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The Fed seems to be facing two major risks: first, premature tapering disrupting markets and triggering global turmoil across asset classes, thereby threatening the fragile economy recovery; second, delayed tapering further fuelling asset price bubbles, which could burst eventually and do major damage. UBS’ Beat Siegenthaler notes the September decision suggested a Fed more worried about the fragile recovery than about the potential for asset bubbles and other longer-term problems associated with extended liquidity injections. Whereas it had originally assumed that a gradual tapering would result in a gradual market reaction, Siegenthaler explains it is now clear that the situation is much more binary; and as such, the hurdles for tapering might be substantially higher than originally thought.

Via UBS,

Central bankers seem more powerful than ever, yet also more divided and confused than for a long time. This may be particularly true for the Fed, as it struggles with how to exit unconventional policies without creating major global market turmoil. In September it shied away from reducing monthly QE purchases, surprising both markets and central bank colleagues around the world. UBS Economics now expects tapering to start in Q1 2014 with the January meeting seen as somewhat more likely than the March meeting. The risks to this call, though, seem almost entirely on the dovish side as a December move would be tantamount to admitting that September was a mistake given the likely lack of decisive data until then. For the dollar, this could keep things difficult for some time.

Looking back…

Why did the Fed decide to hold back in September, deeply puzzling investors who had very widely expected a move, and thereby putting the credibility of its communication strategy at risk? It appears that two arguments were decisive:

First, the recovery was seen as still too fragile to withstand the level of market turmoil that had developed following the taper talk in early summer.

 

Second, the looming government shutdown and debt ceiling were seen as seriously clouding the fiscal outlook.

Relatively soft economic data since the decision have so far seemed to vindicate the decision as has the subsequent political turmoil in Washington.

However, many observers, particularly in Europe, have been critical on the political aspect of the decision as the FOMC seemed to ‘bail out’ the politicians and thus risk creating moral hazard. It would seem fair to say that the ECB, for example, would have acted rather differently in similar circumstances. President Draghi’s pledge in summer 2012 to do ‘whatever it takes’ was the exception to the general ECB rule that monetary policy is not there to address structural problems that are the politicians’ responsibility. In Frankfurt, nonconventional policies are seen as something to get rid of as soon as possible rather than something to retain as an insurance policy. It was no coincidence that in June this year Draghi said with quite some satisfaction that ‘we, unlike other central banks, can gradually downsize our balance sheet without having to take any decisions that would, or could, create volatility’. This, clearly, is not a luxury the Fed has.

…and looking forward

The Fed is facing two major but opposing risks:

first, premature tapering could unleash market turmoil that could threaten a still fragile recovery;

 

second, delayed tapering could further drive up the cost of the inevitable QE exit.

The emerging market collapse in early summer may have been just a harbinger of what could come once central bank liquidity injections end. Some observers have argued that the market will react in a more relaxed manner to the next round of taper talk as the issues would be familiar. However, this might be too optimistic a view. Equity markets have continued to rally with the S&P reaching new record highs while ‘carry’ currencies such as the Australian dollar have regained lost ground, even though the advance has since been capped by the October FOMC statement not shutting the window on early tapering. Given that it has generally been a lacklustre year for most investors, the pressure is to jump back into riskier trades and generate some more performance before year end, even if the tail risk of early tapering might continue to loom. In this situation, any piece of weak data and any dovish communication could push tapering expectations further out and lure investors back into risk, thereby increasing the cost of the inevitable exit.

