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JohnnyCash

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Reply with quote  #7111 
Rickencin --- the above point is straightforward, but the mechanism is a little more complicated. There isn't a single point in time when all debtors can't refi. It is a process, the weakest go first, then the next rung up faces the same fate. There are multiple "Dickens Points" at different times for each debtor class. IF it operates like other markets when prices break then it will gather speed as the decline proceeds.

I say IF because we have never witnessed a collapse such as this in our time. 1929 was a smaller collapse (both in nominal and relative terms) than the one pictured here. The reason is because the Credit Money Supply is so much larger, in nominal and relative terms, today than in 1929. Mike hasn't addressed this point yet.

As Mike Maloney noted, the Credit Money Supply is much larger than the Currency Money Supply. Mike didn't take that idea to the next step. As credit money depreciates in value as each Dickens Points is reached the currency money inversely appreciates. Most importantly, since the Currency Money Supply is so much smaller the appreciation effect is non-linear!

I expect Mike will come to these later points in future videos.

Other dynamics happen as the Deflation proceeds. The losses in the Credit Money Supply reduce the money available for customers to make purchases. This leads to a Deflation induced reduction in aggregate Demand and Prices fall as supplies build.

So, we see two separate dynamics, one a Credit Money Supply contraction, the other a Consumer Demand contraction but both leading to a decline in Prices.

The inevitable rise in unemployment further exacerbates the problem, but in the same direction, Declining Prices.

As you see the simple but accurate Dickens Point is only a cog in a larger machine.

Mike will come to these factors in future videos I am sure, just give him a little more time.

These other dynamics are not added just for the sake of complexity. They are necessary just like the parts of an internal combustion engine or hardware components of a computer.

We haven't begun to assess the specific Stock, Bond and Real Estate market effects or International Currency Market Effects.

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JohnnyCash

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Reply with quote  #7112 
The Velocity of Money Across the Globe

It's bad here, but so much worse everywhere else.

The trend is to Deflation and economic contraction in all major world sectors.

Is China really starting to "boom" again as many "experts" believe?
Not if you understand the implications of the Chinese money velocity.

[102616_ENMa]

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davidoosnk

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Reply with quote  #7113 
I have seen recent indicators that inflation is creeping up. A lot of minimum wage hikes are around the corner in urban areas so those could at least push up inflation in those areas. 
JohnnyCash

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Reply with quote  #7114 
Quote:
Originally Posted by davidoosnk
I have seen recent indicators that inflation is creeping up. A lot of minimum wage hikes are around the corner

David --- how much is the money supply increased when the minimum wage is increased?
Answer: 0, zero, nada, zilch
How much is inflation increased if the money supply is not increased?
Answer: 0, zero, nada, zilch

Inflation can increase prices across the board, all sectors. Supply and Demand increase prices for specific economy sectors and have no effect on other sectors.

Inflation can cause prices to rise but not all price rises are inflationary.

All men are human but not all humans are men.

in urban areas so those could at least push up inflation in those areas. 

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davidoosnk

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Reply with quote  #7115 
OK well yes in theory but the money supply is up big time-- so we already have inflation-- so something like wage inflation could be like the spark that lights the fire i.e. inflation that we actually see beyond abstract 0s and 1s on a Federal reserve computer screen. 

No crystal ball here just a conjecture.
JohnnyCash

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Reply with quote  #7116 
Quote:
Originally Posted by davidoosnk
OK well yes in theory,

Also in fact.

but the money supply is up big time

Yes. but David that was years ago 2010, 2011 at latest. The AMB, Currency Money Supply, increased 400% by Mr. Bernanke's Inflationary actions from August 2008 to 2011. Now we are at the end of 2016.

Everyone expected massive inflationary price increases from '09-'10 into the future. But it didn't happen. That was a new and unexpected monetary event for most observers.

I made a mistake, not everyone thought there would be inflationary caused price increases. Someone in this thread was very clear then and very clear now that the inflation would arrive but the inflationary price increases would not.

Now even Mike Maloney (see Maloney post on bottom of previous page) agrees as of 2016. Mike was thinking about the problem from 2010 to 2016, like you.

However Mike doesn't read this thread but you do. We had a lively discussion about the question from 2009 to 2013.

It's all recorded here.

Ask yourself this question: "Have prices across the economy increased 400% since 2010?"
Answer: No, nein, nyet

In fact many prices are down or trending down. In particular oil and gasoline have had big drops. Remember when gas in Calif was over $4.00? It's nowhere near that now. Oil and gasoline are key indicators of economic activity.

Expanding economies use more oil and gas and prices rise, contracting economies use less, and prices fall. Since oil and all it's distillates are used throughout the economy they are a proxy for all other goods and services, many of which use petroleum distillates.


-- so we already have inflation

This was a key question in this thread a few years ago. We anticipated and then saw that something new was happening in the economy.

The Money Supply (Currency Supply portion) was indeed increased. That is the definition of Inflation. The new thing that happened was a failure of the Banking System or Fed to Inject the new currency into the economy.

So here's a pseudo Zen riddle parallel to "If a tree falls in the forest and no one hears it, does it make a sound?". "If $4Billion bucks gets locked away in Fed vaults, does the economy ever see it?"

We can say at this late date that the answer is "No" (even though we predicted this result long before it happened right here in this thread, it is still here). The Currency Money Supply increased 400% but was never "seen" by the economy.

Proof: If it were seen by the economy we would have prices across the board today 400% higher than 2009-10. We don't, so it didn't.

Oh, and we are not going to see Inflation until Deflation has done it's work.

-- so something like wage inflation

No, no, no. Let me ask you a question. When Ben Bernanke wanted to increase the Currency Money Supply in 2008 did he raise wages to create the new Currency????
Answer: No, Nein, Nyet.

Rising wages do not create new Currency. Just get rid of that Leftist idea now and your understanding will expand.

Inflation can cause prices to rise across the board, but NOT ALL PRICE RISES are the result of Inflation. Just recall Econ. 101, rising Demand causes certain sector prices to rise, falling Supply causes certain sector prices to rise.

All men are human, but not all humans are men.

Don't feel all alone in this confusion. I have it on good word (mine) that Mario Draghi, head of the European Central Bank has the same confusion which led to his use of Negative Interest rates to hmmmm... "ignite" the European economy.

It didn't work, it isn't working now and we predicted that (right here in this thread, it's still here) as soon as word of Mario's confused policy was printed in the US almost 3 years ago.


could be like the spark that lights the fire i.e. inflation

David, David .... the economy is not a stack of cut timber awaiting a match. Have you been talking to Mario??

that we actually see beyond abstract 0s and 1s on a Federal reserve computer screen. 

The Fed actually did create a lot of new currency.

So why didn't we have 400% price inflation?? In reality it should be more than just 400%, some multiple of 400%.

So we had the monetary inflation but for the first time in my knowledge WE DIDN'T HAVE THE EXPECTED PRICE INFLATION. (Something we fully anticipated and predicted in '09, '10, '11 ... in many heated arguments in this thread. Now at this late date 2016 that '09-'11 prediction has been fully verified.)


No crystal ball here just a conjecture.

Yes, conjecture exactly, faulty conjecture.


