The Folly Of Economists: Negative Interest Rates

Bernanke, the person nicknamed ‘Helicopter Ben’ because he said it would be easy to fight deflation even if it had to be done by throwing money out of helicopters, gave us ‘ZIRP,’ which means ‘zero interest rate policy.’ Now he seems to be leaning toward ‘NIRP,’ ‘negative interest rate policy.’ He is an economics professor now. We can only hope that his students do some outside reading, like Ludwig von Mises.
Jeff Cox and Katie Kramer of CNBC wrote this:
Former Fed Chairman Ben Bernanke thinks policymakers should give serious thought to implementing negative rates.
‘Since that can’t be assured, and since the current low-interest-rate environment may persist, there are good reasons for the Fed and other central bankers to consider changes in their policy frameworks,’ he added. ‘The option of raising the inflation target should be part of that discussion. But … it is premature to rule out alternative or potentially complementary approaches, including the possibility of using negative interest rates.’

This post was published at David Stockmans Contra Corner By Bert Dohmen, Forbes ‘ September 19, 2016.

Will the Bank of Japan cause a Global Bond Tantrum?

As investors anxiously await the key monetary policy decisions from the Federal Reserve and the Bank of Japan next week, there have been signs that the powerful rally in bond markets, unleashed last year by the threat of global deflation, may be starting to reverse. There has been talk of a major bond tantrum, similar to the one that followed Ben Bernanke’s tapering of bond purchases in 2013.
This time, however, the Fed seems unlikely to be at the centre of the tantrum. Even if the FOMC surprises the market by raising US interest rates by 25 basis points next week, this will probably be tempered by another reduction in its expected path for rates in the medium term.
Instead, the Bank of Japan has become the centre of global market attention. The results of its comprehensive review of monetary policy, to be announced next week, are shrouded in uncertainty. So far this year, both the content and the communication of the monetary announcements by BoJ governor Haruhiko Kuroda have been less than impressive, and the market’s response has been repeatedly in the opposite direction to that intended by the central bank.
As a result, the inflation credibility of the BoJ has sunk to a new low, and the policy board badly needs to restore confidence in the 2 per cent inflation target. But the board is reported to be split, and the direction of policy is unclear. With the JGB market now having a major impact on yields in the US, that could be the recipe for an accident in the global bond market.

This post was published at David Stockmans Contra Corner By Gavyn Davies, Financial Times ‘ September 19, 2016.

How Donald Trump Could Wipe $420 Billion Off China’s Exports

Victory for Donald Trump in the U. S. presidential election could be a game changer for China’s economy.
The candidate’s promise to slap punitive tariffs on Chinese imports would be highly contractionary, deflationary and wipe hundreds of billions off the value of the world’s second-biggest economy, according to new research by Kevin Lai, the Hong Kong-based chief economist for Asia (excluding Japan) at Daiwa Capital Markets.
Lai estimates that Trump’s suggestion for a 45 percent tariff on Chinese goods to narrow the trade deficit with America would spark an 87 percent decline in China’s exports to the U. S. – a decline of $420 billion. That would, over time and factoring in multiplier effects, mean a 4.82 percent blow to China’s gross domestic product, or about a half trillion dollars’ worth. It doesn’t even take into account an estimated $426 billion in foreign direct investment repatriation if companies started to withdraw.
‘A loss of GDP or a slowdown in GDP growth of this scale would be staggering,’ Lai wrote in a note entitled ‘What would a Trump presidency mean for China.’ ‘Eventually, Trump and his administration may actually compromise with a watered-down version of tariffs.’

This post was published at David Stockmans Contra Corner By Enda Curran from Benchmark, Bloomberg Business ‘ September 14, 2016.

The Mother Of Peak Debt – – Japan’s Total Debt-to-GDP Ratio Stands At 600%

There’s ‘very little’ that Japan can do about its mounting debt pile, which presents a potential risk to growth, according to Pacific Investment Management Co.’s Jamil Baz.
With a government debt load that’s 2 1/2 times the size of annual gross domestic product and a total national borrowing burden that’s six times as large, ‘Japan is suffering from the excesses of the past’ and the country ‘is in a bind right now,” the fund manager’s head of client analytics said in an interview in Sydney last week.
Japan’s economy is still struggling to gain traction even after policy makers hit it with repeated doses of budgetary stimulus and unprecedented monetary easing to drag the country out of its deflationary funk. The Bank of Japan’s adoption of negative interest rates has pushed down debt financing costs for now, but repeated delays to a planned sales tax increase, a new 28 trillion yen ($272 billion) fiscal boost from Prime Minister Shinzo Abe and the pressures of an aging population mean the borrowing pile is likely to keep on growing.

