- In a recent article by Kessler Companies (hat tip Zerohedge) they correctly point out that inflation, as measured by the consumer price index, have a tendency to accelerate as the US economy moves into a recession.
- Contrary to popular belief, the beginning of a recession is not deflationary but the exact opposite.
- Why? The most obvious explanation is simply that the Federal Reserve is forced to act, as the CPI signal (or more accurately the PCE) trigger rate hikes. This increases borrowing costs and disrupts the established money flow forcing the economic system to reallocate resources accordingly. As households home equity lines dries up, there will be less spending on, say, restaurants which concomitantly changes relative prices – wages for waiters fall relative to other wages – and resources then start to flow into other parts of the economy seeking profits where they are easier to achieve. Needless to say this process takes time and is commonly known as a recession.
- The obvious correlation between effective federal funds rates and the CPI substantiates our claim. The real federal funds rate or the spread between “core” CPI and the federal funds rate brings the point home.
- Prior to every recession the real federal funds rate moves higher (more negative in the chart) and then make an abrupt about-turn as the Federal Reserve realize they have moved too far as the process becomes deflationary. It is also highly noteworthy that since the GFC thereal federal funds rate have been negative for an unprecedented amount of time. Compare that to the brief period of negative real yields prior to the GFC and what that lead to and you quickly realize how much economic malinvestments and dislocations are present in the system.
- If we are going with the current forecast by the Federal Reserve staff the implied real federal funds rate will go from unprecedented negative to strongly positive in short order. It is also highly concerning that the calculated sustainable rate of interest given federal debt levels and assumed nominal GDP growth falls below the expected path of the federal funds rate. In other words, as the Federal Reserve intend to move us away from ZIRP with the rest of the world rushing headlong into NIRP (good luck with that) we are bound to bump against the recession ceiling. It has happened every time they tried it before.
- In addition, the tightening cycle is actually far more mature than the tiny hike in December would have you think. Wu and Xia’s “shadow rate” tries to estimate the effect forward guidance and various QE and MEPs have had on financial conditions and from that provide what the actual rate is. By their estimate the tightening cycle started already back in May of 2014.
- This is all well and good, but what caught our eyes when looking at the Kessler chart recreated above was the increasing spread between “core” CPI and PCE as the economy entered into a recessions. The CPI historically
- Political instability arising from European states’ crippling debt burdens may lead to the Eurozone’s implosion, ex-Bank of England (BoE) governor Mervyn King has said.
- The former central banker and staunch Euroskeptic made the prediction in his latest book, The End of Alchemy: Banking, the Global Economy and the Future of Money.
- The newly published work, which is being serialized in the Telegraph, calls for tighter Eurozone integration and significant debt write-offs for Europe’s most austerity-stricken states. However, it also acknowledges such a policy path is dependent on stronger EU states’ willingness to bail out their debt-shackled neighbors.
- In its pages, King argues Europe’s monetary union has created a “dangerous” cocktail of conflicts between bureaucratic EU elites and sovereign states.
- He predicts that peripheral EU nations will grow weary of the effort needed to sustain membership of the Eurozone, despite the fact an exit could breed chaos and plummeting living standards.
- “If the alternative is crushing austerity, continuing mass unemployment, and no end in sight to the burden of debt, then leaving the euro area may be the only way to plot a route back to economic growth and full employment,” he says.
- King was BoE chief when the credit crunch hit Britain in 2007, leading to the implosion of Northern Rock and other British lenders. He has been slated by critics for failing to predict the global financial crisis.
Read more at:European sovereign debt crisis could cause Eurozone implosion – ex-BoE chief
- Over the past year we have diligently followed the bursting of the second tech bubble which in the space of less than one year went from the “running of the bulls” to the “mauling of the unicorns“, mostly in the private markets but also – for those rare few who have made it beyond the IPO stage – in the public arena.
- In the last few months, this painful reality finally hit ground zero – Silicon Valley itself, as best described in “The Mood In Silicon Valley Is Like The “Moment After The Titanic Hit An Iceberg.” As the Wall Street Journalsummarized it:
Some companies are raising funding by selling shares at lower prices than they had in earlier rounds. Such “down rounds” can hurt a startup’s chances at recruiting and discourage employees who are often paid with stock options…. These changes are eroding the idea that drives Silicon Valley’s economy: Work hard, secure venture capital and get rich. With valuations falling, the other side of the equation is reappearing: Failure is often just around the corner.
- Two years have passed since Yanukovich was deposed and, as it turns out, another ruthless clan of oligarchs has taken power. No wonder then that Ukraine is heading for a new wave of violence and chaos.Oligarchs are fighting each other, the IMF is pulling out of the country, officials issue laws and regulations only to see them repealed within a day or two by others, and raided European companies are leaving the country after being robbed by the so-called pro-Brussels oligarchic elite.