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JohnnyCash

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Reply with quote  #7117 
California Isn't In the New Foreclosure "Boom", -- Yet

Some of the old bad actors from 2008 return, loose lending re-emerges.



What The Hell Is Suddenly Going On With Foreclosures?

Tyler Durden's picture
 

Submitted by Wolf Richter via WolfStreet.com, 

Foreclosures suddenly spike most since the last Housing Bust

The total number of homes with foreclosure filings jumped 27% in October from September, when they’d been at the lowest level since 2006. It was the biggest jump in monthly foreclosure filings since August 2007.

Compared to October last year, homes with foreclosure filings still decreased, but this nationwide decrease is covering up what is now happening in 28 states and Washington D.C., according to the Foreclosure Report by ATTOM Data Solutions. There, the inventory of homes with foreclosure filings is beginning to rise even on a year-over year basis. And in some states it soared year-over-year:

  • Colorado +64%
  • Georgia +22%
  • Pennsylvania +20%
  • Arizona +17%
  • Virginia +15%
  • Massachusetts +11%
  • New York +10%

When home prices rise for years, foreclosure filings become rare because defaulting homeowners can usually sell the home for more than they owe and pay off the mortgage. The problem arises when home prices fail to rise locally, and it balloons when home prices fall. We’ve seen that last time around. After bouncing along super low levels during Housing Bubble 1 through 2005, foreclosure filings skyrocketed during the housing crash starting in 2006. At first it was just an uptick that no one paid attention to. By 2008, it helped take down the financial system.

Foreclosure filings peaked in late 2009, began dropping in 2010, and then tapered down to 2006 levels as foreclosures were processed, and as the home price surge of Housing Bubble 2 made new defaults less likely. But the spike in October stands out as much as those in the early phases of the housing bust in 2006 and 2007. Note the blue bar on the right:

us-housing-foreclosures-2016-10

While some states are still trying to digest the foreclosures from the last housing crisis, according to Daren Blomquist, senior VP at ATTOM, “the foreclosure activity increases in states such as Arizona, Colorado and Georgia are more heavily tied to loans originated since 2009”:

“The loans used in this housing recovery that appear to be most susceptible to foreclosure are those such as FHA and VA with low down payments. Our data shows FHA and VA loans combined represent 49% of all active foreclosure inventory for loans originated in the seven years ending in 2015.”

This chart shows the soaring proportion of FHA and VA mortgages issued since 2009 among the active foreclosure inventory.

us-housing-foreclosures-fha_va-2016-10

On average across the nation, the foreclosure rate was one foreclosure filing for every 1,258 housing units. But in some states, the foreclosure rate was much worse. Here are the “top” ten:

  1. Delaware: one in every 355 housing units
  2. New Jersey: one in every 564 housing units
  3. Maryland: one in every 679 housing units
  4. Illinois: one in every 704 housing units
  5. South Carolina: one in every 801 housing units
  6. Nevada: one in every 826 housing units
  7. Florida: one in every 895 housing
  8. Ohio: one in every 930 housing units
  9. Pennsylvania: one in every 1,018 housing units
  10. Georgia: one in every 1,028 housing units.

And here are the “top” ten highest foreclosure rates among the 216 metropolitan areas with a population of over 200,000:

  1. York-Hanover, PA: one in every 274 housing units
  2. Atlantic City, NJ: one in every 301 housing units
  3. Rockford, IL: one in every 481 housing units
  4. Columbia, SC: one in every 498 housing units
  5. Trenton, NJ: one in every 499 housing units.
  6. Reading, PA: one in every 542 housing units
  7. Chicago, IL: one in every 571 housing units
  8. Dayton, OH: one in every 573 housing units
  9. Philadelphia, PA: one in every 597 housing units
  10. Salisbury, MD: one in every 625 housing units.

These “foreclosure filings” are based on data that ATTOM gathered in 2,200 counties where over 90% of the US population lives. They include data on the three phases of foreclosure:

  • Foreclosure starts: lender issues Notice of Default (NOD) and Lis Pendens (LIS)
  • Auction notices for future public foreclosure auctions: Notice of Trustee’s Sale (NTS) and Notice of Foreclosure Sale (NFS);
  • Real Estate Owned (REO) properties that have been foreclosed on and were repurchased by a bank at auction and are now held by the bank.

Broken down based on these three phases of the foreclosure process:

Foreclosure starts jumped 25% in October from the prior month, to 43,352. While still down 11% year-over-year, it was the highest monthly increase in foreclosure starts since December 2008.

Foreclosure starts increased even year-over-year in 23 states and Washington D.C. In some states they soared. The “top” five:

  1. Colorado +71%
  2. Arizona +48%
  3. Ohio +34%
  4. New York +15%
  5. Virginia +15

Auction notices jumped 30% from the prior month to 43,815 (in some states, these are foreclosure starts), the biggest monthly increase since January 2006. While still down 6% year-over-year nationally, auction notices rose year-over-year in 25 states and Washington D.C. The “top” five:

  1. Pennsylvania +66%
  2. Indiana +37%
  3. Illinois +34%
  4. New York +12%
  5. New Jersey +6%

Bank repossessions (REO) jumped 25% from the prior month to 34,288 homes, the biggest monthly increase since July 2015. While REOs were still down 6% year-over-year nationally, they increased in 22 states and Washington D.C. The “top” five:

  1. Massachusetts +104%
  2. Georgia +53%
  3. Wisconsin +45%
  4. Texas +38%
  5. Virginia +17%

The fact that mortgages issued since 2009 are now seeing rising defaults again is worrisome enough. It’s doubly concerning that 49% of these foreclosure filings are on homes with low-down-payment mortgages backed by the FHA and VA and issued since 2009. Recall that low-down-payment mortgages played a big role in the last housing collapse.

ATTOM VP Blomquist tries to remain sanguine: “The increase in October isn’t enough evidence to indicate a new foreclosure crisis emerging in these states, but it certainly demonstrates that this housing recovery is not completely devoid of risk.”

So take this as an early red flag, the kind you might have seen in 2006 when no one paid attention to red flags in the housing market.

Some of the same characters that played leading roles during the last housing bubble and bust are back in their full glory. Read…  Housing Bust 2? Low- and No-Down-Payment Mortgages Surge, “Shadow Banks” Dominate


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JohnnyCash

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Reply with quote  #7118 
A Dollar Shortage Developing In Foreign Currency Markets

This of course follows the thinking here. What happens when the supply of something shrinks? It's price rises. This means the value of other currencies falls relative to the USD.

Is a shortage of foreign USDs Deflationary ---- yes, exactly ---- for Europe. It could affect the US, but later.

The Euro Dollar market has a life of it's own. There is no indication the shortage is the result of Federal Government or Federal Reserve action.

Perhaps, let see, perhaps the Brexit + the Donald win = EuroExit??? (Erexit?).
Italy is going to vote on leaving the EU later this year.

So what's going to happen to the USD in the future?    It's going to keep on rising in value. No hyperinflation here.

The article below says certain nations are really becoming upset with this shortage of USDs and are going to start using other currencies, like the renminbi, or ruble or rupee or .... the market basket of BRIC currencies --- hmmm... that didn't work out well at all, ---- but it sold a few PC newspapers and TV talk shows.

