Guest Post: The Treasury Bubble in One Graph

What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so. Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation). And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies. John Aziz proposes (much to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And that those economists who are calling for even greater inflation are playing with dynamite. See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — we believe that negative side-effects from these policies may cause severe harm. Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). As John wrote recently - "So, does the accumulation of excess reserves lead to inflation? Only so much as the frequentation of brothels leads to chlamydia and syphilis." We’d call that playing dice with the devil.

Who Is Lying: The Federal Reserve Or... The Federal Reserve? And Why Stalin "Lost"

Four time Fed Chairman Marriner Eccles: "As long as the Federal Reserve is required to buy government securities at the will of the market for the purpose of defending a fixed pattern of interest rates established by the Treasury, it must stand ready to create new bank reserves in unlimited amount. This policy makes the entire banking system, through the action of the Federal Reserve System, an engine of inflation. (U.S. Congress 1951, p. 158)... [We are making] it possible for the public to convert Government securities into money to expand the money supply....We are almost solely responsible for this inflation. It is not deficit financing that is responsible because there has been surplus in the Treasury right along; the whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this committee is the only agency in existence that can curb and stop the growth of money.. . . [W]e should tell the Treasury, the President, and the Congress these facts, and do something about it....We have not only the power but the responsibility....If Congress does not like what we are doing, then they can change the rules. (FOMC Minutes, 2/6/51, pp. 50–51)"

Guest Post: How To Speculate Your Way To Success

So far, 2012 has been a banner year for the stock market, which recently closed the books on its best first quarter in 14 years. But Casey Research Chairman Doug Casey insists that time is running out on the ticking time bombs. Next week when Casey Research's spring summit gets underway, Casey will open the first general session addressing the question of whether the inevitable is now imminent. In another exclusive interview with The Gold Report, Casey tells us that he foresees extreme volatility "as the titanic forces of inflation and deflation fight with each other" and a forced shift to speculation to either protect or build wealth.

Fab Five Fed-y: Which Fed Chairman Has Done The Best "Dual Mandate" Job?

While one can talk until one is blue in the face about the pros and cons of the current central bank's (mis)deeds over the past 7 years, the reality is that most people are backward-looking (i.e., economists), not forward (which of course explains the prevalence of speculation as to whether the Fed's exponentially rising balance sheet will result in hyperdeflation or hyperinflation). As such, one can, for now at least, judge the Fed merely in the context of what it has achieved to date, not by the seeds of destruction it has planted. So how has Ben Bernanke performed so far when compared to his previous 4 predecessors, at least based on those two now completely irrelevant, but still oddly believed mandates: inflation and unemployment (because by now we all know that even the Chairman himself admitted the only thing that matters to the Fed is the Russell 2000 closing value). Below we present the Fed's accomplishments in the arena of inflation and jobs in the context of the past 60 years split by Chairmen starting with Martin (remember the 1951 Accord?), then going to Burns/Miller, Volcker, Greenspan and finally Bernanke. So who has been the fabbest among the Fed-est? You decide.

The Risk Of 'Hot' Inflation

Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation. Neither has occurred, and the question is, why not? The answer is a 'cold' inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” inflation. If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation. Surely, this is an outcome that sovereign bond markets and stock markets are completely unprepared for. Indeed, by continually framing the inflation vs. deflation debate in extreme terms, market participants have created a blind spot: the risk of a conventional, but 'hot,' inflation.

Viva Central Planning

In this week's missive, Jefferies' strategist David Zervos decries the doomsayers, panders to the printers, and colors this colossal nominal rally (and its expected infinite horizon) through green toner-colored glasses. All we can say here is "Viva Jefferies' David Zervos, and Viva Sarcasm"... it is Sarcasm right? Because if serious, this letter seems like it could have been penned by anyone fighting tooth and nail to become 3rd undersecretary of central planning in Stalinist Russia. We leave it to readers' judgment on which side of the fence Mr. Zervos sits.

Guest Post: How Far To The Wall?

Decades of manipulation by the Federal Reserve (through its creation of paper money) and by Congress (through its taxing and spending) have pushed the US economy into a circumstance that can't be sustained but from which there is no graceful exit. With few exceptions, all of the noble souls who chose a career in "public service" and who've advanced to be voting members of Congress are committed to chronic deficits, though they deny it. For political purposes, deficits work. The people whose wishes come true through the spending side of the deficit are happy and vote to reelect. The people on the borrowing side of the deficit aren't complaining, since they willingly buy the Treasury bonds and Treasury bills that fund the deficit. And taxpayers generally tolerate deficits as a lesser evil than a tax hike. So stay up as late as you like on election night to see who wins, but the deficits aren't going to stop anytime soon. The debt mountain will keep growing. The part of it the government acknowledges is now approaching $16 trillion, which is more than the country's gross domestic product for a year. Obviously, the debt can't keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things.

Sheila Bair's Modest Proposal To Fix Everything: Hyperinflation

This one is actually quite funny, although we feel that the MMTers, the Neo-Keynesians, the Econ 101 textbook fanatics, and the government apparatchiks out there will fail to appreciate the humor. However, we are a little concerned how many of those in charge read into this a little too much, and decide to make this official policy...