Linear vs. binary

Ideally, the Fed would gradually exit QE as the recovery gradually gains ground. Indeed, this seems to have been the idea behind the tapering talk in early summer, trying to prepare markets for an initial step later in the year. The belief had been that what investors cared about was the stock of QE purchases, i.e. the overall size of the Fed’s balance sheet. As it turned out, however, investors seem to care about the flow of QE purchases instead. Or even worse, they seem to hold a binary view, equating the start of tapering to the end of QE, which means positioning does not adapt in linear, but an abrupt way. It therefore does not matter much whether the initial reduction would be $10bn or $20bn as the market would read any move, whatever the number, as a signal that the monetary policy super tanker had started to turn. Or as St. Louis Fed President Bullard put it last week, “changes in the pace of asset purchases have a very similar financial market effect as changes in the policy rate during more normal times”, meaning that any tapering acts very much like a conventional rate hike. “The Committee needs to either convince markets that the two tools are separate, or learn to live with the joint effects of tapering on both the pace of asset purchases and the perception of future policy rates”. Bullard seems to believe that the Fed has to live with the joint effects, which would suggest that the hurdle for tapering is much higher than initially thought.

A clash of central banking traditions

So what should the Fed do? Few central bankers would dispute that there are risks to keeping nonconventional policy measures in place for an extended period of time. In fact, the marginal benefits in terms of the economic impact seem to be declining, while the risks in terms of asset bubbles and other distortions seems to be increasing. Many would also argue that keeping ’emergency measures’ in place beyond the actual ’emergency’ sends out a bearish signal to investors, keeping confidence down. Central bankers in the European, or more specifically the Bundesbank tradition, would thus argue that given the doubtful benefits of QE together with the increasing longer term risks, the policy should be stopped as soon as possible. The Anglo-Saxon tradition, however, would seem more willing to use asset prices as a tool to support economic activity, and have a higher willingness to accept the risk of bubbles. Indeed, a fear of an asset price shock appears to have been what kept the Fed from taking the plunge in September, and might continue to hold them back for some time. The majo
rity of the FOMC might be seeing propping up asset prices as a second best way to keep sentiment up, in the absence of a convincing economic recovery as the first best solution.

Policy trap

A pessimist might see the Fed facing a lose-lose situation, a veritable policy trap. The only scenario in which a relatively painless escape from the trap would be possible is one in which the economic recovery gains ground and becomes robust relatively quickly. This seems exactly what equity markets are pricing in, i.e. a world in which global economic activity will seamlessly take over from QE as a driver of risky assets. UBS Economics has been drawing a picture that looks fairly close to such a benign scenario, expecting a slow but steady acceleration of global growth over the next two years. Monetary policy accommodation could then be withdrawn gradually, avoiding substantial market turmoil (UBS Global Economic Outlook 2014-2015, 28 October). Viewed from this perspective, the likelihood of the Fed unduly fuelling asset bubbles might thus be considerably higher than the one of prematurely reducing QE and triggering market turmoil, particularly as the track record of the Bernanke Fed, as well as the reputation of incoming Chair Yellen, would suggest that monetary policy in the US will err on the easy side for some time to come. All of this might continue to support risky assets and weigh on the dollar, but also increase the risk of a crash once QE inevitably comes to an end.

Conclusions

The Fed seems to be facing two major risks: first, premature tapering disrupting markets and triggering global turmoil across asset classes, thereby threatening the fragile economy recovery; second, delayed tapering further fuelling asset price bubbles, which could burst eventually and do major damage.

The September decision suggested a Fed more worried about the fragile recovery than about the potential for asset bubbles and other longer term problems associated with extended liquidity injections. Whereas it had originally assumed that a gradual tapering would result in a gradual market reaction, it now appears that the situation is much more binary. If so, the hurdles for tapering might be substantially higher than originally thought.

For investors, the situation is a very challenging one: should they position for a QE world in which risky assets perform well, or for a QE-free world in which risky assets suffer? For the Fed, the ideal scenario might be one where they succeed in keeping the tapering threat alive without actually going there, thereby avoiding both of the above risks. For investors, the resulting low activity and low volatility environment might be challenging.

