INTEREST RATES AT 20 % IN THE USA
Central bankers used to be the “inflation fighters” back in the good old days of the 1960’s, 70’s and 80’s. Just like a team of well coordinated fire fighters dressed in fire protection suits and helmets battling an out-of-control enemy, they launched raids on rising CPI inflation by raising interest rates over and over again, dousing economic growth that had gotten too far ahead of itself.
Paul Volcker is hailed as the genius who killed inflation way back in 1980. He was the head of the US Federal Reserve then and Chief Inflation Fighter. He took brave action and raised the federal reserve official interest rate to 20 % in March 1980. He then lowered it. And then he pushed it up again to 20 % in December of that year. And he kept it above 16 % until May 1981. That is an extraordinary fact. Think about it. Interest rates of 20 % (and much more in the banking sector). You will likely never see such events again unless for some unknown and unlikely reason, the US Dollar collapses sometime in the future and needs to be rescued.
The economic world changed irrevocably in 1980. That was Peak CPI Inflation in the advanced economies — the absolute top of an Everest of inflation. The trend has been downward ever since but no one told the central bankers of the advanced economies. They still think that their chief job is to control the CPI inflation threat when there is none. Forty years later, they still listen and look (endlessly) for fires that just won’t start.
Lately, they have switched to the dark side and have become fire lighters — inflation stirrers. They are now DESPERATE to create some inflation, thinking that they can move their economies back to “normal”. But the previous days of “normal” simply won’t return. 1980 is long gone and it was certainly not a normal situation.
The reasons are complex but they boil down to demographics, cheap petrochemical energy, technological and social change. The world of conventional, mainstream economics simply sees demographics, human behavior and energy as subjects that are below them in their lofty ivory towers of academia where they have built themselves micro-economic empires based upon a whole series of false assumptions and supportive mathematics. But, of course, most long time BOOM readers have known that for a very long time now.
EUROPEAN CENTRAL BANK FIRE-STARTERS
The European Central Bank (ECB) has finally capitulated and admitted that European economic growth has stalled badly and is showing signs of further decline. They announced yet another TLTRO last week — that is a Targeted Longer Term Refinancing Operation.
From the ECB’s website — “Targeted longer-term refinancing operations (TLTROs) are one of the ECB’s non-standard monetary policy tools. Through TLTROs we provide long-term loans to banks and offer them an incentive to increase their lending to businesses and consumers in the euro area. This helps to return inflation rates to levels below, but close to 2% over the medium term. The first TLTRO series was launched in 2014. The second one, introduced in March 2016, is called TLTRO-II.”
They call it “liquidity” and “stimulation” but those are just cute words for cheap money being thrown at the banking sector in the desperate hope that they will be able to find willing borrowers for fresh new loans. The ECB has actually been doing this since 2008. They used to call them LTRO’s but the last two in 2014 and 2016 were called TLTRO’s. Go figure.
March 2008 – The ECB offered the European commercial banks an LTRO with a six-month maturity. 177 banks applied.
June 2009 – The ECB offered its first 12-month LTRO. 1,000 banks applied.
December 2011 – The ECB offered its first LTRO with a three-year term.
February 2012 – The ECB offered another LTRO that provided 800 Eurozone banks with 529.5 billion euros in low interest loans.
Then they changed the name of such loan largesse to TLTRO’s, presumably to boost confidence that they were doing something new.
Mario Draghi is the Italian who is President of the ECB. Let’s deconstruct Mario’s comments from last week when announcing these fresh new loans aimed at “stimulating” credit creation by the commercial banks. Mario’s words are in bold.
“Underlying inflation continues to be muted. The weaker economic momentum is slowing the adjustment of inflation towards our aim.” — Translation: It’s not our fault. Don’t blame us. Yes, we have failed to light the fire of economic growth and CPI inflation that we promised. And yes, we thought that our policies were realistic but we now realize that we have been deluded. But other causes of unexpected weaker economic momentum are to blame, not us.
“Today’s decisions will support the further build-up of domestic price pressures and headline inflation developments over the medium term.” Translation: We cannot openly admit that we were deluded and wrong in our assessment of the prospects for inflation so we will continue to just hope and pray that CPI inflation will somehow magically appear after we hand more money to the banking sector to see if they can find some more borrowers.
“In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.” Translation: We now know how dire the situation really is and we will do anything to rescue it including changing all of our current policies. So go back to sleep. We have it under our skillful control. The ship is moving back on course.
