Debt, Propaganda And Now Deflation


Dorothea Lange Negro woman who has never been out of Mississippi July 1936

Courtesy of Raul Ilargi Meijer @ The Automatic Earth blog:

Looks I have to return to the deflation topic. I’m a bit hesitant about it, because the discussion always gets distorted by varying definitions and a whole bunch of semi-religious issues. The Automatic Earth has for many years said that an immense bout of deflation is inevitable because of global debt levels, and it’s all only gotten a lot worse since we first said that. Our governments and central banks have ‘fought’ deflation with more debt, and that was always the stupidest idea in human history. Or at least, most of us were stupid for believing it would work, or was even intended to.

Just so we don’t get into yet more confusion, i probably need to explain that the debt deflation we’re talking about here is not some subdivision like consumer inflation or price inflation or cookie inflation, those are just hollow and meaningless terms. Debt deflation is deflation caused by too much debt, and the deleveraging it must and will lead to. Deflation does not equal falling prices, those are merely an effect of it.

The reason this matters is that when you equate inflation and deflation with rising or falling prices, you’re not going to be able to know when you actually have deflation. Because prices can rise for all sorts of reasons. Inflation/deflation is the money/credit supply in an economy multiplied by the speed at which money is spent in that economy, the velocity of money.

It should be obvious that prices for some items can still rise, certainly initially, when deflation sets in. Producers that see less sales can try to raise prices for their remaining buyers. Basic necessities will always be needed. Governments can raise taxes. Rising/falling prices tell us only part of the story, and with a considerable time delay.

Ergo: rising/falling prices are a lagging factor, and if you look at them only, you will have missed the point where deflation has set in. What follows, obviously, is that you can’t measure deflation by looking at consumer prices (CPI) or production prices (PPI) numbers. You’d be way behind the curve. CPI and PPI tell you something, but they don’t tell what causes falling or rising prices. And that is a valuable thing to know. Continue reading

Does Quantitative Easing Mainly Help the Rich?

Silly question but of course it does, the central banks of the world are privately owned banks and they benefit….not me or you. Courtesy of CNBC:

Last month, the Bank of England issued a report that must have made Fed chairman Ben Bernanke squirm.

It said that the Bank of England’s policies of quantitative easing – similar to the Fed’s – had benefited mainly the wealthy.

Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.

Many said the BOE’s easing added to social anger and unrest. Dhaval Joshi, of BCA Research wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it.”

The BOE countered that the benefits of easing may have trickled down, and that “without the Bank’s asset purchases, most people in the U.K. would have been worse off.” Continue reading

US Treasury Finally Admits The Truth: Markets Are Solely Propped Up With QE!

If you wish to make an alcoholic well and sober, you do not give him 50 bottles of vodka, a variety of mixes and 100 crates of desperado’s. If you do, you’re an idiot and an enabler. The US, UK, Euro et al economies are sick with two much debt and leverage, why would you make it worse through quantitative easing and POMO (Permanent Open Market Operations) and expect it to solve the problem? If you wish to make a financial system wracked with debt healthier, you do not take part in QE and POMO. Well if you do, you’re an idiot, an enabler and criminally culpable.

Courtesy of The Hedge:

Back in 2010, when few still dared to question that the entire move in the market is predicted by the Fed’s daily POMO (then still on QE2), we laid it out, in a way so easy even a caveman could grasp it, how every tiny move in the stock market is nothing but a function of the Fed’s daily POMO on those days in which Bernanke would be directly injecting liquidity into the capital markets using his Primary Dealer frontmen. Since then nearly three years have passed, and thousands of POMO days. All of which brings us to this quarter’s Treasury refunding presentation, and specifically the section “Effects of policy and market structure” from the Presentation to the Treasury Borrowing Advisory Committee, in which we learn that we had in fact been right all along, and that perhaps for the first time ever, the Treasury admitted that not only “no one dares fight the Fed” but that, as expected, it is “all POMO.”

There, hidden on page 26, or slide 76 of 100, where the Treasury discusses “The Impact Of Monetary Policy”, the biggest “conspiracy theory” of all becomes merely the latest conspiracy fact. First, for corporate bonds…


But just as importantly, for stocks.


But most importantly, and tying it all together, POMO. Only this time, finally, the US Treasury finally admits it.


