December 25, 2018
Make America Deflate Again (MADA 'bout You!)
Timothy Birdnow
The Asian stock market plunged after a Wall Street dropoff. According to CNN money:
End excerpt.
Interesting how CNN KNOWS it is nervousness over Trump's threat to fire Powell and not, oh, I don't know, Powell and the Fed's recent rate hike - and promise of more in the year to come.
The reality is that the Fed has been laboring to tank the U.S. economy all year. And the chickens from Qualitative Easing are coming home to roost, too.
QE was the program where the government essentially bought bad debt - primarily in the housing market - and printed money to pay for it. To avoid Obama taking the heat and to keep the illusion of economic health the Federal Reserve keep interest rates down, so as to offset the natural inflation generated by adding to the money supply. But that trick only lasts so long; it's like playing Old Maid. Sooner or later someone is going to get stuck with the results. The Federal Reserve and Chairman Powell figure they can lay the blame on the outsider Donald Trump.
In point of fact, the Federal Reserve has been without reserves since they started QE, and is now completely depleted and faces something unprecedented; the largest economy in the world's central bank may be insolvent.
Which is part of why Powell and the Fed board are raising interest rates; they need cash, and FAST and the easiest way to get it is to increase interest rates on money they are lending out.
The CNN article continues:
US Treasury Secretary Steven Mnuchin added to the uncertainty on Sunday by releasing an unusual statement saying he had called the CEOs of the biggest American banks. He said the executives assured him their banks are healthy and have "ample liquidity" to lend to consumers and businesses. "Markets continue to function properly," Mnuchin said.
The use of words typically reserved for times of crisis — even though there were no outward signs of one — spooked investors.
End excerpt.
The Empire strikes back!
Mnuchin, the swampiest crocodile in the D.C. marsh, was the guy who recommended Powell for his job. He has to know he is in the crosshairs, and indeed Trump has publicly blamed the Munchkin for recommending Powell, a Keynsian appointed by Barack Obama to the Fed in the first place. Naturally, he's not going to take the blame for imploding the market. If it requires wrecking the economy so be it.
We saw this same game before during the W. Bush Administration.
I ask you; why is the Fed hell-bent on raising interest rates (and they never did when the pseudo-savior Barack Hussein Obama was in office) with a sputtering stock market? They know the rate hikes are not needed; the institution of tax increases via tariffs and trade disputes will slow the economy as it is. There is nothing to justify the hikes unless you understand that they are broke and also want to get Trump.
And this business of the economy "overheating" is a pile of poneranian poo; purely Keynsian thinking. Inflation can occur in specific areas if demand outstrips supply, but supply will quickly catch up. Inflation is caused primarily by bad monetary policy aka printing money and inserting it into the economy. The Fed did a massive amount of that, and used their control of interest rates to avoid the day of reckoning. Now it is coming, and they are going to deflect blame by crashing the market and blaming the current President. Cute trick.
In 1936 the U.s. economy was starting to heal from the disastrous mishandling under the Fed and Hoover/Roosevelt Administrations. So what did the Federal Reserve do? Raised interest rates, leading to the "Depression in a Depression" in '37. Between '37 and '38 U.S. GDP contracted by 9%. Unemployment jumped from 14.3% to 19%. Industrial production declined almost thirty percent.
As this article explains:
Consider, for example, the following summary of economic conditions: (1) Signs indicate that the recession is finally over. (2) Short-term interest rates have been close to zero for years but are now expected to rise. (3) Some are concerned about excessive inflation. (4) Inflation concerns are partly driven by a large expansion in the monetary base in recent years and by banks’ massive holding of excess reserves. (5) Furthermore, some are worried that the recent rally in commodity prices threatens to ignite an inflation spiral.
End excerpt.
Indeed the Fed seems ready to make the same mistake again.
And they caused the Great Depression in the same way, tightening the money supply and raising rates. see this.