Is it just BOOM’s vivid imagination or do the words of Captain Mario sound like the last speech given across the PA system on the Titanic?
“Our steady course continues to be on track. We encountered a slight nudge back there with what appears to have been a rather large and unexpected iceberg but your comfort and destination is still foremost in our minds. The crew have made some initial adjustments necessary to ensure your continued comfort and the correct course to reach our stated destination. In any event, please be assured that I and my expert crew now stand ready to adjust all of our instruments, as appropriate and if necessary, to ensure that your journey continues to move towards the stated aim of reaching New York in a sustained manner.”
“Oh and one last thing — DON’T PANIC (!)”
US TRADE DISASTER IN FULL TILT
US NEW JOBS FIGURE ANOTHER DISASTER
Despite Donald Trump’s best efforts to make America great again through his “skillful” trade negotiation team, the opposite is happening in spades. The latest US trade figures were horrible with imports rising while exports continue to fall.
Over the course of the last year, the US has managed to achieve the largest merchandise trade deficit in its 243 year history. It amounted to almost US$ 900 Billion. The trade gap with China was also a record of US $ 419 Billion.
Over the past year, good ole Donald has imposed tariffs on foreign-made solar panels, washing machines, steel, aluminum and assorted goods from China. He seems to think that these tariffs are taxes paid for by the Chinese. But, of course, he is wrong. The people of America have to pay these tariff taxes as extra costs when they enthusiastically buy imported goods from China. He is harming his own people while telling them that it is all for their benefit. Ho Ho Ho.
And how about his job creation figures? The Non Farm Payrolls number for February was released on Friday and long term BOOM readers would not have been surprised to see what can only be described as pathetic results. BOOM has discussed the poor jobs creation reality of Trumpland on many previous occasions but February’s figure was a doozy — only 20,000 new jobs created. Back in the mid 1990’s we used to see 400,000 to 500,000 new jobs created monthly. THAT is how bad the current numbers are by comparison. The US has a rising GDP with very poor job creation compared to other periods of history. In fact, they are going backwards because 250,000 people retire and 250,000 apply for disability benefits every month.
The US central bank Federal Reserve Chairman Jerome Powell said last week in congressional testimony that “the job market remains strong.’’ Good timing by another central banker. The word clueless springs to mind. Perhaps he should start reading BOOM editorials?
Meanwhile, the Organization for Economic Cooperation and Development OECD reduced its 2019 global growth forecast to 3.3% from 3.5% last week and China lowered its economic growth target. The European Central Bank slashed its growth forecast for 2019 to 1.1 percent from an earlier forecast of 1.7 percent made just 3 months ago in December.
CHINA EXPORTS PLUNGE
The other notable event last week was the collapse in China’s export numbers. Exports from China in February plunged 20.7% from a year earlier, as its trade war with the US impacted. Imports also saw a sharper than expected fall of 5.2% from the previous year.
To add to its massive commercial bank stimulation policy launched in mid-January, the Chinese government last week announced US $ 298 Billion worth of tax cuts to boost slowing growth.
“Oh and one last thing — DON’T PANIC (!)”
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
EMAIL: gerry [@]
HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“
“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans”
“In the first instance, the process of money creation requires a willing borrower.”
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
PRICE PULSE DOMINANCE CHANGES DURING LAST WEEK Ended 10th March 2019:
NO CHANGES THIS WEEK – ALL PRICE PULSES UNCHANGED
NOTE — RED ARROWS INDICATE BOOM PRICE PULSE DOMINANCE in the present moment (as indicated by the date of the chart and taking into account the 3 year time frame shown). The charts are now arranged in PRICE PULSE RED ARROW DOMINANCE. NOTE: All Charts are WEEKLY Charts over the last 3 YEARS time frame. Arrows indicate PAST price action (not future). No predictions are implied from past action.
Comments refer to past PRICE PULSE (Red Arrow DOMINANCE) over the last 3 years, the week ended 10th March 2019. You can RIGHT CLICK a chart and OPEN in a New Tab. Make your own conclusions, do your own research. BOOM does not offer investment advice.
PLEASE NOTE — Many charts are ETF’s from NY Market (not the base commodity or currency etc). The NY Stock Code is in the Top Left Hand Corner of each chart.
