BONDS MAY BE DEFYING DIRE FORECASTS

BUT THEY ARE NOT DEFYING LOGIC

(Part One)
Antal E Fekete
New Austrian School of Economics

Courtesy of Professor Fekete.com:

The title of Sy Harding’s article (Gold Eagle, January 31) says it all: “Bonds Defy Dire Forecasts”. But as I have been saying for years, bonds have not been defying logic, Greenspan’s cliché “conundrum” notwithstanding. The behavior of the bond market has been consistent with Keynesianism. By his compassionate phrase “euthanasia of the rentier” Keynes meant the reduction of the rate of interest, to zero if need be, as part of the official monetary policy to deprive the coupon- clipping class of its “unearned” income. Perhaps it is not a waste of time to repeat my argument why, in following Keynes’ recipe, the Fed is acting contrary to purpose. While wanting to induce inflation, it induces deflation.

The main tenet of Keynesianism is that the government has the power to manipulate interest rates as it pleases, in order to keep unemployment in check. Keynes argued that the free market economy was unstable as it was open to the swings of irrational investor optimism or pessimism that would result in unpredictable and wild fluctuation of output, employment and prices. Wise politicians guided by brilliant economists − such as, first and foremost, himself − had to have the power “to prime the pump” (read: to pump up the money supply) as well as the power to “fine-tune” (read: to suppress) the rate of interest. They had to have these powers to induce the right amount of spending needed to put people to work, to entice entrepreneurs with ‘teaser interest rates’ to go ahead with projects they would otherwise hesitate to undertake. Above all, politicians had to have the power to unbalance the budget in order to be able to help themselves to unlimited funds to spend on public works, in case private enterprise still failed to come through with the money.

However, Keynes completely ignored the constraints of finance, including the elementary fact that ex nihilo nihil fit (nothing comes from nothing). In particular, he ignored the fact that there is obstruction to suppressing the rate of interest (namely, the rising of the bond price beyond all bounds) and, likewise, there is obstruction to suppressing the bond price (namely, the rising of the rate of interest beyond all bounds). Thus, then, while Keynes was hell-bent on impounding the “unearned” interest income of the “parasitic” rentiers with his left hand, he would inadvertently grant unprecedented capital gains to them in the form of exorbitant bond price with his right. Continue reading

20 Signs That The Global Economic Crisis Is Starting To Catch Fire

Courtesy of The Economic Collapse Blog:

If you have been waiting for the “global economic crisis” to begin, just open up your eyes and look around. I know that most Americans tend to ignore what happens in the rest of the world because they consider it to be “irrelevant” to their daily lives, but the truth is that the massive economic problems that are currently sweeping across Europe, Asia and South America are going to be affecting all of us here in the U.S. very soon. Sadly, most of the big news organizations in this country seem to be more concerned about the fate of Justin Bieber’s wax statue in Times Square than about the horrible financial nightmare that is gripping emerging markets all over the planet. After a brief period of relative calm, we are beginning to see signs of global financial instability that are unlike anything that we have witnessed since the financial crisis of 2008. As you will see below, the problems are not just isolated to a few countries. This is truly a global phenomenon.

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Over the past few years, the Federal Reserve and other global central banks have inflated an unprecedented financial bubble with their reckless money printing. Much of this “hot money” poured into emerging markets all over the world. But now that the Federal Reserve has begun “tapering” quantitative easing, investors are taking this as a sign that the party is ending. Money is being pulled out of emerging markets all over the globe at a staggering pace and this is creating a tremendous amount of financial instability. In addition, the economic problems that have been steadily growing over the past few years in established economies throughout Europe and Asia just continue to escalate. The following are 20 signs that the global economic crisis is starting to catch fire…

#1 The unemployment rate in Greece has hit a brand new record high of 28 percent.

#2 The youth unemployment rate in Greece has hit a brand new record high of 64.1 percent.

#3 The percentage of bad loans in Italy is at an all-time record high. Continue reading

Stop stigmatising the unemployed: the problem is the lack of decent jobs

Courtesy of Natalie Bennett @ The New Statesman:

Both a Tory minister and a Labour shadow have this week made the latest in a long line of deeply worrying, stigmatising comments about the unemployed that show a profound failure to understand the nature of our job market, what young people in particular have to offer, and what employers are failing to offer workers.

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Today, Esther McVey, employment minister, told the Daily Mail that young people should “take a job in Costa [coffee shops]” where they could learn to “turn up on time”, and from there build up their career. She complained that they were less qualified than immigrant workers. McVey’s comments show a profound lack of knowledge of both our young jobseekers and of the current labour market. Huge numbers of highly qualified young people are desperately seeking jobs, but if they take jobs well below their training and skills, this can blight their future career chances. A year in Costa is unlikely to prepare you for a graduate-level job – it will more likely sentence you to a life of low pay, insecurity and non-development of your career.

Continue reading

The UK’s “new economic model” – deferred or dumped?

