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Deflation Flirts With America
Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
Jack Allison Street scene, New York City Summer 1938
“When it becomes serious, you have to lie,” said brand-new EC head Jean-Claude Juncker back in May 2011. I’m thinking the last few days have been serious enough to warrant some real whoppers from Brussels. And beyond.
Yesterday, one hour after the S&P reached its low point, not only was it deemed necessary to bring out the Plunge Protection Team, Fed grey head Janet Yellen was trotted out as well to soothe the dark mood with rosy tales about the US economy.
A multi-day series of downturns got a temporary crescendo, with many of the richest stock European exchanges at 10-11% losses from recent highs. Many lost 3-3.5% for the day alone, with Greece down 6.25% (Athens is off some -25% in all), and having its bonds dumped while Germany et al see ‘investors’ fleeing into theirs. A new attack on Athens certainly looks possible. And where Greece goes, so go Italy and Spain, albeit a few mph slower.
Is this the end or the beginning? Well, as should have been clear for a very long time now, you cannot buy growth. And in ‘our’ efforts to buy growth instead of working for it, a lot of damage has been done. Which won’t all show up at once, but it will at some point. There will be many, and mighty, voices clamoring for more of the same, in more than one sense, as people seek to hold on to what looks familiar with additional debt injections in the by now 7 year-old tradition spirit of ‘stimulus’.
It’s become a new normal to claim the Germans must be insane not to follow the teachings of the Great Lord Keynes, with the huge success stories of the US and UK as ‘proof’ of just how wise he was. Then how come this kind of plunge is so predictable?
US stocks see their heaviest trading volume in 3 years. That takes liquidity. Dollars. But they are getting scarce. The ‘insanest’ amounts of free money, from China and America, are shrinking (Japan has become a story all of its own) and right away, panic ensues. Add the threat of higher rates and you get a sell-off. I see plenty ‘experts’ saying both Beijing and Washington will see the folly of their ways in time, but can they really do more of the same? And what would be the benefit vs the cost?
I remain solidly convinced that Yellen et al will suffocate QE, hike interest rates, and raise the dollar. Because that’s the triple that benefits big banks the most. And that’s also why she, yesterday, held that speech in which she ‘voiced confidence in the durability of the U.S. economic expansion’.
Yellen Voices Confidence in U.S. Economic Expansion
Federal Reserve Chair Janet Yellen voiced confidence in the durability of the U.S. economic expansion in the face of slowing global growth and turbulent financial markets at a closed-door meeting in Washington last weekend [..] Yellen told the Group of 30 that the economy looked to be on track to achieve growth of around 3%. She also saw inflation eventually rising back to the Fed’s 2% target as unemployment falls further… [..] Yellen’s reported remarks were roughly in line with the forecasts presented by Fed policy makers at their last meeting in September.
Not only did she, with the PPT, save the day on Wall Street, she also provided the reason why rates will rise, even if world markets have a high fever. In an aside, an Air France plane has been quarantined at Madrid airport just now with a Nigerian man with high fever and 182 other passengers. We can’t seem to get this right, can we?
Back to da mullah. Here’s a few interesting lines from Bloomberg yesterday afternoon:
U.S. Stocks Drop as Weakening Economic Data Fuel Selloff
The Chicago Board Options Exchange Volatility Index, the benchmark gauge of options prices known as the VIX, jumped 15% to 26.25, the highest level since 2012, amid demand for protection against losses in equities.
Almost 12 billion shares changed hands in the U.S., the most since October 2011. Stocks pared losses after the S&P 500 fell to its low of the day of 1,820.66 shortly before 1:30 p.m. in New York. About an hour later, Bloomberg News reported that Federal Reserve Chair Janet Yellen voiced confidence in the durability of the U.S. economic expansion in the face of slowing global growth and turbulent financial markets at a closed-door meeting in Washington last weekend.
Retail sales in the U.S. dropped more than forecast in September, decreasing 0.3% after a 0.6% gain in August that was the biggest in four months, Commerce Department figures showed. Another report today showed manufacturing in the Federal Reserve Bank of New York’s region slowed more than projected in October. The bank’s so-called Empire State index dropped to 6.2 this month from an almost five-year high of 27.5 in September.