For the dollar, the future of QE seems crucial. A clean exit sometime next year would be a major positive driver and this is what investors generally appear to position for, or at least believe in. However, the danger may be that these hopes will continue to be disappointed by a risk-averse Fed, which could thus extend the dollar’s underperformance for quite some time.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/iCPmI7Y_SrQ/story01.htm Tyler Durden

Remember all those YouTube clips (the same medium used to nearly justify World War III) that caught the president lying again and again with promises and assurances everyone would be able to keep their existing insurance plan under Obamacare even though he knew full they wouldn’t, until a week ago, thanks to what is left of the non-brownnosing media, as much was revealed to the general public? Well, it’s time to come clean, and once again via clip. Moments ago, in an interview with NBC, the charming and very photogenic president said he was “sorry.”

“I am sorry that they are finding themselves in this situation based on assurances they got from me,” Obama told NBC News in an exclusive interview at the White House. “We’ve got to work hard to make sure that they know we hear them and we are going to do everything we can to deal with folks who find themselves in a tough position as a consequence of this.”

Surely a good start to make sure “they know they are heard” is for nobody to lose their job over this fiasco, even those who claim full responsibility for the “debacle.”

As for apologies, perhaps it would be more prudent to wait until 2014 when the true costs of this latest welfare Ponzi scheme are revealed for all to see and experience: then it will be a daily tirade of non-stop apologies. So let’s just chalk today down to a general rehearsal.

Visit NBCNews.com for breaking news, world news, and news about the economy

There, there, Obama. All is forgiven. Just please tell Mr. Chairwoman to keep pushing that Nasdaq to its old time highs. Because who knows – without the daily distraction from the economic collapse this country finds itself in, an apology just may no longer be sufficient…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3Lo5SWGIR6c/story01.htm Tyler Durden

Remember all those YouTube clips (the same medium used to nearly justify World War III) that caught the president lying again and again with promises and assurances everyone would be able to keep their existing insurance plan under Obamacare even though he knew full they wouldn’t, until a week ago, thanks to what is left of the non-brownnosing media, as much was revealed to the general public? Well, it’s time to come clean, and once again via clip. Moments ago, in an interview with NBC, the charming and very photogenic president said he was “sorry.”

“I am sorry that they are finding themselves in this situation based on assurances they got from me,” Obama told NBC News in an exclusive interview at the White House. “We’ve got to work hard to make sure that they know we hear them and we are going to do everything we can to deal with folks who find themselves in a tough position as a consequence of this.”

Surely a good start to make sure “they know they are heard” is for nobody to lose their job over this fiasco, even those who claim full responsibility for the “debacle.”

As for apologies, perhaps it would be more prudent to wait until 2014 when the true costs of this latest welfare Ponzi scheme are revealed for all to see and experience: then it will be a daily tirade of non-stop apologies. So let’s just chalk today down to a general rehearsal.

Visit NBCNews.com for breaking news, world news, and news about the economy

There, there, Obama. All is forgiven. Just please tell Mr. Chairwoman to keep pushing that Nasdaq to its old time highs. Because who knows – without the daily distraction from the economic collapse this country finds itself in, an apology just may no longer be sufficient…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3Lo5SWGIR6c/story01.htm Tyler Durden

Authored by Marc Faber, originally posted at The Daily Reckoning,

I would like readers to consider carefully the fundamental difference between a “real economy” and a “financial economy.” In a real economy, the debt and equity markets as a percentage of GDP are small and are principally designed to channel savings into investments.

In a financial economy or “monetary-driven economy,” the capital market is far larger than GDP and channels savings not only into investments, but also continuously into colossal speculative bubbles. This isn’t to say that bubbles don’t occur in the real economy, but they are infrequent and are usually small compared with the size of the economy. So when these bubbles burst, they tend to inflict only limited damage on the economy.

In a financial economy, however, investment manias and stock market bubbles are so large that when they burst, considerable economic damage follows. I should like to stress that every investment bubble brings with it some major economic benefits, because a bubble leads either to a quantum jump in the rate of progress or to rising production capacities, which, once the bubble bursts, drive down prices and allow more consumers to benefit from the increased supplies.

