Money Supply

Today's entertaining European PMI data has gotten quite a few participants excited, with some of the more tabloidy elements even proclaiming that the recovery has arrived. Amusing: one wonders if they did the same when the European PMI printed above 50 the last time around Europe "telegraphed" a recovery back in early 2012 only to crash and burn promptly thereafter. The answer, of course, is rhetorical. Sadly for Europe, not its subsidized industrial complex, what PMI does is a month to month phenomenon driven by FX, government injections, and restocking cycles. A far more important question to the overall European economy caught in a Keynesian debt trap is what is happening with credit creation. It is here that the true fundamental problem affecting Europe is exposed and demonstrates precisely what it is that keeps Mario Draghi up at night.

Markit has released its global business confidence survey, and it makes for sobering reading. Due to sharp declines in business confidence in both the US and China, a new post crisis low has been reached in June. Only the UK was a notable exception, as business confidence there jumped. We would submit that this is no coincidence, as the pace of money supply growth is increasing sharply in the UK, while it it slowing down in both the US and China. The culprit for the slowdown in money supply growth in the US is lending by commercial banks, which is decelerating sharply even as monetary pumping by the central bank continues at full blast.

What happens if the central bank pushes the rate of interest below the marginal time preference? A destructive dynamic is set in motion...

This is the essential primer on the Fed that every high school and college student in America should read. If they study this short essay, they will grasp the essence of the Fed and understand why the financial Status Quo is doomed.

When it comes to changing the "measurement" rules in the middle of the game, nobody does it quite like Japan: in the aftermath of the Fukushima nuclear explosion, when radiation was soaring (and still is with Tritium levels just hitting a record high but who cares - Goldman partners have to earn record bonuses on the back of the irradiated island) Japan's solution was simple: double the maximum safe irradiation dosage. Done and done. Now, it is time to do the same to that other just as pesky, if somewhat less lethal indicator: inflation. Reuters reports that the Japanese government plans to adopt a different measure of inflation to the central bank's.

The price of gold fell last week to the $1,200 level. The lemming sentiment in capital markets is uniformly bearish, yet every price-drop brings forth hungry buyers for physical gold from all over the world. Even hard-bitten gold bugs in the West are shaken and frightened to call a bottom, yet it is these conditions that accompany a selling climax. This article concludes there is a high possibility that gold will go sharply higher from here. There are three loose ends to consider: valuation, economic and market fundamentals.

As central banks around the world conduct the greatest monetary experiment in human history in real-time around us, it's important to keep the Bullwhip Effect in mind. The mathematical odds that the world's many central planners, with their manifold partners in distributing fiat liquidity, are going to have the finesse to successfully steer their ships to safety through the shoals of inflation and deflation that threaten on either side, are very low. And that's before taking into account the unintended consequences of their more extreme measures. The bottom line is if another liquidity crisis hits (which Chris is warning may be at our doorstep), the one thing we can count on is that the response from our leaders will be ill fitting to the situation. To explain why, we connect the Fed and beer - very appropriate given the holiday tomorrow...

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.

According to most commentators, although not an easy task, experienced and wise policy makers should be able to navigate the US economy away from various bad side effects that come in response to a tighter Fed stance. We suggest that whenever the Fed raises the pace of monetary pumping in order to “revive” the economy it in fact creates a supportive platform for various non-productive bubble activities that divert real wealth from wealth generators. Whenever the US central bank curbs the monetary pumping this weakens the diversion of real wealth and undermines the existence of bubble activities - it generates an economic bust. We suggest that there is no way that the Fed can tighten its stance without setting in motion an economic bust. This would defy the law of cause and effect.

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.

Last week's liquidity crunch and market panic is a reminder that Beijing is playing a difficult game. Regardless of what happens next, the consensus expectations that China's economy will grow at roughly 7 percent over the next few years can be safely ignored. Growth driven by consumption, instead of trade and investment, is alone sufficient to grow China's GDP by 3 to 4 percent annually. But it is not clear that consumption can be sustained if investment growth levels are sharply reduced. If Beijing can successfully manage the employment consequences of decreased investment growth, perhaps it can keep consumption growing at current levels. But that's a tricky proposition. It's likely that the days of the super-powered Chinese economy are over. Instead, Beijing must content itself with grinding its way through the debt that has accumulated over the past decade.

As excess reserves in Europe continue to fall, prompting some to claim this is positive since banks are "no longer hoarding cash," the reality of a dramatically deleveraging European financial system is far worse. As Goldman notes, lending to Non-Financial Corporations (NFCs) fell by a significant EUR17.2bn month-on-month (seasonally adjusted) in May (with a stunning 19.9% drop in Spain). Perhaps more worrisome, while NFCs have been seeing lower lending, households have been 'steady' for much of the last year - until now. Bank lending to households fell by EUR7.5bn in May. This marks the first material decline since July 2012. Simply put, the European economy (ad hoc economic data items aside) is mired in a grand deleveraging and since credit equals growth - and the ECB somewhat scuppered by a German election looming likely to hold down any free money handouts (and the fact that they cling to the OMT promise reality that is clearly not doing anything for the real economy) - with lending collapsing, growth is set to plunge further. As we noted previously, there is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.

The late 20th century was a jam-packed time for stock-market crashes that would change, shape and alter our lives in so many ways.

Imagine a football coach who hasn’t caught onto the game’s complexities and continues to run the same play - call it a fullback dive - over and over. When we read calls for more monetary stimulus, we feel as though we're listening to that coach’s brethren in the economist community. These economists argue that the Fed should simply ramp the money supply higher and higher for as long as some economic statistic - GDP is a popular one - remains below a targeted outcome. Dive, dive, dive, punt and repeat. There’s an important difference between football and economics, though. One-dimensional approaches are quickly exposed in football, whereas economies don’t yield clear and timely verdicts on whether policies are effective. There are far too many moving parts to prove cause and effect in a way that everyone can understand and agree. Therefore, bad economic policies persist for a long time before they’re finally found out, and this may be the best way to describe the last 100 years or so of America’s economic history.

It is easy to get the impression that the naysayers are wrong on Europe. After all the predictions of Armageddon, ten-year government bond yields for Spain and Italy fell to the 4% level, France which is retreating into old-fashioned socialism was able to borrow at about 2%, and one of the best performing bond investments has been until recently – wait for it – Greek government bonds! Admittedly, bond yields have risen from those lows, but so have they everywhere. It is clear when one stands back from all the usual euro-rhetoric that as a threat to the global financial system it is a case of panic over. Well, no. Europe has not recapitalized its banking system the way the US has (at great taxpayer expense, of course). Therefore, it is much more vulnerable. Where European governments and regulators have failed to make their banks more secure it is because they tied their strategy to growth arising from an economic recovery that has failed to materialize. The reality is that the Eurozone GDP levels are only being supported at the moment by the consumption of savings; in orther words, the consumption of personal wealth. Wealth that is not infinite; and held by those not likely to tolerate footing the bill for much longer.