That ‘demand for protection against losses in equities’ is a curious line. Can’t they let the PPT act in secret anymore? What else is its use? You can’t very well make it the Public Plunge Protection Team, nudge nudge…
But the big one is the drop in US retail sales. No harsh winter, no hurricanes, not even heavy rains. And the Empire State Index falling of a cliff. I know that today US industrial output came out looking like a harvest queen, and initial claims were down a bit, but I find the timing odd, and I can’t rhyme it with the heavy drop in that NY Fed index. Is it winter in Manhattan already? Or is it Juncker time?
It gets truly hilarious when you see things like this from Bloomberg. Pay special attention to Deutsche’s Joseph LaVorgna:
The $11 Trillion Advantage That Shields U.S. From Turmoil
Call it America’s $11 trillion advantage: Consumer spending is likely to steer the U.S. economy safely through the shoals of deteriorating global growth and turbulent financial markets. The combination of more jobs, falling gasoline prices and low borrowing costs will help lift household purchases. Such tailwinds probably matter more than Europe’s struggles or the slackening in emerging markets that caused the Dow Jones Industrial Average last week to erase its gains for the year.
“We’ve got a lot of things working in favor of the consumer right now,” said Nariman Behravesh, chief economist at IHS. “To have that kind of strength is the biggest asset for the U.S. It’s a pretty rock solid footing.” Household purchases make up almost 70% of the $16.8 trillion U.S. economy and have climbed an average 2% in the recovery that’s now in its sixth year. Spending growth will accelerate to 2.7% next year after 2.3% in 2014, according to the latest Bloomberg survey of economists.
The poll, taken from Oct. 3 to Oct. 8 in the midst of the meltdown in equities, showed little change in the median projections from the prior month. The economy is forecast to expand 3% in 2015 after 2.2% growth this year, according to the survey. “We’ve got the proverbial 800-pound gorilla – the consumer,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Households are more fixated on the good news here, and a big part of that is the labor market. The U.S. is going to be pretty immune to the rest of the world.”
“The U.S. is going to be pretty immune to the rest of the world.” No, Joe, it’s not. The US is less vulnerable than most to lower oil prices and higher and scarcer dollars, true enough. But the US also still has a population in which labor participation is at a historic low, in which those who have jobs are paid less and get far fewer benefits, and which has huge levels of personal debt.
Ergo, the only way the US consumer can consume is by delving deeper into debt. They have to borrow before they can spend. Just like much of the rest of the world. Only, in the US consumer spending accounts for 70% of GDP (and it’s down); in other countries, it’s substantially lower.
A nice example of where the US stands at this point in time is here: German states ask Merkel for more infrastructure spending, which she refuses, while the US can’t even afford it own infrastructure anymore, because all the trillions the US spent (by expanding its central bank balance sheet), – and Germany did not -, went to Wall Street. And then you get this:
German States Join Ranks Pressing Merkel to Spur Spending
Germany’s state governments stepped up calls for infrastructure spending, adding another source of pressure on Chancellor Angela Merkel to boost investment as economic growth falters. Much like Merkel’s national government, the states are caught between a deteriorating growth outlook and the balanced-budget drive that Germany started in response to the euro area’s debt crisis.[..] A day after the German government lowered its growth outlook, proposals to spend more on projects such as highways in Europe’s biggest economy are on the table at a retreat of state premiers that Merkel plans to attend.
Merkel will let some projects be executed, but she won’t let her country sink into debt to do it. For America, that’s not even a choice anymore. It needs Chinese funny money now or bridges will crumble. A country with such a rich history of citizens chipping in to build bridges, roads and other infrastructure, what a remarkable turn-around this is. Only 100 years ago, a town that couldn’t afford to build its own bridges would have been ridiculed. And look now:
Crumbling US Fix Seen With Global Trillions of Dollars
[..] Former Indiana Governor Mitch Daniels said: “America needs the upgrade and modernization of our infrastructure, and I don’t think you’ll get there if you keep excluding, or at least discouraging, private capital.” President Barack Obama’s administration, which had resisted private financing of public works, is starting a new center to serve as a one-stop shop for bringing capital into government projects.