In the 19th century, for example, the canal and railroad booms led to far lower transportation costs, from which the economy greatly benefited. The 1920s’ and 1990s’ innovation-driven booms led to significant capacity expansions and productivity improvements, which in the latter boom drove down the prices of new products such as PCs, cellular phones, servers and so on, and made them affordable to millions of additional consumers.

The energy boom of the late 1970s led to the application of new oil extracting and drilling technologies and to more efficient methods of energy usage, as well as to energy conservation, which, after 1980, drove down the price of oil in real terms to around the level of the early 1970s. Even the silly real estate bubbles we experienced in Asia in the 1990s had their benefits. Huge overbuilding led to a collapse in real estate prices, which, after 1998, led to very affordable residential and commercial property prices.

So my view is that capital spending booms, which inevitably lead to minor or major investment manias, are a necessary and integral part of the capitalistic system. They drive progress and development, lower production costs and increase productivity, even if there is inevitably some pain in the bust that follows every boom.

The point is, however, that in the real economy (a small capital market), bubbles tend to be contained by the availability of savings and credit, whereas in the financial economy (a disproportionately large capital market compared with the economy), the unlimited availability of credit leads to speculative bubbles, which get totally out of hand.

In other words, whereas every bubble will create some “white elephant” investments (investments that don’t make any economic sense under any circumstances), in financial economies’ bubbles, the quantity and aggregate size of “white elephant” investments is of such a colossal magnitude that the economic benefits that arise from every investment boom, which I alluded to above, can be more than offset by the money and wealth destruction that arises during the bust. This is so because in a financial economy, far too much speculative and leveraged capital becomes immobilized in totally unproductive “white elephant” investments.

In this respect, I should like to point out that as late as the early 1980s, the U.S. resembled far more a “real economy” than at present, which I would definitely characterize as a “financial economy.” In 1981, stock market capitalization as a percentage of GDP was less than 40% and total credit market debt as a percentage of GDP was 130%. By contrast, at present, the stock market capitalization and total credit market debt have risen to more than 100% and 300% of GDP, respectively.

As I explained above, the rate of inflation accelerated in the 1970s, partly because of easy monetary policies, which led to negative real interest rates; partly because of genuine shortages in a number of commodity markets; and partly because OPEC successfully managed to squeeze up oil prices. But by the late 1970s, the rise in commodity prices led to additional supplies, and several commodities began to decline in price even before Paul Volcker tightened monetary conditions. Similarly, soaring energy prices in the late 1970s led to an investment boom in the oil- and gas-producing industry, which increased oil production, while at the same time the world learned how to use energy more efficiently. As a result, oil shortages gave way to an oil glut, which sent oil prices tumbling after 1985.

At the same time, the U.S. consumption boom that had been engineered by Ronald Reagan in the early 1980s (driven by exploding budget deficits) began to attract a growing volume of cheap Asian imports, first from Japan, Taiwan and South Korea and then, in the late 1980s, also from China.

I would therefore argue that even if Paul Volcker hadn’t pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the U.S. So with or without Paul Volcker’s tight monetary policies, disinflation in the 1980s would have followed the highly inflationary 1970s.

In fact, one could argue that without any tight monetary policies (just keeping money supply growth at a steady rate) in the early 1980s, disinflation would have been even more pronounced. Why? The energy investment boom and conservation efforts would probably have lasted somewhat longer and may have led to even more overcapacities and to further reduction in demand. This eventually would have driven energy prices even lower. I may also remind our readers that the Kondratieff long price wave, which had turned up in the 1940s, was due to turn down sometime in the late 1970s.

It is certainly not my intention here to criticize Paul Volcker or to question his achievements at the Fed, since I think that, in addition to being a man of impeccable personal and intellectual integrity (a rare commodity at today’s Fed), he was the best and most courageous Fed chairman ever.

