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The concept of the “liquidity trap” is well-known to most: it is that freak outlier in an otherwise spotless Keynesian plane, when due to the need for negative interest rates to boost the economy – a structural impossibility according to most economists although an increasingly more probable in Europe – central banks have no choice but to offset a deleveraging private banking sector and directly inject liquidity into the banking sector with the outcome being soaring asset prices, and even more bubbles which will eventually burst only to be replaced with even more failed attempts at reflation. Sadly, very little of this liquidity makes its way to the broad economy as the ongoing recession in the developed world has shown for the 5th year in a row, which in turn makes the liqudity trap even worse, and so on in a closed loop.

Since there is little else in the central bankers’ arsenal that is as effective in boosting the “wealth effect” – which is how they validate their actions to themselves and other economists and politicians – they continue to do ever more QE. And since banks are assured at generating far greater returns on allocated capital in the capital markets, where they can use the excess deposits they obtain courtesy of the Fed’s generous reserve-a-palooza as initial margin for risk-on trades, the liquidity pipelines remain stuck throughout the world, and loan creation – that traditional money creation pathway – is permanently blocked (as is the case in the US).

Everywhere except the one place that has yet to actually engage in conventional quantitative easing: China. At least explicitly, because loan creation by China’s state-controlled entities and otherwise government backstopped banks, is anything but conventional money creation. One can, therefore, claim that China’s loan creation is a form of Quasi-QE whereby banks, constrained from investing in a relatively shallow stock market, and unable to freely transfer the CNY-denominated liquidity abroad, are forced to lend it out. Paradoxically, this “non-QE” is exactly how QE should work in the US and other developed markets.

That’s the long story.

The short story is far simpler.

In order to offset the lack of loan creation by commercial banks, the “Big 4” central banks – Fed, ECB, BOJ and BOE – have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world “Big 4” central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse.

How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central bank combined!

And that is how – in a global centrally-planned regime which is where everyone now is, DM or EM – your flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it’s really done.

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

The concept of the “liquidity trap” is well-known to most: it is that freak outlier in an otherwise spotless Keynesian plane, when due to the need for negative interest rates to boost the economy – a structural impossibility according to most economists although an increasingly more probable in Europe – central banks have no choice but to offset a deleveraging private banking sector and directly inject liquidity into the banking sector with the outcome being soaring asset prices, and even more bubbles which will eventually burst only to be replaced with even more failed attempts at reflation. Sadly, very little of this liquidity makes its way to the broad economy as the ongoing recession in the developed world has shown for the 5th year in a row, which in turn makes the liqudity trap even worse, and so on in a closed loop.

Since there is little else in the central bankers’ arsenal that is as effective in boosting the “wealth effect” – which is how they validate their actions to themselves and other economists and politicians – they continue to do ever more QE. And since banks are assured at generating far greater returns on allocated capital in the capital markets, where they can use the excess deposits they obtain courtesy of the Fed’s generous reserve-a-palooza as initial margin for risk-on trades, the liquidity pipelines remain stuck throughout the world, and loan creation – that traditional money creation pathway – is permanently blocked (as is the case in the US).

Everywhere except the one place that has yet to actually engage in conventional quantitative easing: China. At least explicitly, because loan creation by China’s state-controlled entities and otherwise government backstopped banks, is anything but conventional money creation. One can, therefore, claim that China’s loan creation is a form of Quasi-QE whereby banks, constrained from investing in a relatively shallow stock market, and unable to freely transfer the CNY-denominated liquidity abroad, are forced to lend it out. Paradoxically, this “non-QE” is exactly how QE should work in the US and other developed markets.

That’s the long story.

The short story is far simpler.

In order to offset the lack of loan creation by commercial banks, the “Big 4” central banks – Fed, ECB, BOJ and BOE – have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world “Big 4” central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse.

How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central bank combined!

And that is how – in a global centrally-planned regime which is where everyone now is, DM or EM – your flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it’s really done.

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

As we noted previously (here and here), the exuberance over ‘lower’ gas prices is a little overdone. Perhaps more worrying though, as Bloomberg’s Jo Brusuelas notes, wholesale gasoline futures are pointing to about a 5% rise in gasoline prices during the next few weeks. This would essentially erase the entire decline in gas prices seen since Sept. 1. As Brusuelas warns, because recent gains in inflation-adjusted personal disposable income on a per capita basis can be directly tied to falling gasoline prices, rising prices may come at an inopportune time for many larger retailers.