U.S. Treasury Secretary Jacob J. Lew said while direct federal spending is indispensable in such cases, tight budgets demand creative ways for unlocking private money.His cabinet colleague, Transportation Secretary Anthony Foxx, put it more bluntly when he announced the Build America Investment Initiative in July. “There will always be a substantial role for public investment,” Foxx said. “But the reality is we have trillions of dollars internationally on the sidelines that are not being put to work.”
Now, America must pay hefty interest rates to strangers on its own bridges. Or they won’t get built. That should hurt. No, it really should.
You can focus on the hosannah news that comes out about the US economy every single day, and on Janet Yellen’s confidence booster yesterday, or you can look at how car sales are deteriorating, after they were upbeat for a while only on subprime loans.
The biggest number for me, amid the global storm in stocks and bonds, and the renewed – very real – threat of financial markets targeting southern Europe, is that drop in US retail sales.
So industrial output was up 1%. So what? That’s not the 70% of your economy. Retail sales are though. And they are down. Because Americans borrowed less, for whatever reason. And what they can’t borrow, they can’t spend. Because they’re dead broke.
So how are you going to make them less broke? Those 92 million Americans who are no longer counted in the work force, how are you going to get them to increase their spending patterns? Or the millions more who are still ‘counted’ in the work force, but have no jobs? Or the fast rising number who have jobs that pay close to or below a living wage?
I say let them stocks plummet, and let’s get a glimpse of where the real economy is at. We’ve seen the fantasy one for 7 years now, and it gets old and bitter.
I see deflation flirting with America. Retail sales equals consumer spending equals velocity of money. And unless the money supply is rising, hardly likely in the taper, less spending is deflation by definition. Forget about PMI and all that kind of data, it’s much simpler than that. Central banks can do all kinds of stuff, but they can’t make us spend our money on things we don’t want or need. Let alone make us borrow to do so. And if we don’t, deflation is an inevitable fact. That doesn’t mean prices for some items won’t go up, but that’s not what counts. It’s about how fast we either spend the money we have – if we have any left – or how much we borrow. And if time is money, then borrowed money is borrowed time. So we really shouldn’t.
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Not gonna happen HERE! The FED
As has been said here on ZH hundreds of times, it's not the stock, it's the flow. There is plenty of cash available. It's the velocity of money dropping like a rock that will create deflationary pressures.
+1. It is flow that makes or breaks the system - just a business. Government can't run from the math either. Can kicking just comes out of the flow. Diminishing returns and elevated stakes and more unintended consequences.
As LOP says... tick tock.
" they can’t make us spend our money on things we don’t want or need"
Obamacare?
They keep trying, don't they?
Thanks Chief Justice, John Roberts
Real people are pulling from the system, i have cash n silver. Yet i refuse to buy their crap. Buy used and just what i need.
Like Rome, folks are slowly making their way from the system...and we all knew what happen to Rome, left weak and ripe for the final downfall, coming soon to Amerika. No money flow, no business as usual, wheres the popcorn.
Besides, what else are a consumer conditioned peoples supposed to do?
Become a citizen again? Care for their chidren and community? That's some skary $hit. Oh, right, it's Halloween.
What is the deal with this deflation stuff?
Every time the Fed threatens to pull the punch bowl everyone screams
DEFLATION! DEFLATION! DEFLATION!
It's like it's a safe word or something..
Indeed. What I'm trying to figure out is just how is this 'deflation' a BAD thing for Joe Sixpack? Oh sure, I get how it's bad for the banksters sitting on trillions in fake 'assets' artificially valued at stratospheric levels of ridiculousness by computer entries......but how does it hurt the average commoner to have the prices of his necessities go down?
P.S. Personally, I don't see a hint of this 'deflation' anywhere in the real, tangible world. Well, except the relatively moderate reduction in price of technological iGadgets over time. The rest? Not so much.