However, the fact remains that the investment community to this day perceives Volcker’s tight monetary policies at the time as having been responsible for choking off inflation in 1981, when, in fact, the rate of inflation would have declined anyway in the 1980s for the reasons I just outlined. In other words, after the 1980 monetary experiment, many people, and especially Mr. Greenspan, began to believe that an active monetary policy could steer economic activity on a noninflationary steady growth course and eliminate inflationary pressures through tight monetary policies and through cyclical and structural economic downturns through easing moves!

This belief in the omnipotence of central banks was further enhanced by the easing moves in 1990/91, which were implemented to save the banking system and the savings & loan associations; by similar policy moves in 1994 in order to bail out Mexico and in 1998 to avoid more severe repercussions from the LTCM crisis; by an easing move in 1999, ahead of Y2K, which proved to be totally unnecessary but which led to another 30% rise in the Nasdaq, to its March 2000 peak; and by the most recent aggressive lowering of interest rates, which fueled the housing boom.

Now I would like readers to consider, for a minute, what actually caused the 1990 S&L mess, the 1994 tequila crisis, the Asian crisis, the LTCM problems in 1998 and the current economic stagnation. In each of these cases, the problems arose from loose monetary policies and excessive use of credit. In other words, the economy — the patient — gets sick because the virus — the downward adjustments that are necessary in the free market — develops an immunity to the medicine, which then prompts the good doctor, who read somewhere in The Wall Street Journal that easy monetary policies and budget deficits stimulate economic activity, to increase the dosage of medication.

The even larger and more potent doses of medicine relieve the temporary symptoms of the patient’s illness, but not its fundamental causes, which, in time, inevitably lead to a relapse and a new crisis, which grows in severity since the causes of the sickness were neither identified nor treated.

So it would seem to me that Karl Marx might prove to have been right in his contention that crises become more and more destructive as the capitalistic system matures (and as the “financial economy” referred to earlier grows like a cancer) and that the ultimate breakdown will occur in a final crisis that will be so disastrous as to set fire to the framework of our capitalistic society.

Not so, Bernanke and co. argue, since central banks can print an unlimited amount of money and take extraordinary measures, which, by intervening directly in the markets, support asset prices such as bonds, equities and homes, and therefore avoid economic downturns, especially deflationary ones. There is some truth in this. If a central bank prints a sufficient quantity of money and is prepared to extend an unlimited amount of credit, then deflation in the domestic price level can easily be avoided, but at a considerable cost.

It is clear that such policies do lead to depreciation of the currency, either against currencies of other countries that resist following the same policies of massive monetization and state bailouts (policies which are based on, for me at least, incomprehensible sophism among the economic academia) or against gold, commodities and hard assets in general. The rise in domestic prices then leads at some point to a “scarcity of the circulating medium,” which necessitates the creation of even more credit and paper money.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3d-NROAmtMk/story01.htm Tyler Durden

Authored by Marc Faber, originally posted at The Daily Reckoning,

I would like readers to consider carefully the fundamental difference between a “real economy” and a “financial economy.” In a real economy, the debt and equity markets as a percentage of GDP are small and are principally designed to channel savings into investments.

In a financial economy or “monetary-driven economy,” the capital market is far larger than GDP and channels savings not only into investments, but also continuously into colossal speculative bubbles. This isn’t to say that bubbles don’t occur in the real economy, but they are infrequent and are usually small compared with the size of the economy. So when these bubbles burst, they tend to inflict only limited damage on the economy.

In a financial economy, however, investment manias and stock market bubbles are so large that when they burst, considerable economic damage follows. I should like to stress that every investment bubble brings with it some major economic benefits, because a bubble leads either to a quantum jump in the rate of progress or to rising production capacities, which, once the bubble bursts, drive down prices and allow more consumers to benefit from the increased supplies.