What does that comment indicate about the authors understanding of money? He understands very little. If foreign nations were in a hissy-fit about the USDs availability  --- they just wouldn't be gobbling them up. It's a contradiction that the author below doesn't see.

The title below says the Fed doesn't understand. What's to understand? The International Demand for the USD is outstripping the EuroDollar supply. As mentioned above the EuroDollars have a life of their own. There's nothing the Federal Reserve charter that requires it to print more USDs and then dump them in Europe or Asia or South America.

Why would that happen??? Well, let's see, could it be the International world sees the USD as the most valuable currency?? If you've followed this thread for a few years then your answer is immediately "Yes".

But isn't that just a cruel, sexist, Donald Trumpian, xenophobic, racist, transphobic, hater, white privilege response as Hillary would say?

I don't know, but Donald didn't say it, the International Currency markets said it, and they are all foreigners.



Dollar Illiquidity Getting Critical: A $10 Trillion Short Which The Fed Does Not Understand

Tyler Durden's picture

In the latest report from ADM ISI’s strategy team, “Dollar Liquidity Threat is Getting Critical and Fed is M.I.A.”, Paul Mylchreest argues that mainstream economic luminaries (like Carmen Reinhart) are finally acknowledging the evolving crisis due to the dollar shortage outside the US, a topic which even the head researcher at the BIS shone a spotlight on yesterday suggesting that the strength of the dollar, not the VIX is the new "fear indicator". 

The bitter irony is that the institution which appears to have very little understanding of what’s actually happening is the Federal Reserve. We noted Stanley Fischer’s speech yesterday when he argued that liquidity is “adequate”.... at least he didn’t say “contained.”

Yet Dollar illiquidity has been one thing that central banks can’t control…think SNB and Swiss Franc, BoJ and Yen (full report on this below) and now the PBoC as the RMB looks at 6.90. Mylchreest points out that Fischer could take a look at dollar cross currency basis swaps (chart below) and the dollar liquidity problem would be immediately obvious. 

Fischer could take a look at dollar cross currency basis swaps (chart below) and the dollar liquidity problem would be immediately obvious.

While everybody is now waiting for the Fed to wake up, here at ZH we have been tracking the issue of a global dollar shortage well ahead of the mainstream, starting back in 2009 and continuing with “The Global Dollar Funding Shortage Is Back With A Vengeance And ‘This Time It's Different" in March 2015 and “Global Dollar Shortage Intensifies To Worst Level Since 2012” in October 2015.

If the dollar continues to strengthen, it will spell trouble for the recently adopted market narrative that Trump brings higher inflation and higher rates. Another major rotation and market reversals are the last thing that active managers need, or can can afford, in the run up to year end.

From the first section of the report:

We know the narrative...Trump equals higher inflation, a tailwind for commodities and a headwind for bonds. We are “Endgame Inflationistas”, but declining US dollar liquidity threatens this narrative near-term.

Dollar illiquidity is something that even central banks struggle to control, e.g. Swiss Franc peg, BoJ losing control of the Yen and now the PBoC/RMB.

The price of the dollar acts like a “Global Fed Funds Rate”. A rising dollar tightens economic conditions globally, adding considerable deflationary pressure as is clear from the chart below.

[PM%201_0]

 

Most commentators are not making the link between a rising dollar and a shortage of offshore dollars (Eurodollars). China’s financial system is vulnerable and it’s being reflected in RMB weakness.

The lack of a dollar swap between the Fed/PBoC is a glaring omission. We expect BRICS nations to become increasingly irritated about the current dollar-based system. (Oh, my goodness, the BRICs are irritated at the US Federal Reserve. Are we trying to make the Federal Reserve the Central Bank for the world? Sorry that's just not in it's charter. Manage your own currencies BRICs. Once you get that figured out you won't need USDs)

In his recent speech, “Is There a Liquidity Problem Post-Crisis?”, Fed Vice Chairman, Stanley Fischer, concluded that liquidity is adequate. Sadly, that is incorrect and a glance at the chart (below) of negative Cross Currency Basis Swaps for dollar funding illustrates the error all too easily. A US$10 trillion Eurodollar short is a more dangerous and risky beast if the Fed doesn’t understand it!

The table below shows the Cross Currency Basis Swap (CCBS) for US dollars using the average for Euros, Yen, British Pounds, Swiss Francs and Canadian Dollars. We discuss the CCBS in more detail below but, in essence, it is the additional cost of borrowing dollars via FX swaps in these currencies compared with what it should be according to interest rate differentials. The more negative the CCBS the more it implies a structural dollar shortage and a liquidity problem in dollar funding markets.

 

[PM%202_0]

While the problem has been building for more than 2 years, mainstream economic luminaries are (belatedly) starting to take notice. This was Harvard’s Carmen Reinhart last month.

“Today, seven decades later, despite the broad global trend toward more flexibility in exchange-rate policy and freer movement of capital across national borders, a ‘dollar shortage’ has reemerged.”
(no, what's emerged is the age old problem of several foreign nations being unable to manage their own currencies, primarily the oncoming demise of the Euro that this Dollar Shortage reflects)


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"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
JohnnyCash

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Reply with quote  #7119 
The only reason governments want a cashless society is to perfect their control over all your daily commercial activities. That's it. It's not about drug money, that's just a cover. It's not about efficiency or convenience, it's all about control over your lives by the likes of Hillary, Bill, Barack, Pelosi, Reid...

Indian Economy Grinds To A Halt After Cash-Ban: "Faith In System Shaken"

Tyler Durden's picture

Amid scenes of panic across India, following PM Modi's shock decision to withdraw high-value bills in the middle of the sowing and wedding season, Reuters reports the move, aimed at cracking down on the shadow economy, has brought India's cash economy to a virtual standstill. With over 90% of all transactions done in cash, money flows in and out of the black-and-white system... until now, as Devangshu Datta exclaims, "The system works because everybody believes that those pieces of paper will be accepted by everybody else... This move has shaken that trust."

Farmers have been left stranded as traders have no cash to pay for their produce, while millions of Indians lined up outside banks and post offices for the ninth day to exchange old banknotes or withdraw rationed money from their accounts.

Many of India's 260 million farmers have no bank accounts and depend on local money lenders to fund sowing, which means those that have to borrow to sow winter crops like wheat or rapeseed could face debt trouble without a good harvest.

And so India's government on Thursday announced immediate steps to ease a cash crunch for farmers amid widespread criticism. In the latest in a series of ad hoc steps, Modi allowed farmers to withdraw up to 25,000 rupees ($368) a week against their crop loans to ensure that sowing of winter crops "takes place properly", a senior finance ministry official said.

[20161117_india_0]

But, as Devangshu Datta explains, the demonetisation of Rs 500 and Rs 1,000 currency notes came as a surprise to almost everyone. The details of re-monetisation are still to become entirely clear. What follows is a set of personal opinions of likely outcomes arising from this move to demonetise. Each of those opinions could be entirely wrong but they are all centred on subjects that are worth thinking about.

But, first, some basic statistics.

About 85% of all currency in circulation has just been turned into coupons that can only be exchanged in specific places. These notes can be converted into currency again only with identity proofs (which hundreds of millions don’t have) and the additional hardship of standing in many queues for many hours.