From the article:
But his entire argument is based on a misconception, that the Fed adopted an easy money policy in 1930. In fact, the Fed did just the opposite. In October 1929 the monetary base was $7.345 billion, and by October 1930 it was $6.817 billion. That’s a drop of over 7%, one of the largest declines in the 20th century. And the monetary base is the type of money directly controlled by the Fed. When people talk about the government "printing money†they are generally referring to the monetary base. So by that definition money was very tight. If money was not tight in October 1930, then the low credit demand of the Great Depression would have meant even lower interest rates; perhaps the 1% we saw in 2003, which prevented another Great Depression.
Now for a curve ball. So far I’ve assumed the Great Depression just happened for mysterious reasons, and that the Fed responded with tight money, thus preventing interest rates from falling as far as market forces would have taken them (assuming a stable monetary base.)
But why did the Depression happen in the first place? It’s very likely that the Fed’s decision to reduce the monetary base by 7% was a major cause of the sharp contraction of 1929-30 (after October 1930 the base rose, as the Fed partially accommodated higher currency demand during the bank panics.) So if tight money caused the Depression, why did rates fall? First we need to recall that monetary policy affects rates in various ways:
1. Liquidity effect; tight money raises rates
2. Income effect; tight money reduces RGDP, investment, credit demand, and real interest rates
3. Inflation effect; tight money reduces expected inflation and thus nominal interest rates
Note that the effect everyone focuses on (the liquidity effect) is actually the outlier, and is also a very short term effect. Indeed I’ve seen the "long run†effects overwhelm the short run liquidity effect in a period less than three months! Thus most of the movements in interest rates that we observe are not the Fed moving rates around via easy and tight money (as most people assume) but rather the market forces moving rates around.
Indeed 1929 is a great example. The Fed only had raised rates to 6% for about three months in 1929, after which the economy started plunging so fast that the interest rates began falling sharply, even without any "easing,†without any increase in the monetary base.
End excerpt.
It seems the Fed is going this exact same route. They maintained loose monetary policy during the Obama era and are now tightening the screws in a very dicey world economic climate. Why, it's almost as if they WANT to tank America.
You could call this policy "Make America Deflate Again" or MADA.
Well, we can all be mada bout it, and probably should.
I argued in the Obama era that interest rates were too low, which discouraged lending because there was no money to be made. Hiking rates was sensible, if done responsibly. But the Fed has gone "balls to the wall" on it, which is roiling markets at home and abroad.
But is there an upside? Well, the worse the American market gets the worse the Asian market, which puts the screws to the Chinese, making them more amenable to compromising with the U.S. on some of their more onerous economic activities. China's rise to superpower status is linked to America's profligate spending and planned decline in wealth and power, planned by the forces of globalism (like the Obama Administration or even the Trump people like Mnuchin or Powell) In other words, the Chinese economy has piggybacked on our own, and in fact the Chinese finances much of our national debt for years. If we go they go. That is why China has been faltering in recent years; it has been a sign of the lack of health in the U.S. economy since the Great Recession. Despite what the media claimed at the time, the Obama-era economy was anemic. China's economic problems proved that.
So, what happens when the Fed kills that gold-laying goose? China weakness (and unfortunately so do our East Asian allies like Japan or South Korea.) Oh, and if China weakens North Korea does also.
This cloud may have a silver lining yet.
The Asian stock market plunged after a Wall Street dropoff. According to CNN money:
Japan's Nikkei plummeted 5% on Tuesday, dragging the index into a bear market. In China, the Shanghai Composite dropped as much as 2.5% before recovering some of its losses to close down 0.9%.
Investors are getting increasingly concerned about a slowdown in global economic growth, according to market experts. Those worries have been intensified by US President Donald Trump's attacks on Federal Reserve Chairman Jerome Powell for continuing to raise interest rates.
The declines in Asia followed another brutal day for US stock markets, which fell more than 2% in a shortened trading session. The Dow, which sank 2.9%, and the S&P 500, which lost 2.7%, suffered their biggest Christmas Eve declines ever.