In the 19th century, for example, the canal and railroad booms led to far lower transportation costs, from which the economy greatly benefited. The 1920s’ and 1990s’ innovation-driven booms led to significant capacity expansions and productivity improvements, which in the latter boom drove down the prices of new products such as PCs, cellular phones, servers and so on, and made them affordable to millions of additional consumers.

The energy boom of the late 1970s led to the application of new oil extracting and drilling technologies and to more efficient methods of energy usage, as well as to energy conservation, which, after 1980, drove down the price of oil in real terms to around the level of the early 1970s. Even the silly real estate bubbles we experienced in Asia in the 1990s had their benefits. Huge overbuilding led to a collapse in real estate prices, which, after 1998, led to very affordable residential and commercial property prices.

So my view is that capital spending booms, which inevitably lead to minor or major investment manias, are a necessary and integral part of the capitalistic system. They drive progress and development, lower production costs and increase productivity, even if there is inevitably some pain in the bust that follows every boom.

The point is, however, that in the real economy (a small capital market), bubbles tend to be contained by the availability of savings and credit, whereas in the financial economy (a disproportionately large capital market compared with the economy), the unlimited availability of credit leads to speculative bubbles, which get totally out of hand.

In other words, whereas every bubble will create some “white elephant” investments (investments that don’t make any economic sense under any circumstances), in financial economies’ bubbles, the quantity and aggregate size of “white elephant” investments is of such a colossal magnitude that the economic benefits that arise from every investment boom, which I alluded to above, can be more than offset by the money and wealth destruction that arises during the bust. This is so because in a financial economy, far too much speculative and leveraged capital becomes immobilized in totally unproductive “white elephant” investments.

In this respect, I should like to point out that as late as the early 1980s, the U.S. resembled far more a “real economy” than at present, which I would definitely characterize as a “financial economy.” In 1981, stock market capitalization as a percentage of GDP was less than 40% and total credit market debt as a percentage of GDP was 130%. By contrast, at present, the stock market capitalization and total credit market debt have risen to more than 100% and 300% of GDP, respectively.

As I explained above, the rate of inflation accelerated in the 1970s, partly because of easy monetary policies, which led to negative real interest rates; partly because of genuine shortages in a number of commodity markets; and partly because OPEC successfully managed to squeeze up oil prices. But by the late 1970s, the rise in commodity prices led to additional supplies, and several commodities began to decline in price even before Paul Volcker tightened monetary conditions. Similarly, soaring energy prices in the late 1970s led to an investment boom in the oil- and gas-producing industry, which increased oil production, while at the same time the world learned how to use energy more efficiently. As a result, oil shortages gave way to an oil glut, which sent oil prices tumbling after 1985.

At the same time, the U.S. consumption boom that had been engineered by Ronald Reagan in the early 1980s (driven by exploding budget deficits) began to attract a growing volume of cheap Asian imports, first from Japan, Taiwan and South Korea and then, in the late 1980s, also from China.

I would therefore argue that even if Paul Volcker hadn’t pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the U.S. So with or without Paul Volcker’s tight monetary policies, disinflation in the 1980s would have followed the highly inflationary 1970s.

In fact, one could argue that without any tight monetary policies (just keeping money supply growth at a steady rate) in the early 1980s, disinflation would have been even more pronounced. Why? The energy investment boom and conservation efforts would probably have lasted somewhat longer and may have led to even more overcapacities and to further reduction in demand. This eventually would have driven energy prices even lower. I may also remind our readers that the Kondratieff long price wave, which had turned up in the 1940s, was due to turn down sometime in the late 1970s.

It is certainly not my intention here to criticize Paul Volcker or to question his achievements at the Fed, since I think that, in addition to being a man of impeccable personal and intellectual integrity (a rare commodity at today’s Fed), he was the best and most courageous Fed chairman ever.