For a hint of deflation in the real tangible world--take a look at oil and the price of gas at your local station. The price of oil will affect the price of just about everything that needs to be moved or which requires energy to produce. And that would be just about everything.
Assuming that the price of oil stays at this price point. Most likely not. And if oil falls down 5%, you really think every thing else will drop 5%. Not likely the same percentage at least.
The biggest negative for deflation for the average Joe is that unemployment will rise and wages will fall more. Less people spending means less workers needed. but yes there is a strong argument that deflaitoin helps the A.J. because the average person has a lot of debt and the easiest way for them to pay that off, is buy spending less and taking the funds from the excess lower prices to pay down debt with.
On the other hand this is horrible for governments with massive amounts of debt, because lack of expansion doesnt allow them to pay the debt off and since they will continue to borrow because hey HAVE to, the sprial gets worse and worse.Then you risk falling into a deflationary depression.
They should have let it blow apart in 08 as delevarging 8 trilion would have sucked and probably taken about 3 years but now.. at 18T.. it will be a lot, lot messier if/when it comes. I personally think it comes.
As Wages fall this will ultimately help in becoming more competitive globally, it wont be fun in the early stages but eventually yes.
I think deflation helps 80% of the country,roughly a push for 18% of the country, 1% gets a hit and the other 1% gets buried.
The only solution for deflation is time. Unwinding 18T in a deflationary mess will take a long time. Over the last 600 years there have been 62 major financial crisis' Deflation won every one of them. My money goes with the guy that is 62 out of 62, Unless its Mike Tyson against Buster Douglass.
HAZMAT responds to Ebola scare at Pentagon, woman 'recently arrived from Africa' vomits on bus
http://wtfrly.com/2014/10/17/hazmat-responds-ebola-scare-pentagon-woman-...
Wilkommen in Amerika!
No way a jet, err, ebola could have made that hole.
All the smart Ebola victims, will be running to DC to spread the joy to the most important (or they think they is) people on the planet, ah the joy of watching the future burial parades in DC on tv, brings a tear to me...sniff
"The Fed’s Last Monetary Bullet is Spin"
http://wallstreetonparade.com/2014/10/the-stock-market-has-lost-confiden...
They're only fooling themselves at this point.....it's like promising free health care for the puppets in their staged show....just nonsense.
I think they're scared shitless.
'Connedsumer spending will power the U.S. thru all the hazardous waters'
That's why all the malls and stores are ghost towns?
When they say deflation is hitting America, what they're really saying is that a lot of loans are going into default and a lot of people are going bankrupt. That's how money contracts. If they don't want deflation to happen, maybe they should stop creating these stupid fucking bubbles. As Peter Schiff would say, if you hate the heroin withdrawal, stop doing heroin. Idiots.
Defaults on mortgages, car loans, credit card debt, student loans and any other kind of debt you can think of.... but the Fed keeps issuing more money to buy up all of these non-performing debts to keep them off balance sheets. Not sure if that's really deflation.
Oil may be going down but that seems to be pure manipulation in the worldwide war of 'control' - efforts to put pressure on Syria, Iran and the Russkies... Some of the oil drop is due to the factors affecting major commodity prices - iron and copper and aluminum et al are going down as the world economy slows.....
But damn.... the price I'm paying for food is sure going up.....
Central banks ARE still printing like mad and foreign holders of the $US are looking to exchange paper for tangible assets with banks dumping much of their 'excess' capital in the stock market - while companies use their excess cash to buy back shares - all of that activity boosting equity share prices with NO meaningful increases in sales or assets. So far much of he excess money therefore remains 'sterilized' but real inflation rates are nonetheless approaching 10%.
face it - the Fed's officially stated goal is 'limited inflation' - though what's happening is far above the stated goal already.... if $US holders start to get REALLY nervous and acccelerate their conversion of paper dollars into tangible assets, the velocity WILL increase dramatically and you'll see panic as paper holders will grow increasingly desperate to convert those dollars into something tangible.... with the rest of the world declining to take $US you'll see those that legally HAVE to accept $US - eg any place in the US - watch prices skyrocket.