This post was published at David Stockmans Contra Corner By Narayanan Somasundaram and Benjamin Purvis via Bloomberg Business ‘ August 31, 2016.

Why A Weak US Consumer Makes A Grim Outlook for the Economy, Stocks

For some time, Stephanie Pomboy, an economist and the founder of MacroMavens, has pushed a provocative theory that a crisis-chastened U. S. consumer would retard global growth. That is why a U. S. recovery has taken so long to take off, and why Japan and Europe look set to embark on more rounds of quantitative easing.
An avid reader of Shakespeare, Pomboy appreciates the comic and tragic dimensions of the markets – the giddy optimism for the second half of the year, and the potentially disastrous consequences of excessively low rates. As stocks teetered at new highs, we phoned Pomboy in Vail, Colo., where she lives when not in Manhattan, to hear her latest views. They aren’t rosy: Investors and policy makers are deluding themselves that we will soon return to a pre-financial crisis framework. Things have changed, she says, which means expectations for economic growth in the second half are far too optimistic. And today’s low rates could cause another financial crisis, bankrupting pension plans, putting retirees at risk, and hurting stocks.
Barron’s: You like to focus on the consumer – and plot U. S. consumer spending as a percentage of GDP versus world trade. Why?
Pomboy: What ignited and supported the entire era of globalization was the spendthrift U. S. consumer; economies have been totally reliant on trade to U. S. consumers. This once-in-a-generation asset deflation will fundamentally change behavior, just as the Depression changed an entire generation’s attitude about spending and saving.

This post was published at David Stockmans Contra Corner on August 22, 2016.

Global Deflation Alert: Australia’s Unprecedented Collapse of CapEx in One chart

You’ve probably heard of the ‘capex cliff’, the term for the collapse in capital expenditure plans by Australian businesses that is an inevitable feature of the economy following the once-in-a-lifetime mining investment boom driven mainly by the surge in Chinese demand over the past two decades.
But with Australia’s manufacturing industry having been hollowed out too over the past decade, the capital investment pipeline for both mining and manufacturing are gone. So the fall-off, when measured in terms of a percentage of GDP, is nothing short of spectacular in historical context, as shown in this chart from Macquarie:

This post was published at David Stockmans Contra Corner By PAUL COLGAN, Business Insider ‘ August 22, 2016.

BOJ Cornered as Japanese Banks Running Out of Bonds to Sell

Japan’s biggest banks are running out of room to sell their government bond holdings, pushing the central bank closer to the limits of its record monetary easing.
Japan Post Bank Co. and the nation’s three so-called megabanks have almost halved their sovereign bond holdings to 114 trillion yen ($1.1 trillion) since March 2013, the month before the Bank of Japan began buying the securities on an unprecedented scale to end deflation. Government notes held by Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. are approaching the level where further reductions would involve securities they need as collateral.
‘Banks are the first port of call’ as the BOJ seeks to boost its JGB holdings by 80 trillion yen annually, said Shuichi Ohsaki, the chief rates strategist at Bank of America Merrill Lynch in Tokyo. ‘But they’re losing capacity to cut beyond those that are reaching maturity.’
Finding willing sellers is a headache for Governor Haruhiko Kuroda as the central bank prepares to review policy at next month’s board meeting, amid growing concern among economists that he has few tools left to revive the economy. Record bond buying has already saddled the BOJ with more than a third of outstanding sovereign notes, draining liquidity from the market and making it more volatile.

This post was published at David Stockmans Contra Corner By Gareth Allan and Shigeki Nozawa via Bloomberg Business ‘ August 18, 2016.