However, the fact remains that the investment community to this day perceives Volcker’s tight monetary policies at the time as having been responsible for choking off inflation in 1981, when, in fact, the rate of inflation would have declined anyway in the 1980s for the reasons I just outlined. In other words, after the 1980 monetary experiment, many people, and especially Mr. Greenspan, began to believe that an active monetary policy could steer economic activity on a noninflationary steady growth course and eliminate inflationary pressures through tight monetary policies and through cyclical and structural economic downturns through easing moves!

This belief in the omnipotence of central banks was further enhanced by the easing moves in 1990/91, which were implemented to save the banking system and the savings & loan associations; by similar policy moves in 1994 in order to bail out Mexico and in 1998 to avoid more severe repercussions from the LTCM crisis; by an easing move in 1999, ahead of Y2K, which proved to be totally unnecessary but which led to another 3
0% rise in the Nasdaq, to its March 2000 peak; and by the most recent aggressive lowering of interest rates, which fueled the housing boom.

Now I would like readers to consider, for a minute, what actually caused the 1990 S&L mess, the 1994 tequila crisis, the Asian crisis, the LTCM problems in 1998 and the current economic stagnation. In each of these cases, the problems arose from loose monetary policies and excessive use of credit. In other words, the economy — the patient — gets sick because the virus — the downward adjustments that are necessary in the free market — develops an immunity to the medicine, which then prompts the good doctor, who read somewhere in The Wall Street Journal that easy monetary policies and budget deficits stimulate economic activity, to increase the dosage of medication.

The even larger and more potent doses of medicine relieve the temporary symptoms of the patient’s illness, but not its fundamental causes, which, in time, inevitably lead to a relapse and a new crisis, which grows in severity since the causes of the sickness were neither identified nor treated.

So it would seem to me that Karl Marx might prove to have been right in his contention that crises become more and more destructive as the capitalistic system matures (and as the “financial economy” referred to earlier grows like a cancer) and that the ultimate breakdown will occur in a final crisis that will be so disastrous as to set fire to the framework of our capitalistic society.

Not so, Bernanke and co. argue, since central banks can print an unlimited amount of money and take extraordinary measures, which, by intervening directly in the markets, support asset prices such as bonds, equities and homes, and therefore avoid economic downturns, especially deflationary ones. There is some truth in this. If a central bank prints a sufficient quantity of money and is prepared to extend an unlimited amount of credit, then deflation in the domestic price level can easily be avoided, but at a considerable cost.

It is clear that such policies do lead to depreciation of the currency, either against currencies of other countries that resist following the same policies of massive monetization and state bailouts (policies which are based on, for me at least, incomprehensible sophism among the economic academia) or against gold, commodities and hard assets in general. The rise in domestic prices then leads at some point to a “scarcity of the circulating medium,” which necessitates the creation of even more credit and paper money.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3d-NROAmtMk/story01.htm Tyler Durden

Once upon a time, a few deluded individuals held hope that quantiative easing may actually do something to improve the plight of the common person instead of simply transferring wealth from the poor to the rich at an ever faster pace. Five years of failed monetary policy later, which has done nothing to stimulate the economy and everything to stimulate unprecedented non-risk taking that makes even the epic asset bubble of 2007 pale by comparison, this naive assumption has been thoroughly destroyed. However, for all those who don’t splurge on yachts, mega mansions, and private jets, the pain is just starting. The latest evidence of this comes from Japan where according to a survey by the Bank of Japan released today, the share of Japanese households with no financial assets rose to a record as falling incomes forced people to dig into their savings.

According to Bloomberg, as a result of Abe’s disastrous “reflation at all costs” policies, the proportion of Japanese households without financial assets reached 31 percent up from 26 percent a year earlier and the highest since the poll began in 1963.