So, thanks to the US Treasury, we know that between January 2009 and April 2013, on days in which the Fed POMO was more than $5 billion, the stock market rose a total of 570 points or 54% of the upmove, on days in which the POMO was between $0 and $5 billion, the stock market gain was “only” 141 points or 15% of the upside, and when there was no POMO, the S&P gained… -51 points.

And like that, another conspiracy theory bites the dust. Are any left? Oh yes, Gold isn’t manipulated because alleging “gold manipulation” is unfit for polite, dignified society and is best left to the realms of the conspiracy theorists.

The Financial System Doesn’t Just Enable Theft, It Is Theft

Under reported inflation, 0% interest rates and quantitative easing are tools used to reduce the purchasing power of people like me or you. We accept inflation without questioning the financial system that kindly gives us rising living costs. Inflation is theft and logically criminal but obfuscation is the name of the game.

“One of the indispensable prerequisites of a mastery of economics is a perfect knowledge of history, the history of ideas and of civilization … To know one field well, one must also know other fields.” Ludwig von Mises

In the past 300 or so years there have been over 700 fiat currencies with an average life span of 26 years, the longest being 50 years. The world, since 1971 has operated on a fiat currency and the cracks are showing for all to see. Only today we had the US readjusting GDP growth for the past 84 years to take into account R&D spending, which was the equivalent of adding the output of Belgium to the yearly figures. R@D spending was already taken into account but when your back is against the wall, why not re-write history.

Courtesy of Charles Hugh Smith of Two

It is painfully self-evident that our financial system doesn’t just enable theft, it is theft by nature and design. If you doubt this, please follow along.

Inflation is theft, but we accept inflation because we’ve been persuaded it benefits us. Here’s the basic story: our financial system creates new credit money (i.e. debt) in quantities that are only limited by the appetites of borrowers and the value of assets they buy with freshly borrowed money.

If this expansion of credit money exceeds the actual growth rate of the real economy, inflation results.

Since our economy is ultimately based on expanding debt in every sector (government, corporations, households), inflation is a good thing because it enables borrowers to pay back old debt with cheaper money.

For example, if J.Q. Citizen makes $50,000 a year and owes $50,000 on his fixed-rate mortgage, what happens if inflation jumps 100%? Assuming J.Q.’s wages rise along with prices, his earnings jump to $100,000 while mortgage remains at $50,000. Though prices of everything else have also doubled, the debt remains fixed, making it much easier for J.Q. to service the mortgage. Before inflation, it might have taken ten days of earnings to make enough money to pay the mortgage payment; after inflation, it only takes five days’ wages to make the payment.

This apparent benefit evaporates if wages do not rise along with the price of goods and services. If earned income stagnates during inflation, the purchasing power of wages declines. If it took two days’ earning to pay for groceries and gasoline before inflation, now it takes three days’ wages. The wage earner is measurably poorer thanks to inflation. How much poorer? Take a look: (chart by Doug Short)


Using the governments’ flawed consumer price index (CPI), household income has declined over 7%. But this understates inflation in a number of ways; as several readers pointed out after reading What’s up with inflation?? (July 25, 2013), such calculations of inflation do not track the reduction in package contents that mask the fact that our dollars are purchasing less goods even though the package remains unchanged: the cereal box is the same size as last year but the quantity of corn flakes has declined.

There are other reasons to be skeptical of official measures of inflation. As I note in the above link, how can healthcare be 18% of the GDP but only 7% in the CPI’s weighting scheme?
The obvious fact is that inflation is stealing purchasing power from every household with earned income, for the simple reason that wages are not rising in tandem with prices.

In 19th century Britain, the price of bread remained stable for most of the century: the price of a loaf of bread in 1890 was the same as it was in 1850. Any increase in wages in a no-inflation environment means the wage earner’s purchasing power has increased. In an inflationary financial system, as earned income stagnates, everyone without access to credit and leverage loses purchasing power, i.e. becomes poorer.

The advent of unlimited credit and leverage enabled new and less overt forms of expropriation, otherwise known as theft.

Let’s say that two traders enter a great trading fair seeking to buy goods to sell elsewhere for a fat profit. That is, after all, the purpose of the capitalist fair: to enable buyers and sellers to mutually profit.

One trader uses the time-honored method of letters of credit: he buys and sells during the fair by exchanging letters of credit which are settled at the end of the fair via payment of balances due with gold or silver.

