Q3 2009 and Q1 2010 with the economy growing at a true rate of 1.4% yearly. Before that moment, between Q4 2007 and Q3 2009, the economy had shrunk -19.2%, shrinking at a rate of -10.1% annually.



Then, those green shoots were trampled under foot. Between Q1 2010 and Q2 2010, the economy shrank -1.1%, effectively wiping out all of that green shoot growth as it shrank at a rate of -2.1%. On the heels of the quick trampling, the economy bounced back momentarily between Q2 2010 and Q3 2010, growing a scant 1.0% and at the annual rate of 2.0%.

And then came another big drop in the economy. Between the three years of Q3 2010 and Q2 2013, the economy shrank a massive -25.4%, shrinking at the yearly rate of -9.3%.

The economy saw a short-lived, half-year 1.5% growth between Q2 2013 and Q3 2013, growing at a yearly of 3.0%. This is likely why Obama took to bragging about his interference in commercial matters.

Since Q3 2013 until now, Q3 2014, the economy has shrank -6.9%, shrinking at a yearly rate of -5.6%.

Bernanke was chairman of the Federal Reserve when both peak true bank credit and peak true GDP hit, inflation to which he and his predecessor, Alan Greenspan failed to see. And then the collapse came when that peak credit inflation led to panic and crisis.

Between Q4 2007 until now, the economy has shriveled by a whopping -42.5%, shriveling up at the yearly rate of -7.6%. This shrinking has brought Americans back to a President Ford era economy when True GDP came in at $1,369.95 trillion annualized at the end of Q3 1975 and $1,407.60  trillion annualized at the end of Q4 1975.

Yet, there is a glimmer of hope. Q2 2014 True GDP tallied to  $1,395.79 trillion annualized and Q3 2014 True GDP tallied to $1,396.56 trillion annualized.

Rather than the earlier stalled recoveries, this one might be legit. Seeing True GDP stabilize might be a sign of a flattening bottom. And while the economy could chug along for a long time at this level, always there is hope for growth from a base.

It seems so unlikely for the economy to shrink much more than it has. At this point, I'd settle for a Reagan-era peak True GDP of $1,740.06 trillion annualized hit back in Q4 1984. Besides, I liked the 80s.





Enjoy!


To live between a rock and a hard place
In between time 
Cruising in prime time
Soaking up the cathode rays

To live between the wars in our time
Living in real time
Holding the good time
Holding on to yesterdays

You know how that rabbit feels
Going under your speeding wheels
Bright images flashing by
Like windshields towards a fly
Frozen in the fatal climb
But the wheels of time 
Just pass you by
Wheels can take you around
Wheels can cut you down
We can go from boom to bust
From dreams to a bowl of dust
We can fall from rockets' red glare
Down to "Brother can you spare..."
Another war
Another wasteland
And another lost generation

It slips between your hands like water
This living in real time
A dizzying lifetime
Reeling by on celluloid

Struck between the eyes
By the big-time world
Walking uneasy streets
Hiding beneath the sheets
Got to try and fill the void


And here is your 1984 bonus.

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Friday, May 23, 2014

LOSING ITS LUSTER. THE SECRET FUTURE OF GOLD REVEALED.



The gold bugs likely will hate seeing this, but the future of gold hardly looks shiny. Once we price gold in gold-weighted dollars, we see reality. Let's have a look.



From when Nixon slammed shut the gold window, gold hit its all-time peak of $377.28 (in GWDs) in July 1980. From there, gold fell, first violently and  then slowly until hitting its all-time low of $51.94 by April 2001. Gold fell a whopping 86.2% from its peak to its trough!

Yet, when we look at gold in GWDs against the true prime rate deflated by the FRBU deflator, we see a strong relationship.


True gold prices closely follow the true prime rate. Where true gold crossed the true prime is when the banking crisis of 2008 hit. And while Fed Res bankers have kept true prime flat since 2009, gold has been falling.

Looking back to the first chart, we see that when Greenspan kicked in inflation of the credit bubble with a fury, gold traded higher in lockstep with higher true credit.

True gold rose 1.54 times between Jan 1, 1999, and March 31, 2008, from $59.24 to $150.36. True gold fell from that peak 17.1% hitting a short-term low at the end of Q4 2008 before shooting up 38.1% at the top at the end of Q3 2011. 

Between 1999 and 2000, gold rose 9% on a rise in true prime of 18.7% and then retreated 11.3% as Greenspan engaged in rate suppression. And then gold shot up thereafter following the final massive leg of inflation of the bank credit bubble.  

Between the end of Q1 2004 through the end of Q2 2006, true prime rose a whopping 108%. Gold went along for the ride fueled by cheap credit. 

The true gold price rose 28.5% from the start of the banking crisis Q3 2008 after true peak credit plateaued beginning Q4 2007.  

Since then, the true price of gold has fallen 39.4%. Where true prime goes, gold goes. Extended ZIRP of Fed Res bankers has pushed down gold from it's peak true price hit at end of Q3 2011.


The true price of gold tracks the true prime rate and its magnitude of tracking depends upon the state of bank credit.

Now let's look at gold versus black gold.



While the relationship isn't exactly a love fest, West Texas Intermediate, though volatile by comparison, seems to hint the way of gold.




So, unless Fed Res bankers lose their minds, again, its not likely that we shall see another Greenspan-Bernanke credit bubble for years, perhaps decades. 

In the short-term, when Fed Res bankers return setting the Fed Funds Rate in relation to the "normal" state of affairs, and thus when true prime rises, gold might hitch a ride and thus as a short term speculation play, there might be profits. 

However, it's likely the gold play of 2001 to 2011 was one of two-in-a-lifetime chances to profit substantially from gold.

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Saturday, May 10, 2014

THE BUBBLE ALAN GREENSPAN COULDN'T SEE WITH ROUTINE DATA COLLECTED BY HIS ONE-TIME EMPLOYER, THE FEDERAL RESERVE

Since peak credit of fourth quarter 2007 of $1.134 trillion (deflated in FRBUs), loans and leases in bank credit of all commercial banks has fallen a whopping -46.31%!

Here is the bubble that Alan Greenspan claims he could not see during his reign as Chairman of the Federal Reserve of the United States. Not only did the bubble run from 1994 to 2006, but also the bubble continued into his successor's Ben Bernanke's reign.


Loans and Leases in Bank Credit, All Commercial Banks in gold window dollars.



Anyone who knows how to calculate the slope of a curve could see the rate of change in credit as time went onward.

After a steady level of credit between 1980 and 1990 and following credit decline to bottom in April 1994, credit took off in two massive stages, the first between April 1994 and January 2001 and the second, between January 2004 to April 2008. 

Anyone who dabbles in stock charts knows this pattern all-too well. 

If only Greenspan knew about Federal Reserve Bank Units, he could have calculated true credit using the FRBU deflator.

Federal Reserve Bank Units (FRBUs), or if you like better, Federal Reserve Buying Units are what circulate goods and services in the U.S.A. and elsewhere on earth.

As I show in WHY FUTURES MARKETS SHOULD SET THE FEDS FUNDS RATE RATHER THAN THE FEDERAL RESERVE BOARD OF GOVERNORS that through the brilliance of a futures market, Americans could safeguard their livelihoods for all time returning to freedom, returning to living among a people who get rich from earnest effort rather than political connection.
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