"The market is getting pummeled from every direction," said Stephen Innes, head of Asia-Pacific trading for online broker Oanda.
The declines in Asia followed another brutal day for US stock markets, which fell more than 2% in a shortened trading session. The Dow, which sank 2.9%, and the S&P 500, which lost 2.7%, suffered their biggest Christmas Eve declines ever.
"The market is getting pummeled from every direction," said Stephen Innes, head of Asia-Pacific trading for online broker Oanda.
Interesting how CNN KNOWS it is nervousness over Trump's threat to fire Powell and not, oh, I don't know, Powell and the Fed's recent rate hike - and promise of more in the year to come.
The reality is that the Fed has been laboring to tank the U.S. economy all year. And the chickens from Qualitative Easing are coming home to roost, too.
QE was the program where the government essentially bought bad debt - primarily in the housing market - and printed money to pay for it. To avoid Obama taking the heat and to keep the illusion of economic health the Federal Reserve keep interest rates down, so as to offset the natural inflation generated by adding to the money supply. But that trick only lasts so long; it's like playing Old Maid. Sooner or later someone is going to get stuck with the results. The Federal Reserve and Chairman Powell figure they can lay the blame on the outsider Donald Trump.
In point of fact, the Federal Reserve has been without reserves since they started QE, and is now completely depleted and faces something unprecedented; the largest economy in the world's central bank may be insolvent.
Which is part of why Powell and the Fed board are raising interest rates; they need cash, and FAST and the easiest way to get it is to increase interest rates on money they are lending out.
The CNN article continues:
US Treasury Secretary Steven Mnuchin added to the uncertainty on Sunday by releasing an unusual statement saying he had called the CEOs of the biggest American banks. He said the executives assured him their banks are healthy and have "ample liquidity" to lend to consumers and businesses. "Markets continue to function properly," Mnuchin said.
The use of words typically reserved for times of crisis — even though there were no outward signs of one — spooked investors.
End excerpt.
The Empire strikes back!
Mnuchin, the swampiest crocodile in the D.C. marsh, was the guy who recommended Powell for his job. He has to know he is in the crosshairs, and indeed Trump has publicly blamed the Munchkin for recommending Powell, a Keynsian appointed by Barack Obama to the Fed in the first place. Naturally, he's not going to take the blame for imploding the market. If it requires wrecking the economy so be it.
We saw this same game before during the W. Bush Administration.
I ask you; why is the Fed hell-bent on raising interest rates (and they never did when the pseudo-savior Barack Hussein Obama was in office) with a sputtering stock market? They know the rate hikes are not needed; the institution of tax increases via tariffs and trade disputes will slow the economy as it is. There is nothing to justify the hikes unless you understand that they are broke and also want to get Trump.
And this business of the economy "overheating" is a pile of poneranian poo; purely Keynsian thinking. Inflation can occur in specific areas if demand outstrips supply, but supply will quickly catch up. Inflation is caused primarily by bad monetary policy aka printing money and inserting it into the economy. The Fed did a massive amount of that, and used their control of interest rates to avoid the day of reckoning. Now it is coming, and they are going to deflect blame by crashing the market and blaming the current President. Cute trick.
In 1936 the U.s. economy was starting to heal from the disastrous mishandling under the Fed and Hoover/Roosevelt Administrations. So what did the Federal Reserve do? Raised interest rates, leading to the "Depression in a Depression" in '37. Between '37 and '38 U.S. GDP contracted by 9%. Unemployment jumped from 14.3% to 19%. Industrial production declined almost thirty percent.
As this article explains:
Consider, for example, the following summary of economic conditions: (1) Signs indicate that the recession is finally over. (2) Short-term interest rates have been close to zero for years but are now expected to rise. (3) Some are concerned about excessive inflation. (4) Inflation concerns are partly driven by a large expansion in the monetary base in recent years and by banks’ massive holding of excess reserves. (5) Furthermore, some are worried that the recent rally in commodity prices threatens to ignite an inflation spiral.