On The Impossibility Of Helicopter Money And Why The Casino Will Crash

…….. As the stock market reached its lunatic peak near 2200 in August, the certainty that the Fed is out of dry powder and that the so-called economic recovery is out of runway gave rise to one more desperate pulse of hopium.
Namely, that the central banks of the world were about to embark on outright ‘helicopter money’, thereby jolting back to life domestic economies that are sliding into deflation and recession virtually everywhere – – from Japan to South Korea, China, Italy, France, England, Brazil, Canada and most places in-between.
That latter area especially includes the United States. Despite Wall Street’s hoary tale that the domestic economy has ‘decoupled’ from the rest of the world, the evidence that the so-called recovery is grinding to a halt is overwhelming.
After all, the real GDP growth rate during the year ending in June was a miniscule 1.2%. It reflected the weakest 4-quarter rate since the Great Recession.
And even that was made possible only by an unsustainable build-up in business inventories and the shortchanging of inflation by the Washington statistical mills. Had even a semi-honest GDP deflator been used, the US economy would have posted real GDP on the zero-line, at best.

This post was published at David Stockmans Contra Corner on August 17, 2016.

Memo To The Donald – – – 10 Great Deals To Save America

…… Unfortunately, it is too late to reverse the tidal wave of system failure that has been brewing for three decades now. It will soon end in a speculator implosion.
Whether that crisis commences before November 8th or soon thereafter is largely immaterial. If the Trump campaign has the good sense to focus on the gathering economic storm clouds, it’s the one thing that could catalyze an out-with-the-bums uprising across Flyover America on Election Day.
So let us reiterate our thesis even more vehemently. The idea that the American economy has recovered and is returning to an era of healthy prosperity is risible establishment propaganda. It’s the present day equivalent of the Big Lie. It’s the reason why Hillary Clinton’s campaign to validate and extend the current malefic Wall Street/Washington regime is so reprehensible.
In fact, the natural post-recession rebound of the nation’s capitalist economy has already exhausted itself after 84 months of tepid advance. Now, the massive headwinds of towering public and private debts, faltering corporate investment and productivity, Washington-based regulatory and tax-barriers and the end of an unsustainable central bank fueled global credit, trade and investment boom are ushering in a prolonged era of global deflation and domestic recession.

This post was published at David Stockmans Contra Corner on August 8, 2016.

It Was All A Dream – – Japan’s Monetary Fiasco Removes All Doubt

Last Friday the Statistics Bureau of the Japanese Ministry of Internal Affairs and Communication reported some more bad news for Prime Minister Abe and really Bank of Japan chief Kuroda. Month-over-month, the consumer price index was down again, leaving it 0.48% less in June 2016 than June 2015. This was the third consecutive month of increasingly negative year-over-year CPI estimates.
When QQE was first implement back in April 2013, its staff economists guessed that it would take two years to get Japan back to 2% inflation; the standard target for almost all the central banks in the ‘developed’ world. The point of QQE as apart from all prior QE’s, and there had been nine or ten before it depending on your definitions, was that it would be so big, powerful, and sustained that the ‘deflationary mindset’ that had, according to orthodox economists, gripped Japan for decades would be forced to surrender to this new monetary regime. Two years was their conservative forecast.
The Bank of Japan did achieve the first part; the central bank has, as of the latest balance sheet figures for June 2016, quadrupled the level of bank reserves in Japan. The end of month balance in March 2013 was 52.6 trillion, a number that at the outset of prior QE’s was already supposed to be impressive, further meaning that it wasn’t as if BoJ was starting from nothing. More than three years and an acceleration of QQE later, there are now 272.6 trillion of bank reserves in Japan, an increase of 418.2%.

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ August 3, 2016.

Try, Try, Try Again! Japan Set For 26th Fiscal Stimulus Plan Since 1990

Prime Minister Shinzo Abe’s ‘bold’ plan to revive the economy with a $273 billion package leaves him traveling down a well-trod path: it marks the 26th dose of fiscal stimulus since the country’s epic markets crash in 1990, in a warning for its effectiveness.
The nation has had extra budgets every year since at least 1993, and even with that extra spending, it has still had six recessions, an entrenched period of deflation, soaring debt and a rapidly aging population that has left the world’s third-largest economy still struggling to get off the floor.

This post was published at David Stockmans Contra Corner By Enda Curran and James Mayger, Bloomberg Business ‘ August 1, 2016.

