Sunday, August 28, 2016

Lethal Dose of QE On Its Way

On Friday, Janet Yellen hinted at the possibility of unprecedented monetary stimulus.  What form this might take remains unclear.  Yet only a few options exist - mainly, negative interest rates and helicopter money.  Japan has already instituted NIRP (negative-interest-rate policy), as have many European countries.  Japan has hinted at the possibility of helicopter money being necessary, seeing the ineffectiveness of NIRP. 

A healthy economy needs interest rates.  As Peter Schiff has noted in his writings, savings are the bedrock of capitalism.  People use savings and interest income to invest.  Without a positive interest rate, the whole economy stalls out.  That’s what has been happening, as evidenced by the plunging velocity of money, something I have written about previously.

How anyone believes that NIRP can be a good thing lies beyond the scope of reason.  The only way it can be considered positive involves looking at the obscene amounts of debt in the system.  Interest rates must go ever lower in order to sustain more and more debt.  Imagine you have a credit card and keep charging more and more.  That’s fine, so long as your interest rate keeps on plunging, you will never have to make much of a payment.

Of course, everyone knows that’s just not how it works.  So it’s silly to think this charade can go on forever.  At some point things must reach a breaking point.  Years of stagnation seem destined to precede that breaking point, as we have seen in Japan. 

The Fed’s balance sheet has ballooned to over $4 Trillion USD.  The next dose of QE may be in excess of $2 Trillion.  Like a drug addict, more and more stimulus is needed to prop up the economy, until finally….overdose. 

What will be the ultimate outcome of this insane monetary experiment?  What are your thoughts?  Feel free to leave a comment below.

Tuesday, August 16, 2016

Three points to economic depression

With global stock markets reaching record highs, mainstream media continues to push the narrative that “good times are here again”. 

Yet when one peers beneath the surface of this 1920s-like frothy equity fiasco, a very different picture emerges. 

Objective economic indicators all point toward a grim reality: outright economic depression.  It’s plain enough for anyone to see.  However, most media outlets today do not connect the dots between certain data points, and therefore present a skewed reality again and again.

Which points can show us what’s really going on?  There are three main issues I’d like to mention in this post, all of which demonstrate without a shadow of a doubt that for the great majority of Americans and other citizens, times have never been tougher.  These include the following: 1) Fertility and marriage rates at record lows.  When people live in poverty, they can no longer afford to marry or raise children.  2) Interest rates at record lows, roughly 14 trillion in negative yielding debt.  A healthy economy needs a positive interest rate in order to spur investment based off capital gains.  With no such gains to be found, people pile into risk assets in a desperate ditch for yield.  This raises assets prices and creates the illusion of recovery.  Finally, 3) M2 Velocity of money at record low in America, while Fed’s balance sheet stands at about 4 Trillion USD.  This inconvenient truth never, ever gets mentioned once in the mainstream news channels.  Most people don’t even have a clue what this means. 

Let’s focus first on fertility rates.  Never before in recorded history have people been having less babies.  The significance of this cannot be overstated.  No reason exists for this to be the case other than an utter lack of economic opportunity.  Very few jobs exist that can feed a family, so people forego parenthood.  An entire generation may never have the chance to become parents.  What might the following generation experience?

The previous generation of baby boomers can no longer raise retirement income from fixed-income investments such as CD accounts and government bonds.  Central bank policies known as zero interest rate policy (ZIRP) and now negative interest rate policy (NIRP), have eliminated opportunities for investors.  Grandma and grandpa now have to either subsist on social security or risk it all in the stock markets.   In fact, many seniors have been forced to forego retirement altogether and continue working, further tightening labor conditions for the younger generation.  That constitutes two entire generations who must be cash-strapped, as evidenced by point #3. 

Velocity of money can best be described as the pulse of an economy.  No other single objective indicator can better show the state of an economy.  M2 velocity refers to the number of times a piece of currency changes hands within the real economy.  When things are good, people spend money they earn.  I buy something from a local shop, the shopkeeper then invests some of that money into his business, buying other things and then the process repeats.  However, this normal process seems to have stalled out in modern day America.  The evidence cannot be more simple and clear.  The following chart displays a very frightening image of an economy in free-fall.  No one can dispute that chart.  The numbers do not lie, and they speak for themselves.  The velocity of money has never been lower, and it continues to reach new lows.  It has fallen every year since 2008, and shows no sign of recovery whatsoever.  Based on this metric alone, it makes more sense to claim we are experiencing an economic depression than some kind of “recovery”. 

Overall, anyone claiming that everything is normal must either be clueless or delusional.  People have stopped having children, interest rates have never been lower, and the velocity of money continues to plummet.  These three points present a solid indication of a zombie economy.  Without low to negative interest rates and massive “quantitative easing” (money creation), who knows what might occur?  And so the central banks, who created this whole mess in the first place, get to pose as the saviors of their own calamity.  Lord Rothschild, one of the world’s foremost bankers, has even declared this to be a monetary experiment the likes of which this world has never before seen.

How this experiment ends will be anyone’s guess.  Yet given what has been covered in this post, it seems plain enough that the outcome will be less than positive.