In that scenario, it's better to own US equities - ompanies with real assets) at inflated prices than holdoing paper dollars worth nothing. Better to buy up US real estate, commodities or ANYTHING than lose all of what you're holding in paper dollars.
Think about the effect. ANY holder of $US anywhere in the world will be competing with US consumers to buy ANYTHING in the US that is worth anything - competing with US citizens for even basics like food and energy. Prices will go through the roof.
Nice editorial.... touches the salient points (and problems) of the US economy. Not a pretty picture.
Nice to see some AE stuff on ZH.
Previous Tylers and AE had a bit of a spat back in the day re: deflation (AE) and hyperinflation (ZH).
okay article; until the conclusion; that's not what counts. It's about how fast we either spend the money we have----" what counts is confidence. Paper money lives on it. When the mass mind rolls over and notices that the dollar is a wobbly as a jello instead of "as good as golld", it's going to be interesting. They may decide to leave off life support for the stawk market; in favor of various "strong dollar" machinations; depending on what things look like where they're sitting; but they know they need that dependably strong dollar to survive. survive the can kicking period, anyway. edit. I'm "automatically" assuming an international point of view, here; because that's where the issue will be decided. We definitely can't survive having those off-shore dollars come home to momma.
Have to think internationally. These problem are going get real global first... then real local.
"I remain solidly convinced that Yellen et al will suffocate QE, hike interest rates, and raise the dollar. Because that’s the triple that benefits big banks the most. And that’s also why she, yesterday, held that speech in which she ‘voiced confidence in the durability of the U.S. economic expansion’."
WTF are you smoking? The long bond says you're full of shit. If deflation is flirting with America like you say then they sure as hell aren't going to raise rates and invert the yield curve. An inverted yield curve is the worst thing that could happen to the banks. Check that.... The worst thing for banks would be if they didn't own a fed who can manipulate rates for them.
The loss of purchasing power in Europe is a result of its absurd supply chain which is merely designed to concentrate monetary power and not to distribute goods
(I imagine its the same for the US)
Keep in mind I live within walking distance of the last major brewery in Cork (now owned by Heniken international)
Half of the cost of a pint goes into taxes - which means I cannot afford to drink in a local pub.
If I want affordable Heniken I must go down to the supermarket and buy stuff brewed and canned in Amsterdam.....
long distance "Trade" in beer can never be justified given that it is a liquid of some considerable weight.
There is no friggin energy crisis.
The crisis is one of the concentration of capital which prevents distribution of purchasing power.
A simple artifact of this demonic scheme is high energy prices.
monopoly capitalism.? another interesting insight into day-to-day in Europe.
Perhaps it's time to home brew.
No idea what the laws are on your side of the pond, but here, for personal & gift use, it's legal.
My future son-in-law started doing this last summer. On a whim.
First batch was fair to partly crappy, but now... dammmm! It's pretty good.
I'm losing interest in the canned crap.
And STICK IT TO DA MAN!
So the drop in prices could not possilbly be linked to the horrible economic environmnent created by the Federal Government and the Federal Reserve, right? Or businesses producing, and retailers trtuing to see us crap we do not want? Or builders building things we do not desire?
And it's so bad that even trillions of dollars in QE and Federal Spending have not been able to stem the damage.
I reject the idea that deflation is something to be avoided. In fact, it is the ONLY thing that is going to allow us out of this mess.
Deflation rewards savers. Something the elitist leaders do not want.
When the prices fall enough to the level to attract buyers WITHOUT coercion, then we will be getting somewhere.
Until then, they are just wasting our time.
They have already brought years of future demand into today's economy. WTF did they expect when the future got here and those buyers were already satisfied?
Oh yeah, that's why BOTH parties are trying to open the borders for ILLEGALS to come in and Consume.
So instead of rolling a Keg of beer into me local pub ,washing the glass and refilling etc etc .
The beer must be canned using extremely energy intensive aluminium ..........trucked to the shipyard , transported to Cork by sea , trucked to the supermarket , et etc ....
I must now consume this beer at home at a atomic level which requires additional lighting and heating bills.