Courtesy of Prime Economics:

The UK economy has – in terms of GDP – performed somewhat better in 2013 than almost all analysts expected. That includes us in PRIME. But the “growth” – which looks like being around 1.75% year on year – is nothing like as large or as entrenched for the future as many commentators want to persuade us. It comes after a year (2012) of utterly dismal economic performance, due largely to the austerity policy of the government, in which real GDP per head of population fell again, with GDP rising by just 0.25%.

But here we go again. Chancellor George Osborne tells us – 16 months ahead of the next General Election – that we must cut public spending by a further £25 billion after the election. Whatever the state of the economy. The problem, he claims, is public spending. Yet the austerity policies pursued – though not as severe as the Eurozone’s masochistic policies – have contributed directly and significantly to the UK’s weak economic performance till mid 2013.

Let us travel back in time to February 2010, less than 3 months before the last General Election. George Osborne delivers the Mais Lecture. In it he says:

“We have to move away from an economic model that was based on unsustainable private and public debt. And we have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports.”

First, note that – at that time – Mr Osborne was rightly concerned about the level of private debt as well as public debt. While private debt has slightly declined, the ‘deleveraging’ has been modest over the last 3 years. But ever since he became Chancellor, he and his government have turned a blind eye to private debt, concentrating solely on public debt.

And as regards more investment and higher (net) exports, well, see below.

So the big question is whether the ‘new’ economic model promised has been ditched in favour of, well, the old economic model – and indeed whether either model is right for Britain today.

BBC Business Editor Robert Peston puts it nicely today in his blog:

“Households are behaving in a way that Keynesian economists say the chancellor should have been acting. And the chancellor has on the kind of hair shirt that consumers should perhaps still be wearing, given that they went so spending and borrowing bonkers in the boom years.”

Let’s look a bit deeper.

Continue reading

The Hidden Motives Behind The Federal Reserve Taper

Courtesy of Brandon Smith of Alt Market:

“The powers of financial capitalism had (a) far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland; a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank… sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.” – Carroll Quigley, member of the Council on Foreign Relations

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If one wishes to truly understand the actions behind private Federal Reserve policy, one must come to terms with a fundamental reality – everything the Fed does it does for a reason, and the most apparent reasons are not always the primary reasons. If you think that the Fed simply acts on impulsive stupidity or hubris, then you haven’t a clue what is going on. If you think the Fed only does what it does in order to hide the numerous negative aspects of our current economy, then you only know half the story. If you think the Fed does not have a plan, then you are sorely mistaken… Continue reading

Bank of England Announces 7% Unemployment-Linked “Forward Guidance” But Credibility Questioned

Unconventional monetary policy is here to stay and similar to the Federal Reserve, the BoE is linking monetary policy to it’s unemployment levels. Quantitative Easing does not work, especially when we have so much debt but linking it to employment allows the financial terrorism games to continue as the employment numbers provided are anything but exact. By increasing the balance sheet of the BoE by £375 billion per year, we are putting that debt onto our children and their children. This is anything but sensible or financially prudent, how will we unwind this debt? The answer is, we won’t. This is a kick the can down the road approach, it will fail but at least we know who to blame. Courtesy of Zerohedge:

Moments ago the Bank of England’s Mark Carney, very much as expected and warned previously, announced for the first time as part of the BOE quarterly Inflation Report press conference (the full August inflation report can be found here) the official linkage of monetary policy outlook to unemployment and pledged to expand stimulus if needed as he tried to quell investor bets on higher interest rates. Specifically as part of the BOE’s forward guidance, Carney linked interest rates to a 7% unemployment threshold while forecasting that unemployment would be higher than 7% until at least Q3 2016, or in other words, no threat of an end of extraordinary monetary policy any time soon.

However, while the market enjoyed the announcement initially and sent cable 100 pips lower to 1.52, the initial dovish mood was quickly reversed after the market observed that Carney’s statement carried with it three “knock out clauses” which made the forward guidance far less explicit and put doubts into the market about the credibility of this latest monetary experiment as a result unwinding an initial 100 pip drop in cable and sending it over 200 pips higher from the lows.

Specifically:

  • the policy stance will depend on economic conditions, and will also be determined by the BOE’s inflation target which remains at 2%
  • the BOE’s guidance won’t hold if the CPI is seen 0.5% over 2% in the next 18-24 months the guidance won’t hold if the BOE’s council sees a financial stability threat
  • Carney refrained from overlooking the BOE’s inflation mandate and reiterated the bank’s commitment to price stability
  • Carney said that a prolonged period of low rates has stability risks, and added that the UK economy will undoubtedly face shocks in the future which further detracted from the credibility of forward guidance
  • Finally, the BOE forward guidance is not a change in the bank’s reaction function Carney clarified.

The combination of all these “credibility-questioning” clauses promptly unwound the initial currency weakness, and promptly sent the GBPUSD soaring over 200 pips in the opposite direction as some saw Carney’s remarks as far less of a “commitment” than previously expected.

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