Over half of India’s population doesn’t have any sort of bank account at the moment and about 300 million don’t have basic ID such as Aadhaar either and hence, cannot access the banking system at all. About 130 million Indians have mobile wallets (about 25 million have credit cards) and there are maybe 550 million-600 million debit cards in circulation. So access to cash is very, very important for average Indians.

Liquidity in the economic system will be sucked out for several weeks at the very least, due to the very stringent restrictions on cash withdrawals from ATMs, and bank accounts. Plus there’s the sheer logistics of getting that massive volume of new notes into circulation. In addition there will be a cost to printing and distributing the new notes and taking the old currency out of circulation.

India is a cash economy. Well over 90% of all transactions are done in cash. Most of these transactions are legal, consisting of relatively small amounts, and frequently done by people who don’t make enough money to pay income tax. Your domestic worker pays for her bus ticket. You pay her husband, the plumber, for fixing your flush. The security guard at the bank ATM buys cigarettes.

Money flows in and out of the black-and-white system. The paan-wallah pays the fast-moving consumer goods companies for the cigarettes and chewing gum he sells, and keeps the retail margin. That’s white. He ploughs the surplus cash into buying paan leaves in undocumented transactions: the farmer who grows the paan pays no tax; the trader who sells paan under-reports the transactions. That’s black. The mechanic (who is outside the tax net) receives an (undocumented) tip for changing a flat tyre and buys a metro token (putting cash back into government coffers), or goes to see a movie (paying service tax).

Industries like fashion, retail, interior decoration, furniture, laundry and dry-cleaning services, hospitality, medical services, gems and jewellery, et cetera., are large conduits for these flows. We could call them black and white industries. Construction and real estate are totally built around black and white. Land is always sold with part of the price being paid in cash. The real-estate developer buys in black and white and he sells in black and white. The construction process is also black and white (carrying ghost workers on the construction rolls is one easy way to generate black money for example).

These are the facts.

Slowdown in growth

And now for some estimates and opinions.

By all estimates, the size of the black economy in India is large and the undocumented, informal but legal economy is also large. Estimates range from 20% of official Gross Domestic Product to 40% of official GDP. Many assets are held in the form of real estate and jewellery or assets stashed abroad in bank accounts or real estate, etc. However, political parties and religious bodies tend to hold trunkfuls of physical cash and some cash-intensive businesses also have large floats sitting around.

Now we come to the opinions.

The informal economy will be badly impacted. The non-cash assets will remain but those will be “frozen” for a while in that it will be difficult to convert those assets immediately. Cash assets will need to be laundered in some fashion (maybe by opening religious trusts and trustees “donating” notes to the trust, etc.) and will probably incur massive discounts in conversion. There will be blackmarket conversions to hard currencies and bullion, with rupee notes being accepted at massive discounts (anecdotal conversations suggest that the United States dollar is now trading at 15% premium to the Reserve Bank of India rate).

All the black and white and cash-intensive industries will be impacted for a while by the liquidity freeze. So will other industries with high cash turnovers (such as roadside vegetable sellers). This will show up in serious economic under-performance and in a slowdown in GDP growth.

The slowdown in GDP growth will not be completely captured in official statistics but there will be signs for sure in terms of consumption falling. Since consumption contributes much more than investment to India’s GDP growth, it will certainly hurt. Almost certainly, GDP growth estimates will be revised downwards (even if the government is reluctant to do so).

Who will it hurt?

This move will certainly hurt cash-intensive political parties, which have undeclared trunkfuls of cash. in fact, the conspiracy theorists will assume that this move is largely driven by tactical considerations about funding the upcoming assembly elections in Punjab, Gujarat and above all, Uttar Pradesh.

Political parties can now accept donations from abroad and the Bharatiya Janata Party has an obvious advantage, given its major outreach to non resident Indians. So the BJP could produce money from abroad which it can convert into rupees. The BJP is also aided by its links to a non-governmental organisation, the Rashtriya Swayamsevak Sangh, which can campaign on its behalf, with the tab for that campaigning not picked up by the BJP.

The move to demonetise will hurt the very rich in absolute terms but it will mean marginal damage to their assets. It will impact the middle class in terms of inconvenience for several months. It will gut the very poor and the lower income groups. These are people with little in the way of ID proof and they often keep cash stashed under the bed because they have no bank accounts.

Your domestic worker, whose ID (if she has one) says she lives in a village a 1000 km away. Your driver, who saves a chunk of his salary and sends it home to his family. The disabled flower seller/beggar at the traffic lights. The 12-year-old selling pirated books who ran away from an abusive home. The waiter-cum-delivery boy at the local dhaba. The massage parlour therapist. These are the people who will get really badly hurt. They all have high proportions of their income stashed in cash and they will have to pay large sums under the table to legitimise it.

What next?

The long-term impact of this move might be hard to assess. Once cash liquidity comes back to the economy, will there be reforms in the actual way that black and white business work? Or will people simply find new ways to game the system? I am cynical enough to suspect the latter will happen. It happened in 1978 when the Janata Party demonetised. While the Indian economy has changed considerably since 1978, Indians have also developed a global reputation for ingenuity and jugaad in the last 40 years. A lot of very smart people now have skin in the game when it comes to gaming the demonetisation.

There could be two types of political backlash as a result of this move. The rich trader class may move away from the BJP because many stand to lose large sums in absolute terms, and their assets will be frozen for a while. The second backlash will come in terms of voteshare shift from lower income groups, who will lose a large proportion of their savings and spend large quantities of time trying to convert hard-earned cash.

There are a couple of other points to ponder. The Income Tax and Excise Departments’ ability to gather data will increase exponentially. So will their discretionary powers, when they can query people who pay large sums in cash into their accounts. This might lead to an exponential rise in demands for under-the-table payoffs to officials in those departments in the next year. Also, India has no Privacy or Data Protection Laws. That data could be sold to all sorts of people and I cannot begin to guess what the consequences could be. Let us see.

A final philosophical point. Our entire monetary system depends on trust. A banknote is a piece of paper that says the RBI will give the bearer another similar piece of paper, or make an entry in an electronic ledger for that amount. The system works because everybody believes that those pieces of paper will be accepted by everybody else and therefore, money serves as an useful medium of exchange. This move has shaken that trust.


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"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
JohnnyCash

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Reply with quote  #7120 
Euro Weakens as USD Continues to Soar

A confirmation of the suspicion from a post two steps above. The USD is in shortage in Europe as Europeans and International Traders bail out of the Euro.

My mind goes back to Jim Rickards about 3 years ago predicting the collapse of the US Dollar (hyperinflation wise). His predictions are recorded in this thread. We never accepted the idea then and still don't years later. Jim Rickards wasn't the only one, there were and still are others who make the same prediction.

Jim got so much press, so many acclaims of "genius". Also others who agreed with him, many of the Gold Bugs, but not just them. Peter Schiff too, and the fellow with the sort of German accent, editor of the "Doom,Boom and Gloom" report.

It's not going to happen until Deflation has done it's work. That's the important event Jim and the others never saw and still don't see.

Nor did they appreciate the methodology of Martin Armstrong. Flight Capital flows will continue to underwrite the USD. Just as we are currently witnessing with the decline of the Euro.