Charts are produced from http://www.stockcharts.com
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
PRICE PULSE RISING — (RED ARROW UP DOMINANCE)
# SHANGHAI STOCKS — UP Arrow Dominant
# COPPER PRICE — UP Arrow Dominant
# SWISS STOCKS — UP Arrow Dominant
# SOIL (POTASH ETF) — UP Arrow Dominant
# SINGAPORE STOCKS — UP Arrow Dominant
# US JUNK BOND PRICES — UP Arrow Dominant
# HANG SENG — UP Arrow Dominant
# RWR (US Real Estate REIT Fund) — UP Arrow Dominant
# RUSSIAN RTSI STOCK INDEX — UP Arrow Dominant
# US HIGH GRADE CORP BONDS (LQD) — UP Arrow Dominant
# EMERGING MARKETS ETF (EEM) — UP Arrow Dominant
# YUAN (AGAINST USD) ETF (CYB) — UP Arrow Dominant
# AGGREGATE US BOND PRICES (BND) — UP Arrow Dominant
# GOLD PRICE in USD — UP Arrow Dominant
# GOLD PRICE (in Aus Dollars) — UP Arrow Dominant
# INDIAN STOCKS — UP Arrow Dominant
# BRAZIL STOCK INDEX — UP Arrow Dominant
# PALLADIUM PRICE — UP Arrow Dominant
# ARGENTINA STOCKS — UP Arrow Dominant
# US INFLATION PROTECTED BOND PRICES — UP Arrow Dominant
# US UTILITIES STOCKS — UP Arrow Dominant
# RIO STOCK (Iron Ore) — UP Arrow Dominant
# US 3 MTH T BILL YIELD — UP Arrow Dominant
# LIBOR — UP Arrow Dominant
PRICE PULSE FALLING — (RED ARROW DOWN DOMINANCE)
# TED SPREAD — DOWN Arrow Dominant
# NATURAL GAS (SPOT PRICE) — DOWN Arrow Dominant
# US DOW STOCK INDEX — DOWN Arrow Dominant
# US BIOTECHNOLOGY INDEX — DOWN Arrow Dominant
# JAPAN STOCKS — DOWN Arrow Dominant
# WEST TEXAS OIL PRICE — DOWN Arrow Dominant
# US TRANSPORT INDEX — DOWN Arrow Dominant
# US INSIDER SENTIMENT (KNOW) — DOWN Arrow Dominant
# QUAL (Quality ETF) — DOWN Arrow Dominant
# MTUM (Momentum ETF) — DOWN Arrow Dominant
# RUSSELL 2000 INDEX — DOWN Arrow Dominant
# TRIM TABS US FLOAT (TTAC) — DOWN Arrow Dominant
# FINANCIAL SECTOR ETF (XLF) — DOWN Arrow Dominant
# US KBW BANK INDEX — DOWN Arrow Dominant
# NASDAQ COMP INDEX — DOWN Arrow Dominant
# COMMODITIES INDEX (USCI) — DOWN Arrow Dominant
# SWISS FRANC (AGAINST $US) — DOWN Arrow Dominant
# FRANCE STOCKS — DOWN Arrow Dominant
# AUSSIE ALL ORDS INDEX — DOWN Arrow Dominant
# THAI SETI INDEX — DOWN Arrow Dominant
# GERMAN DAX — DOWN Arrow Dominant
# TAIWAN STOCKS — DOWN Arrow Dominant
# FVL — VALUE LINE — DOWN Arrow Dominant
# YEN (AGAINST $US) — DOWN Arrow Dominant
# COAL ETF (KOL) — DOWN Arrow Dominant
# INDUSTRIAL METALS ETF (DBB) — DOWN Arrow Dominant
# SOUTH KOREA STOCKS — DOWN Arrow Dominant
# AUSSIE DOLLAR AGAINST US DOLLAR — DOWN Arrow Dominant
# CANADIAN DOLLAR AGAINST USD — DOWN Arrow Dominant
# BRITISH POUND AGAINST USD — DOWN Arrow Dominant
# EURO (AGAINST $US) — DOWN Arrow Dominant
# NOMURA HOLDINGS — DOWN Arrow Dominant
# PLATINUM PRICE — DOWN Arrow Dominant
# BITCOIN INDEX $NYXBT — DOWN Arrow Dominant
# DEUTSCHE BANK SHARES — DOWN Arrow Dominant
# FOOD INPUT PRICES (DBA) — DOWN Arrow Dominant
# EURODOLLAR INDEX ($XED) — DOWN Arrow Dominant
PRICE PULSE UNCERTAIN NON-DOMINANCE OF RED ARROW –
# US LONG BOND PRICE (TLT) — NO Arrow Dominant
# DENMARK STOCKS — NO Arrow Dominant
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