Guest Post: Dueling Economic Banjos Offer No Deliverance

Americans have been listening to the mainstream financial media’s song and dance for around four years now.  Every year, the song tells a comforting tale of good ol’ fashioned down home economic recovery with biscuits and gravy.  And, every year, more people are left to wonder where this fantastic smorgasbord turnaround is taking place?  Two blocks down?  The next city over?  Or perhaps only the neighborhoods surrounding the offices of CNN, MSNBC, and FOX?  Certainly, it’s not spreading like wildfire in our own neck of the woods…Many in the general public are at the very least asking “where is the root of the recovery?”  However, what they should really be asking is “where is the trigger for collapse?”  Since 2007/2008, I and many other independent economic analysts have outlined numerous possible fiscal weaknesses and warning signs that could bring disaster if allowed to fully develop.  What we find to our dismay here in 2012, however, is not one or two of these triggers coming to fruition, but nearly EVERY SINGLE conceivable Achilles’ heel within the foundation of our system raw and ready to snap at a moment’s notice.  We are trapped on a river rapid leading to multiple economic disasters, and the only thing left for any sincere analyst to do is to carefully anticipate where the first hits will come from. Four years seems like a long time for global banks and government entities to subdue or postpone a financial breakdown, and an overly optimistic person might suggest that there may never be a sharp downturn in the markets.  Couldn’t we simply roll with the tide forever, buoyed by intermittent fiat injections, treasury swaps, and policy shifts? The answer……is no.

Artemis On Volatility At World's End: Deflation, Hyperinflation And The Alchemy Of Risk

Imagine the world economy as an armada of ships passing through a narrow and dangerous strait leading to the sea of prosperity. Navigating the channel is treacherous for to err too far to one side and your ship plunges off the waterfall of deflation but too close to the other and it burns in the hellfire of inflation. The global fleet is tethered by chains of trade and investment so if one ship veers perilously off course it pulls the others with it. Our only salvation is to hoist our economic sails and harness the winds of innovation and productivity. It is said that de-leveraging is a perilous journey and beneath these dark waters are many a sunken economy of lore. Print too little money and we cascade off the waterfall like the Great Depression of the 1930s... print too much and we burn like the Weimar Republic Germany in the 1920s... fail to harness the trade winds and we sink like Japan in the 1990s. On cold nights when the moon is full you can watch these ghost ships making their journey back to hell... they appear to warn us that our resolution to avoid one fate may damn us to the other.

America: A Government Out Of Control

Something odd and not quite as planned happened as America grew from its "City on a Hill" origins, on its way to becoming the world's superpower: government grew. A lot. In fact, the government, which by definition does not create any wealth but merely reallocates it based on the whims of a select few, has transformed from a virtually invisible bystander in the economy, to the largest single employer, and a spending behemoth whose annual cash needs alone are nearly $4 trillion a year, and where tax revenues no longer cover even half the outflows. One can debate why this happened until one is blue in the face: the allures of encroaching central planning, the law of large numbers, and the corollary of corruption, inefficiency and greed, cheap credit, the transition to a welfare nanny state as America's population grew older, sicker and lazier, you name it. The reality is that the reasons for government's growth do not matter as much as realizing where we are, and deciding what has to be done: will America's central planners be afforded ever more power to decide the fates of not only America's population, but that of the world, or will the people reclaim the ideals that the founders of this once great country had when they set off on an experiment, which is now failing with every passing year?

Guest Post: Global Oil Risks in the Early 21st Century

The Deepwater Horizon incident demonstrated that most of the oil left is deep offshore or in other locations difficult to reach. Moreover, to obtain the oil remaining in currently producing reservoirs requires additional equipment and technology that comes at a higher price in both capital and energy. In this regard, the physical limitations on producing ever-increasing quantities of oil are highlighted, as well as the possibility of the peak of production occurring this decade. The economics of oil supply and demand are also briefly discussed, showing why the available supply is basically fixed in the short to medium term. Also, an alarm bell for economic recessions is raised when energy takes a disproportionate amount of total consumer expenditures. In this context, risk mitigation practices in government and business are called for. As for the former, early education of the citizenry about the risk of economic contraction is a prudent policy to minimize potential future social discord. As for the latter, all business operations should be examined with the aim of building in resilience and preparing for a scenario in which capital and energy are much more expensive than in the business-as-usual one.

Phoenix Capital Research's picture

In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes. And this time around, the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years. Again, this time it is different. I realize most people believe the Fed can just hit “print” and solve everything, but they’re wrong. The last time the Fed hit “print” food prices hit records and revolutions began spreading in emerging markets. If the Fed does it again, especially in a more aggressive manner as it would have to, we would indeed enter a dark period in the world and the capital markets.


Guest Post: A Postmortem Of Niall Ferguson's Otherwise Epic Lecture: Empires On The Edge Of Chaos

A few words on this IMO must watch lecture - Niall Ferguson: Empires on the Edge of Chaos  While Fergie is brilliant in his historical analysis, he gets a few niggling points wrong - Which I suspect is in part from having an Anglocentric viewpoint, which leads one to ignore some fairly hushed up (by the MSM) points of the good 'ol US of A, and in part from his rather British nature of believing in above all else, order, honoring of contracts, rule of law, and other quaint genteel notions of civil society.