Now consider this. The Euro is still one of the stronger world currencies. Meaning there is a host of weaker currencies that are suffering more.

The USD has many problems, it is not perfect ----- but it is better than the rest for the foreseeable future.

Not only that but if Mr. Trump's plans for the US economy are implemented they will increase US GDP and put more Americans to work. It will also find the "Deportables", those who are using Social Security, Medi-Cal and MediCare benefits but were never here to work and pay into those funds.

All the talk about Yellen raising Interest rates is just distraction, blather. The markets are adjusting the rates on Federal Debt just fine, Janet. Why not take a couple of years off?

Euro In Historic Slide As Dollar Surge, Bond Rout Continues

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It has been more of the same this morning as the dollar extended its advance on the still undeteremined Trump reflationary policy measures after Yellen signaled an interest-rate hike could be imminent, while bond yields around the globe rose again, metals declined,  European stocks advanced and futures were modestly in the red just shy of all time highs.

A quick recap of what Yellen said: she reinforced the message that the Fed was close to raising rates, noting that the case for hiking ‘relatively soon’ would continue to strengthen as long as incoming data held strong. She also signalled the need for the FOMC to avoid delaying rate increases for too long, as “it could end up having to tighten policy relatively abruptly” in the future if the economy began to overheat. Yellen also quelled some fears that the pace of rate hikes would speed up in the future by noting that the FOMC expected that the economy would warrant only “gradual increases” in rates, reasoning that monetary policy was only moderately accommodative at the moment and the risk of “falling behind the curve” in the near future was limited. Yellen also noted her intention to serve out her full four-year term as Fed Chair – thus ending speculation that she might resign following Trump’s criticism of her policies during the former’s presidential campaign. There was some political tension in her remarks though as she defended financial regulations that President elect Trump has sought to partially reverse.

She also cautioned against Congress providing the economy with too much of a budgetary boost and suggested that they should target any stimulus towards the long run productivity of the economy. All in all markets have taken her testimony as signalling a near certain rate hike at the December meeting, with such a scenario now priced in at 96% on Bloomberg (vs. 94% yesterday).

[prob%20bbg%20hike_0]

As a result of Yellen's hawkishness, overnight the dollar DXY index rose as high as 101.43, a new 13 year high, sending the offshore Yuan to record lows above 6.90, and unleashing a Yen selling frenzy, before moderating some of its gains after the European open. The Bloomberg Dollar Spot Index climbed 0.4 percent to trade at its highest level since February. The yen retreated 0.4 percent.

“Right now it is a dollar-dominated story,” Philip Borkin, a senior economist in Auckland at ANZ Bank New Zealand Ltd., said in a client note. “But beyond a Fed rate hike next month, many questions remain over the path of policy going forward - for both fiscal and monetary.”

Japan’s Nikkei 225 Stock Average entered a bull market after it extended its rally from a June low to more than 20 percent after the S&P 500 Index came within four points of a record on Thursday. Equities in Europe rose for a second day. The greenback’s gain weighed on oil, gold and copper, with the industrial metal set for its first weekly slide in four weeks. Global bonds headed for their steepest two-week loss in at least 26 years.

As we reported yesterday, the EUR was about to make a dubious historic record, as it fell for the 10th consecutive day.

[EUR%20drop%20historic_0]

It has never done so before, and the last time the European currency declined for 9 straight sessions was just days before the Lehman collapse.

 

[EURUSD%20citi_0]

The latest driver of USD strength was Janet Yellen, who In her first public statement since the U.S. election told lawmakers that the Fed is close to hiking rates. The comments torpedoed Treasuries, while American financial stocks pushed their rally since Donald Trump’s presidential victory back above 10 percent Thursday. Speculation that he will boost fiscal stimulus continues to lift industries that are perceived to benefit from economic growth.

“The fact that she didn’t push back against market expectations for a December hike is perhaps the most significant takeaway,” said Jack Spitz, managing director for foreign exchange at National Bank of Canada in Toronto, referring to Fed Chair Yellen. “The dollar is higher as a result.”

In early trading, European equities rose with the Stoxx Europe 600 Index adding 0.3%, heading for a 1.2% weekly advance. Industrial shares contributed the most to the measure’s Friday rally, while mining companies fell with commodities prices. Shippers and carmakers led gains on the Topix index in Tokyo, which rose 0.4 percent. The Nikkei 225 closed at its highest level since January. Telecommunications and consumer stocks drove Australia’s S&P/ASX 200 Index up 0.4 percent, while South Korea’s Kospi index slipped 0.3 percent. Hong Kong’s Hang Seng China Enterprises Index advanced 0.2 percent, while the Shanghai Composite Index dropped 0.5 percent on the mainland.

S&P 500 futures slipped 0.1 percent to at 2,181, following a 0.5% advance in the S&P on Thursday. Bank shares led the index to its highest level since Aug. 15, when the gauge reached an all-time high. “Markets have arrived at a point where they need to weigh the risks of being caught out by the potential stimulatory impacts of the Trump administration’s policies, against the risk of being caught by those policies not being implemented,” Ric Spooner, chief market analyst at CMC Markets, told Bloomberg by email.

Away from the frenzied dollar rally an the equity reflation trade, the biggest concern remained global bonds and at what point will the rising yields put a damped on the risk-on euphoria. As noted earlier, the bond selloff deepened Friday, with yields on U.S., European and Asia-Pacific sovereign debt increasing. The Bloomberg Barclays Global Aggregate Index fell 4 percent from Friday Nov. 4 through Thursday. It’s the biggest two-week rout in the data, which go back to 1990. Yields on Australia’s 10-year notes jumped 15 basis points to 2.72 percent. Yields on similar-maturity Italian debt rose 9 basis points, while those on Treasuries increased two basis points to 2.33 percent, extending the eight basis-point jump last session.

At some point very soon, the financial tightening as a result of surging yields and USD will become self-defeating and lead to a revulsion from risk assets, however for now the markets continue to ignore this flashing red warning.


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The Indian Currency Alteration Leads To Economic Catastrophe

In an alleged effort to control black markets the Indian government declared 1,000 and 500 Rupee notes to be worthless. These notes were very popular with the Indian public and many had stored their wealth in bundles of the 1,000 and 500 Rupee notes. Large numbers of Indian citizens feared they would be unable to exchange their large notes for smaller ones before the deadline. Panic is developing in some places as the money supply goes through sudden contraction.

Now grocery stores report customers haven't the cash to buy goods. Across India small businesses are dying for the same reason. Long lines of bank customers wait hours to reach an ATM only to find it is out of cash. The Indian government has resorted to "Helicopter Money" (loading pallets of cash on Army helicopters) to move new currency to banks and businesses.

What happened? The cash injections of the Indian government cannot keep pace with the demand for withdrawals. That is exactly what happened in the US in the 1930s when 2 1/2 ton Federal Reserve trucks loaded with pallets of cash could not keep up with depositor demands for their money.

Was the Indian government really trying to abolish black markets that have been in India for centuries or was it an initial move to eliminate cash? Many informed observers believe the latter.

This is an example of just how foolish governments can be. Whatever the effects of black markets were they have been overshadowed by the unnecessary catastrophe that the Indian government has manufactured for the Indian economy.