End excerpt.
Indeed the Fed seems ready to make the same mistake again.
And they caused the Great Depression in the same way, tightening the money supply and raising rates. see this.
From the article:
But his entire argument is based on a misconception, that the Fed adopted an easy money policy in 1930. In fact, the Fed did just the opposite. In October 1929 the monetary base was $7.345 billion, and by October 1930 it was $6.817 billion. That’s a drop of over 7%, one of the largest declines in the 20th century. And the monetary base is the type of money directly controlled by the Fed. When people talk about the government "printing money†they are generally referring to the monetary base. So by that definition money was very tight. If money was not tight in October 1930, then the low credit demand of the Great Depression would have meant even lower interest rates; perhaps the 1% we saw in 2003, which prevented another Great Depression.
Now for a curve ball. So far I’ve assumed the Great Depression just happened for mysterious reasons, and that the Fed responded with tight money, thus preventing interest rates from falling as far as market forces would have taken them (assuming a stable monetary base.)
But why did the Depression happen in the first place? It’s very likely that the Fed’s decision to reduce the monetary base by 7% was a major cause of the sharp contraction of 1929-30 (after October 1930 the base rose, as the Fed partially accommodated higher currency demand during the bank panics.) So if tight money caused the Depression, why did rates fall? First we need to recall that monetary policy affects rates in various ways:
1. Liquidity effect; tight money raises rates
2. Income effect; tight money reduces RGDP, investment, credit demand, and real interest rates
3. Inflation effect; tight money reduces expected inflation and thus nominal interest rates
Note that the effect everyone focuses on (the liquidity effect) is actually the outlier, and is also a very short term effect. Indeed I’ve seen the "long run†effects overwhelm the short run liquidity effect in a period less than three months! Thus most of the movements in interest rates that we observe are not the Fed moving rates around via easy and tight money (as most people assume) but rather the market forces moving rates around.
Indeed 1929 is a great example. The Fed only had raised rates to 6% for about three months in 1929, after which the economy started plunging so fast that the interest rates began falling sharply, even without any "easing,†without any increase in the monetary base.
End excerpt.
It seems the Fed is going this exact same route. They maintained loose monetary policy during the Obama era and are now tightening the screws in a very dicey world economic climate. Why, it's almost as if they WANT to tank America.
You could call this policy "Make America Deflate Again" or MADA.
Well, we can all be mada bout it, and probably should.
I argued in the Obama era that interest rates were too low, which discouraged lending because there was no money to be made. Hiking rates was sensible, if done responsibly. But the Fed has gone "balls to the wall" on it, which is roiling markets at home and abroad.
But is there an upside? Well, the worse the American market gets the worse the Asian market, which puts the screws to the Chinese, making them more amenable to compromising with the U.S. on some of their more onerous economic activities. China's rise to superpower status is linked to America's profligate spending and planned decline in wealth and power, planned by the forces of globalism (like the Obama Administration or even the Trump people like Mnuchin or Powell) In other words, the Chinese economy has piggybacked on our own, and in fact the Chinese finances much of our national debt for years. If we go they go. That is why China has been faltering in recent years; it has been a sign of the lack of health in the U.S. economy since the Great Recession. Despite what the media claimed at the time, the Obama-era economy was anemic. China's economic problems proved that.
So, what happens when the Fed kills that gold-laying goose? China weakness (and unfortunately so do our East Asian allies like Japan or South Korea.) Oh, and if China weakens North Korea does also.
This cloud may have a silver lining yet.
Posted by: Timothy Birdnow at
11:40 AM
| No Comments
| Add Comment
Post contains 1634 words, total size 12 kb.
30kb generated in CPU 0.0712, elapsed 0.494 seconds.
35 queries taking 0.4892 seconds, 165 records returned.
Powered by Minx 1.1.6c-pink.
35 queries taking 0.4892 seconds, 165 records returned.
Powered by Minx 1.1.6c-pink.