Pay Attention To What BoJ Did Do

As if a mirror of the Federal Reserve, what is more important from the Bank of Japan flop today is what it did do rather than what it did not. Everyone was looking for at the very least an even quicker pace to QQE if not the full-blown ‘helicopter’ of momentum dreams. Instead, BoJ offered what appears tepidity. As widely expected, their ETF buying program was expanded to 2.7 trillion annually, but that wasn’t the end of the submission. The only other change was to double a ‘dollar lending’ program that few knew existed.
In April 2012, the Bank of Japan policy statement included the official approval of a plan to extend dollar loans from its supply of dollar ‘reserves’ to eligible Japanese companies obtaining overseas finance.
The goal of overcoming deflation will be achieved both through efforts to strengthen the economy’s growth potential and support from the financial side. With this in mind, the Bank will pursue powerful monetary easing, and will support private financial institutions in their efforts to strengthen the foundations for Japan’s economic growth via the fund-provisioning measure to support strengthening the foundations for economic growth. At today’s meeting, as shown in the Attachment, the Bank established detailed rules for a new U. S. dollar lending arrangement equivalent to 1 trillion yen, of which a preliminary outline was released at the previous meeting in March.
‘Eligible’ counterparties are narrowed specifically in the technical terms to only those firms who have accounts at FRBNY or have accounts at banks with settlement recourse to FRBNY (where BoJ’s assets are mostly in custody). All loans are in US dollars posted by eligible collateral with 1-year duration (and 3 available one-year rollovers, for a total of four years) at 6-month LIBOR refreshed every six months. The maximum loan per counterparty is $1 billion, with a total balance capped at $12 billion (those amounts were today doubled).

This post was published at David Stockmans Contra Corner on July 29, 2016.

Global Deflation Alert: World Trade Growth Has Ground To A Halt

Falling rates of global trade growth have attracted much comment by analysts and officials, giving rise to a literature on the ‘global trade slowdown’ (Hoekman 2015, Constantinescu et al. 2016). The term ‘slowdown’ gives the impression of world trade losing momentum, but growing nonetheless. The sense of the global pie getting larger has the soothing implication that one nation’s export gains don’t come at the expense of another’s. But are we right to be so sanguine?
World trade volume plateaued around January 2015
Using what is widely regarded as the best available data on global trade dynamics, namely, theWorld Trade Monitor prepared by the Netherlands Bureau of Economic Policy Analysis, the 19th Report of the Global Trade Alert, published today, evaluates global trade dynamics (Evenett and Fritz 2016). Our first finding that the rosy impression painted by some should be set aside. We demonstrate that:
-World export volumes reached a plateau at the start of January 2015. The same finding holds if import volume or total volume data are used instead.

This post was published at David Stockmans Contra Corner on July 29, 2016.

The World is following Japan’s lead at the Worst Possible Time

After its spectacular rise over the 45 years following World War II, Japan’s economy was hailed as a model of how to do things right. But then times changed. Japan shifted from leading the way, to showing the world what notto do. And now, the world is doing it anyway.
The symptoms
From the end of World War II through 1992, Japan’s economy grew at an average of 7.3 percent a year. That’s as impressive as China’s recent economic growth. But since 1992, Japan has been in a decades-long economic slump, with real GDP growth averaging just 0.8 percent a year.
Meanwhile, Japan’s debt load has ballooned. From 1992 to 2015, government debt as a percent of the country’s GDP increased from under 100 percent of GDP, to 229 percent of GDP.
Japan’s prolonged economic slowdown helped bring about an era of deflation. Now its annual inflation rate stands at negative 0.4 percent (a negative inflation rate means there is deflation). This means that, in theory, if you paid 280 yen for a dozen eggs last year, this year they would cost 278 yen. In a deflationary environment, consumers believe prices will be lower in the future – so they delay purchases, waiting for lower prices. This in turn slows economic growth and results in further deflation.
To get people to borrow and spend more, the Bank of Japan started slashing its prime lending rate in 1992. It cut it until the rate reached nearly zero. It’s been there for about 20 years. And recently, Japan’s central bank decided to move to negative interest rates – a financial concept that is flipping the world of finance on its head.
Today, deflation, negative interest rates and horrible demographics are the hallmarks of Japan’s economy. These are all symptoms of what could be called ‘Japanese disease.’
One of the side effects of the disease has been pitiful stock market performance. Japan’s Nikkei 225 index hit a peak of 38,957 in 1989. It is now at 16,620. So 27 years later, the stock market is 57 percent below its all-time peak.