But that’s not all: it’s about to get even worse: Abe needs to, and has been desperately trying to convince companies to drive up workers’ pay, so that he can sustain a “recovery” that has only manifested itself in stock market reflation, a crashing currency and soaring import prices. Already facing declines in wages – the 16th consecutive month of dropping wages in fact as we showed a week ago – households will be hit in April by a consumption-tax increase intended to shore up Japan’s finances. Only now a third of Japanese society will have no reserves which to tap. And that third is only going to increase as more and more are forced to sell that last asset they have: Japanese equities, until Abe’s pathetic experiment meets its inevitable final outcome.

In other words, thank you Abenomics for being precisely the failure which we predicted a year ago it would be. In the meantime, the class disparity in Japan is merely tracking that of the US tick for tick, as the middle class in yet another country is destroyed, and forced to spend all of its accumulated savings on staples like food and energy, even as the “deflation monster” ravages all other goods and services and certainly wages, meaning the government is locked in doing even more of the same failed actions that have brought the country even further to the edge of total collapse, hoping for a different outcome this time.

Bloomberg continues:

“It’s critical that Abe succeed in convincing corporates to raise wages,” said Izumi Devalier, a Hong Kong-based economist at HSBC Holdings Plc. “Lower-income households may come to feel they’re getting the short end of the stick from Abenomics.”

Since a year in, verbal urging has failed, the last option is legislation, and a Japanese government which passes laws on a monthly, or weekly, basis decreeing how many percent higher the new minimum wage will be, until finally all the “export-driven” top line growth evaporates. As for capital spending and fixed investment, forget it.

In conclusion, like with every other insolvent, authoritarian government, there is some hope:

“The survey shows a grim wage situation,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Now some companies are hinting at higher salaries so we may see a better result next year.”

Good luck, but please don’t hold your breath. Instead, just keep holding your begging cap to capture some of that QE “wealth effect” trickle down.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/XboY_5_QhGg/story01.htm Tyler Durden

Submitted by Simon Black of Sovereign Man blog,

Check out this chart below. It’s a graph of total US tax revenue as a percentage of the money supply, since 1900.

For example, in 1928, at the peak of the Roaring 20s, US money supply (M2) was $46.4 billion. That same year, the US government took in $3.9 billion in tax revenue.

So in 1928, tax revenue was 8.4% of the money supply.

In contrast, at the height of World War II in 1944, US tax revenue had increased to $42.4 billion. But money supply had also grown substantially, to $106.8 billion.

So in 1944, tax revenue was 39.74% of money supply.

You can see from this chart that over the last 113 years, tax revenue as a percentage of the nation’s money supply has swung wildly, from as little as 3.65% to over 40%.

But something interesting happened in the 1970s.

1971 was a bifurcation point, and this model went from chaotic to stable. Since 1971, in fact, US tax revenue as a percentage of money supply has been almost a constant, steady 20%.

You can see this graphically below as we zoom in on the period from 1971 through 2013– the trend line is very flat.

What does this mean? Remember– 1971 was the year that Richard Nixon severed the dollar’s convertibility to gold once and for all.

And in doing so, he handed unchecked, unrestrained, total control of the money supply to the Federal Reserve.

That’s what makes this data so interesting.

Prior to 1971, there was ZERO correlation between US tax revenue and money supply. Yet almost immediately after they handed the last bit of monetary control to the Federal Reserve, suddenly a very tight correlation emerged.

Furthermore, since 1971, marginal tax rates and tax brackets have been all over the board.

In the 70s, for example, the highest marginal tax was a whopping 70%. In the 80s it dropped to 28%.

And yet, the entire time, total US tax revenue has remained very tightly correlated to the money supply.

The conclusion is simple: People think they’re living in some kind of democratic republic. But the politicians they elect have zero control.

It doesn’t matter who you elect, what the politicians do, or how high/low they set tax rates. They could tax the rich. They could destroy the middle class. It doesn’t matter.

The fiscal revenues in the Land of the Free rest exclusively in the hands of a tiny banking elite. Everything else is just an illusion to conceal the truth… and make people think that they’re in control.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/cJ4NJno1Pi8/story01.htm Tyler Durden