Category Archives: The Fed

Here We Go Again

Recurring economic crises are nothing but the consequence of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit. […]

And although the conclusion to which my investigations lead, that expansion of credit cannot form a substitute for capital, may well be a conclusion that some may find uncomfortable, yet I do not believe that any logical disproof of it can be brought forward.

— Ludwig von Mises, The Theory of Money and Credit, 1934, 2009 edition

Deflation Watch

ECRI chimes in – I told you so.

The plunge in oil prices, which dropped below $50 this week, blindsided many businesses and investors. But the inevitable decline was foreshadowed months ago by a downturn in commodity prices, as measured by ECRI’s Industrial Price Index (IPI) which was previously known as the JoC-ECRI IPI*…….

…..Oil price inflation has now plummeted to a 32-month low – its worst reading since early 2016 (bottom line). But industrial commodity price inflation, as measured by the IPI, has already dropped to a 33-month low, and is still falling (top line), signaling continued downside risk for oil price inflation.

Deflation Watch

Crude Oil (WTI) is through $50/bbl to the downside.

Only two prices matter; energy and labor.

I assume Powell knows this and that’s why he goosed markets yesterday. He’s worried that he’s broken something. He has.

Close To The Event Horizon?

From ECRI’s Lakshman Achuthan:

Notably, the combined debt of the US, Eurozone, Japan, and China has increased more than ten times as much as their combined GDP [growth] over the past year.

Remarkably, then, the global economy—slowing in sync despite soaring debt—finds itself in a situation reminiscent of the Red Queen Effect we referenced 15 years ago, when tax cuts boosted the US budget deficit much more than GDP. As the Red Queen says to Alice in Lewis Carroll’s Through the Looking Glass, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Inflation?

The increase in average hourly earnings (AHE) was taken as a sign of economic strength. Well, no. AHE is aggregate earnings divided by aggregate hours worked. So if hours worked is declining faster than earnings, AHE goes up. But is a sign of weakness. From ECRI.

In another case of up means down, the NOPE index is signalling trouble.

Economy On Fire?

CNBC says the economy is “on fire” after today’s establishment survey report of an increase of 201,000 jobs.

From the household survey in the same report, the number of people employed fell by 423,000. The labor force shrank by 469,000.

Pretty weird fire, if you ask me. Mostly just reflects the fact the these are random numbers and guesses.

Those Words Again

Fed Chairman Powell, speaking this morning at the Jackson Hole festival of central banker self-love, promised to do “whatever it takes” to prevent another financial crisis.

Unfortunately, Mr Powell, your predecessors have done everything that it takes to guarantee another crisis, a truly special one this time.

The New Gilded Age

The Gilded Age, roughly 1870-1900, was a period where abject poverty and fabulous wealth coexisted.

Unlike today’s New Gilded Age, the original was a period of rapid economic growth. Today, wealth has been concentrated in the hands of a tiny elite by the actions of the Fed, which have inflated asset prices.

I offer as evidence:

24Karat gilded chicken wings. Serving no purpose whatsoever except ostentation. (The gold is tasteless and passes unchanged through the digestive system).

The PhD Standard

James Grant (Grant’s Interest Rate Observer) in 2011:

“The 2007-2009 real estate debacle is the monetary equivalent of a chain reaction on a foggy California freeway. The trouble with our monetary mandarins is they [the Fed] believe impossible things. They have persuaded themselves that the central bank can pick the interest rate that will cause the GDP to grow, payrolls to expand, and prices to levitate by just two percent a year, as they measure it. It is impossible as experience and common sense attest. Yet, they hold it to be true.

… William F. Buckley famously and persuasively said that he would rather be governed by the first 400 names in the Boston phone directory than by the faculty of Harvard. Unaccountably, this Congress has entrusted the value of the dollar that we own, that we transact to an independent committee dominated by monetary scholars. In one short generation we have moved to the PhD standard from the gold standard.”

The insanity continues.

Credit Impulse

The credit impulse isn’t the sudden urge to borrow – it is the additional income and concomitant spending that results from an increase in aggregate debt. Spending capacity = net income + credit impulse. Credit impulse (annual) = current debt amount – year ago debt amount. Not complicated.

The credit impulse is how easy money creates economic expansion as economic entities – households, corporations, governments, etc. are able to spend more than they earn.

The downside is that, sooner or later, the entities reach the limit of their ability to borrow. The credit impulse disappears and the economy shrivels. Incomes diminish and defaults begin as entities can no longer service their debt. Credit becomes very difficult to obtain, lenders fail as capital losses mount and the economy accelerates downhill as the credit impulse goes negative as borrowers are unable to roll over their debt.