This post was published at David Stockmans Contra Corner By Kim Iskyan, Business Insider ‘ July 28, 2016.

Japan’s Lemming Syndrone

The financial world is buzzing about former Fed chairman Ben Bernanke’s recent trip to Japan, where he advised Japan’s central bank chief Haruhiko Kuroda on how to manage his nation out of multi-decades of stagnant growth. Channeling economist Milton Friedman, Bernanke warned that Japan was vulnerable to perpetual deflation and stagnate growth and that helicopter money – where the government issues non-marketable bonds with no maturity date and the Central Bank buys them with counterfeited credit – was the most useful tool in overcoming this condition.
Bernanke encouraged Japan to carry on with the Abenomics policies that have failed to date by supplementing monetary policy with even more fiscal stimulus – as if Japan’s 230% debt to GDP ratio wasn’t enough. And he assured Abe and his staff that the Bank of Japan (BOJ) has instruments to ease monetary policy yet further.
And in case this village needed another idiot, Nobel laureate Paul Krugman, also chimed in. Arguing that Japan should raise its inflation target to 4 percent and embark on a significant but temporary fiscal stimulus to boost prices in the economy. Speaking at a conference on Thursday in Singapore, Krugman called for ‘a big burst of government spending and maybe also cash donations.’
But the truth is that despite pumping trillions of yen into the financial system, Japanese money printing has had little or no effect in restoring growth. In fact, Japan has already undertaken the largest quantitative easing program – much larger in relative terms than the U. S. Federal Reserve and the European Central Bank.

This post was published at David Stockmans Contra Corner on July 25, 2016.

What Is Helicopter Money? Goldman Explains

Whether Japan admits it or not, helicopter money – thanks to Ben Bernanke – is here, and the market’s reaction this week was simply the first stage of pricing it in, as confirmed by the biggest drop in the Japanese currency this century.
Incidentally, we are “confident” that the SEC will inquire whether Citadel- Ben Bernanke’s official employer – was actually short the Yen ahead of its employee going to Japan and advising the Bank of Japan what to do, and how to crush its currency. Obviously that would be a grandiouse, and criminal, conflict of interest.
We won’t be holding our breath, but while we wait here is a useful primer for all those wondering just what is coming, courtesy of Goldman Sachs, which explains the nuances of monetary policy’s endgame: Helicopter Money.
Q1: What does helicopter money refer to in the first place?
A1: Literally, it is a policy whereby the government or central bank supplies large amounts of money, as if it were scattering money from a helicopter. A more practical definition, however, is a policy whereby the central bank has primary responsibility for funding to facilitate more flexible and active fiscal spending by the government. The concept of helicopter money has been around for years. Professor Milton Friedman was first to propose the idea in 1969, and in the early 2000s then Federal Reserve Board Governor Ben Bernanke raised it as one prescription to prevent deflation.[1] Very recently, a July 13 Sankei Newspaper article suggesting Prime Minister Abe and his advisers were considering helicopter money sparked debate on the subject in Japan.

This post was published at Zero Hedge on Jul 15, 2016.

“Bring It On!”

Five words are important now: failure, exposure, rejection, repression, and war. The status quo has failed on multiple fronts. Its failures and corruption are being exposed, its governance and legitimacy questioned and rejected. The response is all too predictable: repression at home, war abroad. The Clintons represent the toxic confluence, the maelstrom’s vortex, and Hillary Clinton will press the powers’ response.
Anything but free market economics is a redistributive shell game with a sell-by date. Government debt, spending, and programs, redistribution, and central bank debt monetization and interest rate suppression have passed their expiration, leaving mountains of IOUs that will never be repaid and prostrate economies in the first thralls of a deflationary contraction that will be one for the ages. Particular rancid: illusory, credit-based wealth has gone to a small, well-connected coterie who access microscopic interest rates for financial engineering and speculative fun and games. Left behind: honest producers and savers, who have seen their incomes shrink and the economy wither.
Not content to lay waste to their own countries, the powers have visited their destructive and murderous mayhem upon wide swathes of the globe. Seeking to impose order they have instead promoted chaos, failed states, refugee flows, and the spread of terrorism. Stuck in costly and inconclusive quagmires in second-tier states, the US war lobby seems intent on provoking decidedly first-tier Russia and China, with a concomitant escalation of negative consequences. You can’t get any bigger, or potentially more suicidal, than war with the second and third largest nuclear-armed powers.