When the brewey is a few 100 meters up the friggin road !!!!!
There is no real physical scarcity in Europe.
Most of the energy is lost in so called "trade"
Then our leaders claim there is a shortage of stuff.........
Its quite a magic trick - this euro.
scarcity? is a made up word to charge you more...like supply and demand.
"I remain solidly convinced that Yellen et al will suffocate QE, hike interest rates, and raise the dollar. Because that’s the triple that benefits big banks the most."
Of course, it's the 'Automatic Earth', so one must take the obsession with 'deflation' into account. That said... How. Many. Times. Have obsessed deflationists told us - since 2008, that we're headed for a deflationary crash, where asset prices tumble, etc...? These people live in a U.S.-centric 'bubble' all their own, where no outside circumstances (foreign policy anyone...?) matter - at all, nor do untenable political ramifications as a result of packing up the $liquidity circus and heading out of town. Gawd what absolute ignorant Nonsense...
I'd really like to buy the notion that we're doomed, DOOMED! But I just can't yet accept it. It looks like the economy has at least stabilized and we're nearing the end of the "you didn't build that" economic agenda, which implies a more favorable environment ahead for starting and growing businesses. We might just muddle through here and be able to grow our way out of this mess. The one wild card is, of course, the Fed. All that liquidity is going to cause inflation if the economy picks up, unless they can successfully unwind it. We'll see. So bottom line I'm still more worried about inflation than deflation, which could ultimately prove beneficial with respect to the debt overhang, if it doesn't get out of control. I know, I'm an optimist - what can I say?
We had 2% inflation last month, which is perfect when you get zero interest on savings.
The euro responds to higher input prices by simply stopping production..............
Production cannot adjust as there is no demand signal.
It does this because consumers become broke.
The health fascists role in the modern Europe is to disguise the loss of purchasing power inherent in its design.
https://www.youtube.com/watch?v=5t-rIofv4tc
The conventional wisdom can be wrong for a long time. In WWI, generals were ordering suicidal infantry attacks long after it was evident that it was crazy to do so. Similarly, the inflation bogeyman can't be chased away by any amount of data. The Inflationistas just know it is a problem, because if it isn't happening now, it will happen real soon. They are always right, no matter what the data says.
The willingness of people to hold mistaken beliefs in the face of overwhelming contrary evidence is a terrible flaw that will probably result in our extinction.
Hold that pigs head so I can put some fresh lipstick on it.....
I thought deflation was when the value of a dollar goes up. (happy times for poor people and savers)
Now, deflation means people aren't buying useless junk. (and borrowing money to do it)
They won't pay interest on savings, they print print print and then blame the mess on the people that have no hand in it.
I'm so confused. Or Raul is.
BTW, they can't raise rates and keep the empire going. So they won't.
Deflation in this instance means the gov can't get cheap money...
Where is the discussion of interest rate swaps and credit creation through shadow channels? Without it, how can a statement like this be made with such confidence?
"I remain solidly convinced that Yellen et al will suffocate QE, hike interest rates, and raise the dollar. Because that’s the triple that benefits big banks the most".
From the BIS (emphasis added):
"As interest rates deeply influence the performance of both financial and non-financial firms, the enormous size of markets for derivatives that facilitate their hedging and reallocation should come as no surprise. With an average of $7.4 trillion per trading day in April 2013, total turnover in interest rate derivatives, including both exchanges and OTC markets, was well above the $5.5 trillion traded in the FX segment.
OTC contracts account for only one third of turnover in the interest rate segment but make up the bulk of the open positions. Notional amounts outstanding of OTC interest rate derivatives stood at $561 trillion in mid-2013, far above the $62 trillion of open interest on the international derivatives exchanges."
-- http://www.bis.org/publ/qtrpdf/r_qt1312h.htm
Ponder that number for a moment: $623 trillion (vs the entire planet's Gross World Product at ~$72 trillion) in mostly OTC contracts that have longer average duration, are illiquid, and are frequently poorly offset. A disaster waiting to happen as any unexpected volatility is sure to cause a large chunk of those contracts to present gross exposure instead of netting away, enough to easily overwhelm the capital of exposed institutions.
