If you listen to TV commentators, you’ve been told the worst is behind us. Growth is picking up, and Europe is coming out of its slumber. No one seems to be concerned that this tepid below-2-percent growth is being entirely fed by the central bank’s massive money printing. It’s a “growth at any price” policy. How quickly we forget. We currently fear Fed tapering, as we should. Yet, we should be even more fearful that it doesn’t taper. Today, we really have a dreaded choice of losing an arm now or two arms and a leg tomorrow. Because the price distortions have been massive, the adjustment will be horrendous. Government policy makers and government economists simply do not understand the critical role of prices in helping discovery and coordination.
There's growing speculation that China will soon announce an overhaul of its financial system to address increasing risks from escalating debt.
As it turns out, a lot... and also very little.
When it comes to the very simplest axiom on modern Keynesian economics, it seems one can't repeat it enough times: have leverage, have growth... don't have leverage, don't have growth. That is the reason why in early summer, China tried to conduct a mini-taper of its own to streamling its monetary pipeline which had been so filled with bad and non-performing credit, that the PBOC effectively pulled the switch on new liquidity for over a month. What happened almost immediately after, when rates on ultra short term funding soared to 20%+, nearly destroyed the domestic banking system and resulted in a major slowdown in the Chinese economy. "Luckily" for China, its close encounter with the taper was brief, if quite painful, and following a period of shock, the Chinese central bank had no choice but to resume injecting banks with their daily dose of monetary morphine all over again. This in turn, has brought us to square one: nothing in the local banking system has been fixed, and what's worse, while China has bought itself a few months respite, the dominant old problem of a collapsing credit impulse, as decribed before, in the country with the largest corporate credit bubble in the world, is about to come back with a bang in a few short months. In short: China just did what the US has boldly done so many times before - kicked the can.
For the second day in a row, better than expected Chinese "data" set sentiment across the board when following an improvement in its trade data (even as crude oil imports dropped to an 11 month low), last night China reported a better than expected August Industrial Production print of 10.4%, compared to 9.7% for July, and higher than the 9.9% expected. This was driven by a pick up in Chinese M2, which rose from 14.5% to 14.7% Y/Y, as the PBOC has once again resuming what it does best, injecting liquidity into the system, even if said liquidity no longer makes its way into the proper channels, as new CNY loans missed the expected CNY730bn, rising to 711.3bn for August. Elsewhere, not all was good on the Industrial Production front, following a French miss of -0.6% on expectations of a rebound to +0.5%, as well as a miss in mfg production of -0.7%, down from -0.4% and below the expected 0.7%. This, in parallel with Moscovici once again saying the 2013 deficit will be "slightly higher than 3.7%" means that just like in 2012, and with German economic metrics continuing to contract, as the periphery stages a modest rebound it is the core that threatens Europe's stability once again. Finally, and since in Europe everything is ultimately funded by current account positive Germany either directly or via TARGET2, the recent Italian economic strength, which also means a bounce in imports, meant that Italian TARGET2 liabilities (through which Germany indirectly funds Italy's current account deficit) are once again back at a 4 month high. And so the cycle repeats.
$51, 323, 233, 866, 518. That’s the current global public debt that exists all countries together. Next year it will rise to$54, 020, 847, 580, 179.
The Wall Street Journal recently ran a front-page article reporting that the monetary-policy “doves,” who had forecast low inflation in the United States, have gotten the better of the “hawks,” who argued that the Fed’s monthly purchases of long-term securities, or so-called quantitative easing (QE), would unleash faster price growth. The report was correct but misleading, for it failed to mention why there is so little inflation in the US today. Those who believe that inflation will remain low should look more thoroughly and think more clearly. There are plenty of good textbooks that explain what too many policymakers and financial-market participants would rather forget.
From goal-seeked GDP, manipulated inflation, liquidity-flow-exaggerated trade data, and hidden (and divergent) PMI details, the question of the unreliability of Chinese data is not a new one. However, anecdotes aside, a new study from Peking University finds, conservatively, correcting for housing price inflation in the Chinese CPI data adds approximately 1% to annual consumer price inflation in China, reducing real GDP by 8-12% or more than $1 trillion.