- It was evident from the beginning that the US and NATO-sponsored power transition was doomed to fail. Prime Minister Yatsenyuk made no secret on his personal website about his principal partners, NATO and Victor Pinchuk’s foundation. Victor Pinchuk is a link between the Ukraine corrupt oligarchic establishment and the Western political elite. In 2005, the BBC depicted him as a paragon of Ukraine’s kleptocracy:
“Ukraine’s largest steel mill has been bought by Mittal Steel for $4.8bn (£2.7bn) after an earlier sale was annulled amid corruption allegations.
The Kryvorizhstal mill was originally sold to the son-in-law (Mr. Pinchuck) of former President Leonid Kuchma for $800m.
It was one of the scandals that sparked the Orange Revolution and propelled President Viktor Yushchenko into power.”)
- Directly after the power transition, European leaders understood that the situation in the Ukraine was unmanageable, which we know from a confidential telephone conversation between Minister Paet (Minister of Foreign Affairs of Estonia) and Mrs. Ashton (High Representative of the Union for Foreign Affairs and Security Policy) that became public.Both politicians understood that the Maidan protesters had no trust in the politicians who formed the new coalition. Mr Paet said, “there is now stronger and stronger understanding that behind snipers it was not Yanukovich, but it was somebody from the new coalition.” Their conversation makes it clear that both European politicians understood that, contrary to the official statements coming from Brussels, Europe has no solution for Ukraine’s problems and no trust in its new leaders.
Read more at:Ukraine Collapse Is Now Imminent
- Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote “Be Careful What You Wish For” saying that “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.“
- Well, maybe not… especially if physical currency is gradually phased out in favor of some digital currency “equivalent” as so many “erudite economists” and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency – just like physical gold – provides a convenient loophole to the financial repression of keeping one’s savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.
- For now cash is still legal, and NIRP – while a reality for the banks – has yet to be fully passed on to depositors.
- The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened isprecisely the opposite: “as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”
- Call it another massive error on behalf of Keynesian central planners who once again fail to appreciate the nuances of the common sense and the liquidity preference of ordinary consumers.
- However, just because negative rates have not been passed on to savers yetor just because cash still has not been made illegal, that doesn’t mean it won’t be.
- The question at this point is twofold: what happens after the savings of ordinary depositors in the bank officially taxed and/or cash becomes phased out, and more importantly, what happens just before.
- In other words, will there be a run on physical cash?
- The truth is that if society panics and there is a full blown rush out of existing electronic bank deposits and into physical currency to avoid negative rate taxation, only those who panic first will be safe. Why? Because of the “magic” of fractional reserve banking – there is simply not enough physical currency in circulation to satisfy all savers’ claims.
- Here is HSBC’s Steven Major trying to explain the problem:
Read more at:The Global Run On Physical Cash Has Begun: Why It Pays To Panic First
- For a long time there was still some skepticism whether Turkey was providing military and other support to members of the Islamic State. As we reported last week, that skepticism was promptly eliminated following the release of transcripts of phone calls that took place between Turkish military officers and Mustafa Demir, the ISIS commander in charge of the Syria-Turkey border.
- The transcripts are part of a court case on ISIS at the Ankara 3rd High Criminal Court. “The issues alleged in the case came to light because of an investigation launched following information given by six Turkish citizens whose relatives joined ISIL,” Today’s Zaman reports. “Upon the application by the relatives, monitoring of the communications of 19 people started, and a prosecutor named Derda Gökmen reportedly filed a claim against 27 suspects.”
- The transcripts are as follows:
Read more at:US Government Sells $680 Million In “Bunker Buster” Bombs To ISIS-Supplier Turkey
- The Syria truce coordinating center has detected shelling of residential areas in Damascus carried out by terror groups, said Sergey Kuralenko, the head of the center launched by Moscow at Khemim airbase earlier in the week.
- Over 20 blasts were registered earlier Saturday over a period of five hours, Kuralenko said.
- The information on the shelling was immediately passed to the US coordination center in Amman, the military said, RIA Novosti reported.
- There were no immediate reports of any casualties, according to SANA news agency.
- The Syrian capital came under shelling just a few hours after a nationwide ceasefire was introduced. The deal on “cessation of hostilities” came into effect at midnight Damascus time. Outlined by the US and Russia, it was unanimously adopted by the United Nations Security Council earlier Friday and obliged all parties involved in the conflict to abide by it.
- The exceptions are Islamic State group (IS, formerly ISIS/ISIL), Al-Nusra, and other terrorist organizations as designated by the UN Security Council.
Read more at:Over 20 blasts in Damascus as ‘terrorists shell residential areas’