In the crisis Indian citizens have rushed into the US Dollar for cash instead. Some are calling for abandoning the Indian currency altogether and adopting ---- you guessed it ---- the US Dollar for the national Indian currency!

Remember it was only a couple of years ago that the BRICs (Brazil, Russia, India and China) were going to create a replacement International Reserve currency for the USD! Remember how all the US newspaper writers fell for the idea and predicted the death of the USD?

We didn't fall for it here.



India Economy Falls into Chaos – Dollar Rise in Huge Demand

india-cash-protest

US dollars are soaring in premiums on the street. There is a serious risk that the government has shaken the confidence of the people to such a degree, that they trust the US dollar more than their own currency. Prime Minister Narendra Modi has come out an said the currency changeover could still take a few weeks and could lead to inconveniences, according to the magazine Brics. The Indian economy is a highly cash transacted economy far more so than the United States and Europe. The government has brought the economy to a virtual standstill. Food stores are near closing because the customers have no money. Small and medium-sized enterprises have stopped functioning because the invoices are not paid for.

When Japan would routinely devalue the outstanding currency in the same manner each time a new emperor took the throne, the population responded by using rice and Chinese coins. Japan lost the ability to even issue coins for 600 years. The Indian economy is turning to the dollar. Physical dollars are commanding a premium because they can politically trust the dollar and not their own currency.

Indians are participating in protests against the the government simply cancelling the 500 and 1,000-rupee notes. This has unleashed real chaos in India and the experiment is proving to be a complete disaster, which is good news for the West. Literally, hundreds of thousands of Indians have stormed the ATMs trying to get cash, reports the Hindustan Times. They are trying to get their money out of banks. This has proven in many places to be just not possible as cash is in short supply.




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JohnnyCash

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Reply with quote  #7122 
Weimar Hyperinflation Takes-Off In Venezuela

Now you can watch a nation go into hyperinflation in real time!

No one counts cash anymore, they just weigh it!

Sales of wheelbarrows boom as wallets go out of style! (sort of, but not far from the truth)

On the Brighter side: President Maduro's mint has solved the Venezuelan shortage of toilet paper!

President Maduro does a several hour per day radio show salsa dancing to Latin Rythms! --- if you can't eat or work then dance! (From another article a couple of weeks ago, not posted here.)

Viva Maduro, Viva Chavez, Viva Socialismo!! Viva Fidel!! Viva Raul! and dance, dance, dance!!!


Venezuela Braces For Hyperinflation As Merchants Weigh "Mountains Of Cash" Instead Of Counting It

Tyler Durden's picture

For anyone still curious what hyperinflation in real time looks like, here is the visual answer...

[Venz%20bolivar_0]

And as SHTFPlan.com's Mac Slavo notes, Venezuela is deep into the death spiral, and things are likely to get worse before they get better.

[20161201_hyper]

 

As the South American nation’s paper currency continues to lose value with each passing day, the people of Venezuela are forced to carry piles of cash just to buy basic goods and services – with many merchants now literally weighing the next-to-worthless cash rather than wasting time to count it.

Clearly, this does not bode well.

Venezuela continues to repeat the mistakes of other failed states as its currency comes dangerously close to all-out hyperinflation, as has happened in Zimbabwe and Weimar Republic Germany.

via the UK Independent:

Inflation in Venezuela is expected to reach 720 per cent this year, with the largest bolívar bill now worth just five US cents on the black market.

Some shopkeepers have reportedly taken to weighing rather than counting the wads of cash customers hand them, and standard-size wallets have become all but useless in the socialist South American state. Instead, many people stuff huge volumes of cash into handbags, money belts, or backpacks, in scenes analysts have said are suggestive of “runaway” inflation.

[…]

Humberto Gonzalez, who runs a delicatessen in the city, said he uses the same scales to weigh slices of salty white cheese and the stacks of bolívar notes handed over by his customers .

“It’s sad… at this point, I think the cheese is worth more.”

[…]

“When they start weighing cash, it’s a sign of runaway inflation,” he said. “But Venezuelans don’t know just how bad it is because the government refuses to publish figures.”

For several years now, President Maduro opted to continue printing more and more cash as a means of dealing with the oil crisis and the collapsing value of the bolívar, and as a result, the money just isn’t worth much at all.

The printing press simply cannot save the country from a death spiral, but it doesn’t mean Maduro is prepared to let go of power. He has maintained that Venezuela’s problems are due to economic warfare being waged by the United States to topple the oil-rich socialist regime.

Bremmer Rodrigues, who runs a bakery on the outskirts of Caracas, said his family are at a loss over what to do with their bags of bills. “It’s a mountain of cash, every day more and more.”

[…]

The shrinking value of the currency has meant that withdrawing the equivalent of £5 from an ATM produces a fistful of more than 100 bills. Some ATMs now need to be refilled every three hours, because the machines can only hold so much cash. This means there are often a limited number of functioning ATMs in Caracas, and long queues to withdraw money.

Venezuela is scheduled to reissue the currency at higher denominations, but it is unclear how much that will help the larger problems that the country faces.

Maduro has attempted to stave off collapse and avoid the inevitable by ruling with an iron fist.

As a result, the people have been forced to endure incredibly long lines to buy food rations; everyday life has been disrupted in every way possible, as crime and poverty have taken a toll on the population.

Food shortages and inflated black market prices for staples, meat and other necessities have driven many to poach stray animals for food and take other desperate measures. Malnutrition is becoming a rampant problem, and the health of the society in general is at a very stressed point.

As Shaun Bradley reported:

Life in Venezuela now consists of empty grocery stores, record rates of violent crime, and widespread shortages of just about everything. The economic and political conditions have been deteriorating for years, but recent stories coming from this once-rich nation are astonishing. Bars have run out of beer, McDonald’s can’t get buns for their Big Macs, and rolling blackouts are a regular occurrence. The average person spends over 35 hours a month waiting in line to buy their rationed goods, and even basics like toilet paper and toothpaste are strictly regulated.

Jason Marczak, director of the Latin America Economic Growth Initiative, spoke about the crisis:

“When people are literally going hungry and children are dying at birth because there aren’t the right medical supplies … when basic things like Tylenol aren’t even available … this causes a huge amount of angst in the population.”

screen-shot-2016-11-29-at-2-37-32-pm


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JohnnyCash

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Gold And Interest Rates


The traditional theory says Gold is a poor investment because it doesn't pay interest. Therefore when Interest rates rise Gold prices must fall.

Is that long held reasoning akin to the old assessment of Real Estate from pre-1990, that Real Estate prices don't go down --- remember "they aren't making any more of it".

It turns out that history has an contrary opinion about Gold as the author below makes clear. Gold hit it's highest relative gains during a century high interest rate period.

Gold hit a second all time high in 2011-12 at about $1,900 per ounce when Interest rates were the lowest in history.

Go figure, or read the article below.



Trump Vs China: Credit Cycles & Gold

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Submitted by Alasdair Macleod via GoldMoney.com,

The Trump shock produced some unexpected market reactions, partly explained by investors buying into a risk-on argument,equities over bonds and buying dollars by selling other currencies and gold.