This post was published at Zero Hedge on Jul 12, 2016.

Bernanke’s Black Helicopters Of Money

Ben Bernanke is one of the most dangerous men walking the planet. In this age of central bank domination of economic life he is surely the pied piper of monetary ruin.
At least since 2002 he has been talking about ‘helicopter money’ as if a notion which is pure economic quackery actually had some legitimate basis. But strip away the pseudo scientific jargon, and it amounts to monetization of the public debt – – the very oldest form of something for nothing economics.
Back then, of course, Ben’s jabbering about helicopter money was taken to be some sort of theoretical metaphor about the ultimate powers of central bankers, and especially their ability to forestall the boogey-man of ‘deflation’.
Indeed, Bernanke was held to be a leading economic scholar of the Great Depression and a disciple of Milton Friedman’s claim that Fed stringency during 1930-1932 had caused it. This is complete poppycock, as I demonstrated in The Great Deformation, but it did give an air of plausibility and even conservative pedigree to a truly stupid and dangerous idea.

This post was published at David Stockmans Contra Corner on July 11, 2016.

BOJ’s Money Printers Rebuked: Shoppers Tighten Purse Strings, Japan Retailers Seeing Red

Japan’s discount-seeking shoppers drove some retailers into the red last quarter as an uncertain economic outlook persuaded consumers to tighten their purse strings.
Supermarkets and clothing stores will probably cut prices more to spur sluggish sales, which caused Aeon Co., the nation’s biggest retailer by sales, to report its worst first quarter in eight years – a 6.3 billion yen ($62 million) loss. Seven & i Holdings Co. posted operating profit that missed analysts’ estimates as its department store business that includes retailer Sogo & Seibu widened its operating loss to 1 billion yen.
Aeon joined Fast Retailing Co. in pledging to offer cheaper products – a strategy that may drag down spending and frustrate Prime Minister Shinzo Abe’s effort to fight deflation and revive the world’s third-largest economy. Last month, Abe postponed a sales-tax increase by two years to avoid further declines in consumer spending.
‘The exit from deflation is getting more distant, or rather the deflationary mindset is rising,’ said Mitsushige Akino, executive officer at Ichiyoshi Asset Management Co. in Tokyo. ‘The drops in stock prices, the negative interest rates and the delayed tax hike – all you get is something bad. Consumers’ psychology is not heading in a positive direction.’

This post was published at David Stockmans Contra Corner on July 8, 2016.

Wall Street Monkeyshines – – Look Ma, No Hands!

The boys and girls on Wall Street are now riding their bikes with no hands and eyes wide shut. That’s the only way to explain Friday’s lunatic buying spree in response to another jobs report that proves exactly nothing about an allegedly resurgent economy.
When the S&P 500 first hit 2130 back in May 2015, reported LTM earnings were $99.25 per share, and that was already down 6.4% from the cyclical high of $106 per share in September 2014. Thus, stocks were being valued at a nosebleed 21.5X in the face of falling earnings.
During the four quarters since then, reported LTM earnings have slumped by a further 12.3% to $87 per share. So that brings the ‘cap rate’ to 24.5X earnings that have shrunk by 18% over the last six quarters. Wee!
You have to use the parenthetical because the casino is not capitalizing anything rational. It’s just drifting higher in daredevil fashion until something big and nasty stops it.
That something would be global deflation and US recession. Both are racing down the pike at accelerating speed.
Needless to say, when these lethal economic forces finally hit home, the puppy pile-up on Wall Street is going to be one bloody mess. But that’s the price you pay when you have destroyed honest price discovery entirely, and have transformed the money and capital markets into robo-machine driven venues of rank speculation.
Janet Yellen and the other 100 clowns who run the world’s central banks, of course, have no clue as to the financial doomsday machine they have enabled. Indeed, they apparently think efficient pricing and allocation of capital doesn’t matter.

This post was published at David Stockmans Contra Corner on July 9, 2016.