Ultimately, the trader’s purchases are limited by the amount of silver/gold (i.e. real money) he possesses.

Trader #2 has access to leveraged credit, meaning that he has borrowed 100 units of gold with a mere 10 units of gold and the promise of paying interest on the borrowed 90 units.

This trader can buy 10 times more goods than Trader #1, and thus reap 10 times more profit. After paying 10% in interest, Trader #2 reaps 9 times more profit based on the credit-funded expansion of his claim on resources.

The issuance of paper money is an even more astonishing shortcut claim on real-world resources. Trader #3 brings a printing press to the fair and prints off “money” which is a claim on resources. The paper is intrinsically worthless, but if sellers at the fair accept its claimed value, then they exchange real resources for this claim of value.

Needless to say, those with access to leveraged credit and the issuance of fiat money have the power to make claims on resources without actually having produced anything of value or earned tangible forms of wealth.

Those with political power and wealth naturally have monopolies on the issuance of credit and paper money, as these enable the acquisition of real wealth without actually having to produce or earn the wealth.

This system is intrinsically unstable, as the financial claims of credit and fiat money on limited real-world resources and wealth eventually exceed real-world resources, and the system of claims collapses in a heap. Though this end-state can easily be predicted, the actual moment of collapse is not predictable, as those holding power have a vast menu of ways to mask their expropriation and keep the game going.

For example, quantitative easing (QE), which is ultimately the issuance of unlimited credit and leverage to the chosen few at the top of the heap of financial thievery: Are We Investing or Are We Just Dodging Thieves? (July 29, 2013).

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” Ernest Hemingway, The Next War

Things are falling apart–that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

What if the Fed didn’t provide QE….

Assume the same for all economies being artificially propped up by reckless Central Bank spending. Prolonging a failed system is irresponsible and dispictable. Politicians are criminally culpable for continuing the fraud, allowing debasement of the currency and for monetizing debt. The patient is dead just no one dares admit it.

Without innovation and new emerging sectors within an economy, a system requiring growth, will not grow.


Japanese Kamakazi QE aka Abenomics

As Japan has committed to kamakazi style quantitative easing, attempting to print itself out of economic stagnation, it is heading down a path which will lead to the Yens demise. Not only is debt to GDP 200% but the bond market is beginning the phases of crashing as confidence dictates bond yield. You cannot have a quantitative easing programme which is as big as the USA’s but have an economy 4 times smaller. Although the initial results of QE are helping exports, the countries around it will begin to reduce the value of their currencies to maintain competitiveness. This action will wipe out Japanese savings and hyperinflation will become rampant, the warning signs are here but the politicians hold steadfast on their deluded path.

For an in-depth look at what’s happening in Japan, watch this Otterwood observations, its only 23 minutes but explains the issues.


From the Hedge:

Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots – CPI is not deflating as fast as it was… and ‘some’ inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation – on the basis, we assume, that if they don’t mention it, it never happened. The result post a nothing-burger of ‘more uncertainty’ from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.


5 Year Japanese Bond Yields:


The UKs recovery is the worst since 1930

The UKs recovery from recession has been slow, in fact the economic recovery since the crash of 2008 is the slowest since 1921, as reported in the Guardian. It’s no wonder things seem so hard looking at the below chart.

The ONS blamed the weather for a low rate of growth: “The strongest evidence was that it reduced retail output in January and March 2013 but boosted demand for electricity and gas in February and March, which increased output in the energy supply industries.”GDP was 0.4% higher in Q1 2013 than in Q3 2011 and therefore has been broadly flat over the last 18 months.”

I think there’s more than the weather at work.


A recession is defined as two or more consecutive quarters of economic decline, the UK has just missed its third recession in four years. Is austerity really working? No it’s not, the UK government needs a different approach and quick but it has nothing to offer.

If this is the worst recovery since 1930 then that should be reflected in the stock market performance and you guessed correctly. It doesn’t.


The stock market has appreciated over 85% since its lows of 2009 but if the economy has just missed its third recession in four years, how is this possible? Quantative Easing is looking like a likely culprit, excess fiat is being pumped into the banks and inflating the stock market to give the appearance of a healthy economy. I’ve discussed that the financial markets are fixed here and here but rather than dwell on fixed markets, have a QE giggle with Mr John Clarke.