Bear in mind that these contracts can cross currencies (eg, one party is in USDs, the other in EURs) so such contracts are sensitive to FX movements.
Now bear in mind that an institution that initiates a swap (say a regional bank) does so by posting collateral with a swap dealer. Exactly what that collateral is depends on the terms of the swap which, being OTC, can be bespoke, (though commonly it is high-rated assets such as US TSYs). This is the world's primary stock for rehypothecation (credit creation by the shadow banking system). Total shadow channels account for around half of all the fairy money that exists in our debt = money system.
Now revisiting Raul's thesis:
"I remain solidly convinced that Yellen et al will suffocate QE, hike interest rates, and raise the dollar. Because that’s the triple that benefits big banks the most".
Suffocate QE. OK, if the credit seas are calm enough out there and the bleeding from defaults has slowed, then yes, QE can safely be stopped. This will trigger further credit expansion through shadow channels as the Fed removes itself from competition for shadow-banking collateral. I, however, remain unconvinced that the bleeding has actually stopped (particularly Fannie and Freddie) and the Main St borrower remains burned (generationally so).
But hike rates and raise the dollar to benefit big banks the most? How can this be said with certainty? Every rate swap has a loser in that scenario with a potentially huge double whammy for cross-currency swaps. There's no way in hell that they're all perfectly hedged!
Screw with rates and FX and there will be deflationary implosions in various places around the planet. The Fed surely must be aware of this, therefore rate hikes will be telegraphed far, far in advance. FX volatility must also be making top banksters nervous, hovering their thumbs over the QE button again.
For Raul's thesis to be correct it has to mean that, net, US banks are on the right side of contracts exposed to US rates and USD cross-currency, and that the Fed is happy to go "protectionist" and hang Europe and Japan out to dry. I find that unlikely given that big banks are multinational.
Shadow finance and the Bond Markets do appear to have the Fed on a very tight rein. It appears to me about all the Fed can do is try and remain in front of the cart and keep galloping.
They have to provide the same degree of service to shadow banking as they do to traditional banking. They weren't doing it in 2008 and got caught with their pants down. They're trying now with a rolling stock of TSYs and the RRF (reverse repo facility) which is a crappy shadow equivalent of the discount window.
Problem is, they can issue traditional reserves out of thin air but they cannot do so for shadow reserves without Treasury being the provider (as has been the case so far).
Maintaining a rolling stock of TSYs via POMO has negative consequences, the two most important being that it forces deficit spending that is often poorly allocated, and that it adds risk to the system by killing TSY yields and forcing buyers to chase yield elsewhere, in riskier places.
(Bears mentioning also that the Fed cannot buy direct from Treasury, (by law), therefore a shadow reserve system leaks money to the Primary Dealers, a cost not present when providing traditional reserves).
Since the crisis began I've maintained that the Fed should be staying away from the long end of the curve (it did initially, but then pandered to banks and spread out with Operation Twist), and that the easy way to solve govt misallocation is with citizen dividends (weighted by former tax contributions, a qualitative factor to promote sound allocation). Australia tried something similar to a citizen dividend, though without the qualitative factor, and it worked. Finally, that all (quasi) private QE should be done as repos to keep banksters on the hook for bad behavior.
The Fed&Treasury (Fedury) are doing it wrong. At the very least they should be trying to limit "financial innovation" and shrink shadow banking back to a small fraction of traditional banking, but they aren't making any serious effort (really got blind-sided by global shadow-banks). Whole thing is FUBAR.
Predict deflation, predict inflation,,,it's likely stagflation is what ya get, until the pitchforks come out.
Deflation is what we'll get between the time the current dollar is blown up and some new currency is introduced to fill the void. That will have to wait 'till after the Crackup Boom.
I see FED people.
No doubt deflation is picking up steam. The BLS doesn't see it yet, but those without blinders see it perfectly well.
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...
http://www.globaldeflationnews.com/dow-jones-industrial-average-baseline...
"Deflation flirts with America"
That deflation just knows how to lead an economy on...