 

 

Via Bloomberg’s Joseph Brusuelas,

Real per capita disposable income is up 0.9 percent on a year ago basis – weak under any conditions. The reversal of those modest gains due to rising gas prices would not bode well for what is shaping up to be the most challenging holiday spending season since 2009.

Consumer spending and sentiment are notoriously sensitive to price increases at the pump. If gasoline futures are correct, the 5 percent increase in prices may result in as much as a $40 billion hit to consumer wallets just as the traditional holiday spending season hits its stride during the next few weeks.

 

While gasoline prices are down 16 percent since the February peak, the combined effects of the $148 billion increase in tax rates on upper income households and the resetting of the payroll tax effectively offset potential early-year gains in personal disposable income.

For middle income consumers and those further down the income ladder, small changes in disposable income can have a significant effect on discretionary spending. Among this group, 48 million individuals receive food stamps and will already see a net loss of about $16 billion in transfer payments due to cuts in the Supplemental Nutrition Assistance Program.

Under conditions of weak income growth and modest employment gains, aggressive discounting by retailers has not translated into a sustained acceleration in overall spending.

Demand for services has averaged 1.8 percent during the expansion, well below the 3 percent level seen during the previous two business cycles. On a year-ago basis, overall retail spending peaked in 2010 and has continued to decelerate since.

Meanwhile, November gains in retail outlays were directly tied to transitory events rather than a broader shift in the overall behavior of consumers. Auto purchases in October were pushed forward into November due to the government shutdown. The spillover of the “iPhone effect” into November also temporarily boosted the overall level of spending and probably helped mask underlying weakness in the retail sector.

 

Since the end of the Great Recession, the upper two quintiles of income groups have emerged relatively unscathed while the lower three quintiles continue to bear the disproportionate burden of the adjustment underway in the domestic labor market and broader economy. This suggests the status quo in the economy and overall spending will probably continue to hold; upper-income consumers benefiting from historically low interest rates, home price increases and appreciation in equity markets will contribute the lion’s share of gains in holiday spending this year.

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

As we noted previously (here and here), the exuberance over ‘lower’ gas prices is a little overdone. Perhaps more worrying though, as Bloomberg’s Jo Brusuelas notes, wholesale gasoline futures are pointing to about a 5% rise in gasoline prices during the next few weeks. This would essentially erase the entire decline in gas prices seen since Sept. 1. As Brusuelas warns, because recent gains in inflation-adjusted personal disposable income on a per capita basis can be directly tied to falling gasoline prices, rising prices may come at an inopportune time for many larger retailers.

 

 

Via Bloomberg’s Joseph Brusuelas,

Real per capita disposable income is up 0.9 percent on a year ago basis – weak under any conditions. The reversal of those modest gains due to rising gas prices would not bode well for what is shaping up to be the most challenging holiday spending season since 2009.

Consumer spending and sentiment are notoriously sensitive to price increases at the pump. If gasoline futures are correct, the 5 percent increase in prices may result in as much as a $40 billion hit to consumer wallets just as the traditional holiday spending season hits its stride during the next few weeks.

 

While gasoline prices are down 16 percent since the February peak, the combined effects of the $148 billion increase in tax rates on upper income households and the resetting of the payroll tax effectively offset potential early-year gains in personal disposable income.

For middle income consumers and those further down the income ladder, small changes in disposable income can have a significant effect on discretionary spending. Among this group, 48 million individuals receive food stamps and will already see a net loss of about $16 billion in transfer payments due to cuts in the Supplemental Nutrition Assistance Program.

Under conditions of weak income growth and modest employment gains, aggressive discounting by retailers has not translated into a sustained acceleration in overall spending.

Demand for services has averaged 1.8 percent during the expansion, well below the 3 percent level seen during the previous two business cycles. On a year-ago basis, overall retail spending peaked in 2010 and has continued to decelerate since.

Meanwhile, November gains in retail outlays were directly tied to transitory events rather than a broader shift in the overall behavior of consumers. Auto purchases in October were pushed forward into November due to the government shutdown. The spillover of the “iPhone effect” into November also temporarily boosted the overall level of spending and probably helped mask underlying weakness in the retail sector.

 

Since the end of the Great Recession, the upper two quintiles of income groups have emerged relatively unscathed while the lower three quintiles continue to bear the disproportionate burden of the adjustment underway in the domestic labor market and broader economy. This suggests the status quo in the economy and overall spending will probably continue to hold; upper-income consumers benefiting from historically low interest rates, home price increases and appreciation in equity markets will contribute the lion’s share of gains in holiday spending this year.

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