This is because President-elect Trump has stated he will implement infrastructure investment and tax-cut policies. If he pursues this plan, it will lead to larger fiscal deficits, and higher interest rates. The global aspect of the markets recalibration focuses on the strains between the dollar on one side, and the euro and the yen on the other, both still mired in negative interest rates. The capital flows obviously favour the dollar, and are putting the Eurocurrency markets under considerable strain.

Gold has been caught in the cross-fire, being a simple way for US-based hedge funds to buy into a rising dollar by selling gold short. While this pressure may persist, particularly if the euro weakens further ahead of the Italian referendum, it is essentially a temporary market effect. This article explains why this is so by analysing the next phase of the credit cycle, and the implications for interest rates and prices, which will be fuelled by higher US fiscal deficits in addition to China’s stockpiling of raw materials. It concludes that there are factors at work which were originally identified by Gordon Pepper, who was acknowledged as having the finest analytical mind in the UK Gilt market in the 1960s and 1970s.

Pepper observed that banks were consistently bad investors in short-maturity gilts, almost always losing money. The reason, he explained, was banks bought gilts when they were averse to lending, and sold them when they become more confident. This meant banks bought government bonds when economic confidence was at its lowest, bad debts in the private sector had risen, and interest rates had fallen to reflect the recessionary environment. These were the conditions that marked the high tide in bond prices.

As surely as day follows night, recovery followed recession. As trading conditions improved, corporate takeovers became common as businesses repositioned themselves for better trading prospects, and a period of increasing industrial investment followed. The banks began belatedly to sell down their gilt positions to provide capital for economic expansion. By the time banks felt confident enough to lend, markets had already anticipated higher demand for credit, as well as a more inflationary outlook. Inevitably, banks ended up selling their gilts at a loss.

Pepper had identified the mechanics behind bank credit flows between financial and non-financial sectors, an important topic broadly overlooked even today. Currently, the credit cycle has become prolonged and distorted, because most of the accumulated malinvestments that would normally be eliminated in the downturn phase of the credit cycle have been allowed to persist, thanks to the Fed’s aggressive suppression of interest rates. Consequently, bank credit was never reallocated from unproductive to more productive use, but has been added to and extended in the name of financial engineering. 

Things are about to change. President-elect Donald Trump has stated that he will expand government spending on infrastructure and at the same time cut taxes, in which case he will set in motion a new expansionary phase for the US economy, leading to an additional increase in bank credit. The immediate effect has been to drive up bond yields and increase expectations of higher dollar interest rates.

Working from Gordon Pepper’s thesis, the banks are only in the initial stages of mark-to-market bond losses, since they have yet to sell down their bond holdings to create lending room for infrastructure expansion and a sharply higher fiscal deficit. That will not happen before next year, assuming Trump follows through on his economic plans. But markets can be expected to increasingly discount future bond sales by the banks and other financial intermediaries before then, and given that yields fell to unusually low levels ahead of Trump’s expansionary plans, bond losses can be expected to be correspondingly greater.
 

The new expansionary phase

President-elect Trump is in effect advocating a substantial fiscal stimulus to the economy. The difference between monetary stimulus and fiscal stimulus is found in price inflation. Simply put, monetary stimulus tends to inflate asset prices, while fiscal stimulus tends to inflate consumer prices. Therefore, fiscal stimulus leads with greater certainty to rising interest rates and bond yields, because of the price inflation effect, inflicting painful losses for banks invested in bonds. 

The change from monetary to fiscal stimulus can be expected to undermine asset prices, for reasons that will become clear. The following table illustrates the flows that can arise from fiscal stimulus of the economy, and puts Pepper’s theses in a clearer light.

[20161203_gold2]

Government spending increases over the cycle, reflecting fiscal stimulus, in this example from 35% to 37% of the economy. And because the fiscal stimulus is spent in the non-financial private sector, that increases as well. Inevitably, the financial sector, representing money that’s employed in purely financial activities, gets squeezed, in this case falling from 30% to 25% of the economy. Financial activities can be said to deflate.

While actual numbers will differ from this theoretical example, it illustrates that in the expansionary phase money must leave purely financial activities. You cannot have both fiscal stimulus and a reallocation of economic resources into the non-financial private sector without creating a powerful deflationary effect on financial assets. Consequently, not only will bond yields rise, but equity markets will be impacted as well, at the very point where fundamentals for equities appear to be at their best. Today’s equity market euphoria is therefore a reflection of improved sentiment, ahead of the reality. 

Keynesians would argue that the strains faced by the financial sector can be offset by credit expansion. Initially, this may be the case, so long as banks have room on their balance sheets for additional credit growth. However, the inflationary effects of fiscal expansion on consumer prices become a considerable and relatively immediate force, rapidly dominating monetary policy considerations. This is due to the fiscal deficit being directly translated into increased demand for goods and services through government spending, driving up prices as the extra money created out of thin air is spent. The result is interest rates are inevitably raised by the central bank to protect the purchasing power of the currency.

Probably the clearest example in living memory of this effect was the UK economy in the first half of the 1970s, which prompted Pepper’s analysis. From 1970 onwards, the Heath government reflated aggressively by depressing interest rates and increasing fiscal stimulus. The result was a stock market boom that ended in May 1972, gilt yields having bottomed earlier that year. As the economy improved, gilt yields rose further, and equities entered a deep bear market. The Bank of England increased interest rates, while gilt yields rose, equity prices fell, and price inflation increased. Speculation migrated from equity markets into commercial property, when rents and capital values responded to expanding office demand, driven by the artificial economic boom. 

Eventually price inflation accelerated to the point where interest rates had to be raised further, triggering a collapse in the commercial property market, necessitating the rescue of the lending banks associated with it. Over the course of the cycle, the Bank of England’s base rate had increased from 5% in September 1971 to 13% in November 1973, precipitating the commercial property crash. Long-dated gilt yields had more than doubled to over 15%, and the equity market lost 75% of its value by the end of 1975. The British Government’s financial position was so bad, she had to borrow money from the IMF.

All the signs of a similar cycle are emerging today but on a grander scale, with Donald Trump intending to pursue the expansionary fiscal policies of Edward Heath. But there are obvious differences, particularly the high burden of debt in the private sector. In the 1970s private sector debt levels were low, so much so that residential property prices in the UK were broadly unaffected by rising interest rates. Today, residential property prices at the margin typically reflect 80% loan-to-value mortgages. Indeed, the level of private sector debt in America is now so great that a rise in the Fed Funds Rate to between two and three percent may be enough to crash both residential property prices and the US financial sector with it.

Another important difference is the interconnectedness of markets. Rising yields for US Treasuries are certain to be transmitted into rising yields in other currencies, particularly for the Eurozone. The Eurozone’s banks, whose currency’s very survival could be threatened by these developments, will face bond losses potentially so great that the whole European banking system could collapse. The ECB is likely to continue to pump money into the financial sector in a desperate attempt to save the banks, but it can only do so much before the price-inflation effect of a falling euro forces it to raise interest rates as well.