The concept we call gross domestic production (GDP) is highly distortive. It obfuscates intelligent debate in economics as the true underlying force for economic growth, capital accumulation, is seen as detrimental to prosperity
It should come as no surprise to most ZeroHedge readers but sometimes the facts and data need to be reiterated to ensure the message is not getting lost. As Michael Snyder rhetorically asks, did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us? We were always told that the goal of quantitative easing was to "help the economy", but the truth is that the vast majority of the money that the Fed has created through quantitative easing has not even gotten into the system. Instead, most of it is sitting at the Fed slowly earning interest for the bankers. Our financial system is a house of cards built on a foundation of risk, leverage and debt. When it all comes tumbling down, it should not be a surprise to any of us.
At the end of the day, Friedman jettisoned the gold standard for a remarkable statist reason. Just as Keynes had been, he was afflicted with the economist’s ambition to prescribe the route to higher national income and prosperity and the intervention tools and recipes that would deliver it. The only difference was that Keynes was originally and primarily a fiscalist, whereas Friedman had seized upon open market operations by the central bank as the route to optimum aggregate demand and national income. The greatest untoward consequence of the closet statism implicit in Friedman’s monetary theories, however, is that it put him squarely in opposition to the vision of the Fed’s founders. As has been seen, Carter Glass and Professor Willis assigned to the Federal Reserve System the humble mission of passively liquefying the good collateral of commercial banks when they presented it. Consequently, the difference between a “banker’s bank” running a discount window service and a central bank engaged in continuous open market operations was fundamental and monumental. In short, the committee of twelve wise men and women unshackled by Friedman’s plan for floating paper dollars would always find reasons to buy government debt, thereby laying the foundation for fiscal deficits without tears.
China's Mea Culpa: "It Is Not That There Is No Money, But The Money Has Been Put In The Wrong Place"Submitted by Tyler Durden on 06/23/2013 12:36 -0400
Ten days ago, we penned "Chinese Liquidity Shortage Hits All Time High", in which we predicted ridiculous moves in the Chinese interbank market as a result of short-term funding literally evaporating as a result of the PBOC's stern refusal to step in and bail out its banking sector (despite the occasional rumor of this bank bailed out or that) by injecting trillions in low-powered money. A few days later this prediction was confirmed when the overnight repo and SHIBOR market for all intents and purposes broke down as was also reported here previously. Now, for the first time, China, via the Politburo's Chinese Hilsenrath-equivalent, Xinhua, has provided its own version of events which is as follows: "It is not that there is no money, but the money has been put in the wrong place."
...You were considered a hoarder and a slacker if you still resisted turning over your gold to the government.
Goldbugs the world over may not know it, but the one catalyst they are all waiting for, is for the PBOC to throw in the towel to Bernanke's and Kuroda's liquidity tsunami and join in the global reflation effort. Alas, those hoping the Chinese central bank would do just this on Friday were disappointed. Moments ago the 21st Century Business Herald, via MNI, reported that the People's Bank of China "decided to shelve plans to inject short-term liquidity into the market late Friday because of concerns it would be sending the wrong signal in light of the government's ongoing commitment to its "prudent" monetary policy stance. Rumors hit the market mid-afternoon about an injection in the region of CNY150 bln via the PBOC's rarely-used short-term liquidity operation (SLO) tool. But how much longer can it avoid the inevitable: what happens when overnight loan yields soar to 20% or 30% or more, and when the repo and SHIBOR markets lock up and no overnight unsecured wholesale funding is available? Because when China finally does join what is already an historic liquidity tsunami then deflation will be the last thing the world will have to worry about. In the meantime, we welcome every chance to dollar cost average lower on physical hard assets, the same hard assets that none other than 1 billion concerned Chinese will direct their attention to when inflation makes it long overdue comeback to the world's most populous country.
The biggest fear of the Federal Reserve has been the deflationary pressures that have continued to depress the domestic economy. Despite the trillions of dollars of interventions by the Federal Reserve the only real accomplishment has been keeping the economy from slipping back into an outright recession. However, when looking at many of the economic and confidence indicators, there are many that are still at levels normally associated with previous recessionary lows. Despite many claims to the contrary the global economy is far from healed which explains the need for ongoing global central bank interventions. However, even these interventions seem to be having a diminished rate of return in spurring real economic activity despite the inflation of asset prices. The risk, as discussed recently with relation to Japan, is that the Fed is now caught within a "liquidity trap." The Fed cannot effectively withdraw from monetary interventions and raise interest rates to more productive levels without pushing the economy back into a recession. The overriding deflationary drag on the economy is forcing the Federal Reserve to remain ultra-accommodative to support the current level of economic activity. What is interesting is that mainstream economists and analysts keep predicting stronger levels of economic growth while all economic indications are indicating just the opposite.