Britain, along with everyone else in the seventies, as well as the US in the coming years, also had a specific problem in common, rising commodity and energy prices. Artificial demand generated by fiscal expansion in the US in the 1970-74 era contributed to a significant increase in the general level of commodity prices. Most notable was the increase in the price of oil, as OPEC ramped it up from $3 to $12 per barrel in 1973 alone. Rising commodity prices were paid for by monetary expansion, just like today. And today, China is pursuing vast infrastructure plans for all Asia, which requires her to stockpile and use unprecedented quantities of industrial raw materials and energy. Trump’s expansionary plans will clash with China’s far larger plans, driving up commodity prices measured in dollars even further. This is in addition to the substantial gains seen so far, making a bad price outlook even worse.

The effect on gold

The chart below shows how the gold price behaved in the 1970s.

[20161203_gold1]

Gold rose from $35 to $197.50 between 1970 and the end of 1974, an increase of more than four times. During that period, as mentioned above, the Bank of England’s base rate rose from 5% to 13%. The Fed’s discount rate was 4.5% in 1972 and rose to 8% in August 1974. So, a rising gold price was accompanied by a rising interest rate, contradicting the conventional wisdom of today. Gold went on to hit a peak price of $850 at the afternoon fix of 21 January 1980, when the Fed’s discount rate was at an elevated 12%.

The current belief that rising interest rates are bad for gold was disproved by those events. The reason gold rose had little to do with interest rates, and everything to do with accelerating price inflation. The only way a rising gold price could be halted was to raise interest rates high enough and sharply enough to collapse economic activity, which is what Paul Volcker did in 1980-81. In other words, until the Fed abandons all pretentions to supporting economic growth, people will continue to increase their preferences for owning goods over holding dollars, thereby continuingly reducing its purchasing power. 

Another way of looking at the prospective gold price is to think of it in terms of raw material prices, which tend in the long run to be more stable when measured in gold, than when measured in fiat currencies. Given the outlook for commodity prices, as both China and America compete for raw materials and expand the quantity of money to pay for them, the gold price is more likely to maintain a level of purchasing power against rising commodity prices, instead of it declining with paper currencies. China has prepared herself for this event, having embarked on a longstanding policy of stockpiling gold since 1983. The amount she has accumulated in addition to declared reserves is a state secret, but my estimate is at least 20,000 tonnes. In 2002, the State had presumably secured enough physical gold for itself to allow its own citizens to join in, because that is the year the Peoples Bank established the Shanghai Gold Exchange, and the ban on private ownership of gold in China was lifted.

Over the last fourteen years, private individuals and businesses in China have accumulated at least another 10,000 tonnes, and China has become the largest producer and refiner of gold by far. We can truly say that China has prepared herself and her citizens well in advance for the collapse in purchasing power of the paper currencies that her demand for commodities is likely to engender. The only thing she must do is to get rid of her accumulation of US Treasuries before they become worthless, which she is now doing.

America, by contrast, is wholly unprepared for higher commodity prices. Her gold reserves, assuming they are as stated, are insufficient to underwrite a declining dollar, and in any event conversion into gold is not on offer to holders of dollars. In terms of commodity demand, America will be playing second fiddle to China in the coming years anyway, only making a bad price situation potentially worse. 

Because of continuing non-cyclical Chinese demand for commodities, there is a significant risk that not even a debt-liquidating slump brought about by significantly higher interest rates will kill price inflation in western currencies. Unlike the 1970s, when the dollar was the tune to which all the others danced, China, Russia and all nations tied to them by trade no longer dance exclusively to the dollar’s tune. Consequently, US monetary policy no longer exercises absolute control over global price inflation, measured in fiat currencies.

Price inflation pressures could therefore persist, despite a US debt-liquidating slump. The possibility that the price environment for the dollar will continue to be inflationary in a US economic slump, despite the Fed’s monetary policy, cannot be ruled out. But before that possibility is put to the test, the likelihood of a systemic collapse in the Eurozone is a more immediate and threatening risk.

Conclusion

We currently face the prospect of a reallocation of capital from America’s financial sector into government and non-financial activities, driven by President-elect Trump’s expansionary plans. These plans, if pursued, will lead to money flowing from purely financial activities and will have a profoundly negative effect on asset prices. Furthermore, price inflation, the result of fiscal expansion, will raise consumer prices to unanticipated levels, forcing the Fed to raise interest rates more than expected today. This article has pointed out why rising interest rates in the expansionary phase of the credit cycle do not undermine the gold price, unless, and this is no longer certain, interest rates are raised to the point where the US economy is driven into a slump. However, the world is no longer dependant solely on US economic and monetary factors, because Asian demand for industrial materials has become the principal engine of commodity demand. We can therefore no longer be sure a Volcker-style shock from the Fed will kill price inflation at the end of the upcoming expansionary credit cycle.

As all experience from the past clearly demonstrates, it is a mistake to believe that the gold price is set solely by dollar interest rates, or its relative strength in other currencies. This being the case, the current weakness of the gold price is simply a reflection of temporary dollar shortages, and nothing more.


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rickencin

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Reply with quote  #7124 

Well the Fed finally raised the Fed Funds interest rate from .5% to .75%.  This was widely anticipated.  Still the Dow which had a peak of 19,966 for the day fell as low as 19,749.  It's hard to say if this is real.  A lot of people like the excitement of "getting out ahead of the news".  Much like gambling on football.  These are the day (or second) traders.  We'll see in a couple of days where the Dow ends up. 

Janet Yellen, Fed Chairman:

"My colleagues and I are recognizing the considerable progress the economy has made towards our dual objectives of maximum employment and price stability," Yellen said.

"We expect that the economy will continue to perform well, with the job market strengthening further, and inflation rising to 2% over the next couple of years," she added. 

Jane Yolen, children's author:

I am the pea,
     under your bed,
the itch, the wish,
     the sound in your head,
the uneasy question,
    
the dream that you dread,
the royal pain carried
    
until you are dead.


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JohnnyCash

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Reply with quote  #7125 
Rick --- the Fed is just following the Market Interest rates on Treasuries which have been up a point or more across the 10 and 30 yr Notes for the last several weeks.

Yellen waited for a market driven trend developed before increasing the couple of rates controlled by the Fed by 1/4%.

The real question is why are rates rising? The prices of Treasuries have been falling. Why are they falling? Is the economy picking up? No. It's risk, the market has adjusted it's risk assessment of US Treasuries. Janet followed, she didn't lead.

Is the stock market being driven by greater sales across the board? No, it's flight capital from all over the world flowing into the US, just like WWI & WWII and corporations buying their own stock to increase the EPS ratio without having real increases in gross revenues.

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kaihacker

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Reply with quote  #7126 
Inflation vs deflation.  It has been 7.5 years since this thread was started.  It is interesting looking back over it.
Here are some numbers (or as of the previous close):

Asset type                                                    First post - Feb 8, 2009                      Today - Nov 5, 2017
Stocks (Dow)                                                   8,056                                                23,539
S&P Chase-Shiller national home price index      147.63                                               195.05
CPI AUCSL                                                       212.705                                             246.373
Gold                                                                $934                                                  $1269
Oil                                                                   $74                                                    $55



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mlreits

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Reply with quote  #7127 
The perma-bears did more damage to investors than the value they created. Wait, they added no value. [biggrin]

Unfortunately, there's no repercussion for their action. Sigh....

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Minh

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