Will It Be Inflation Or Deflation? The Answer May Surprise You
by Zero Hedge - May 23rd, 2013 10:33 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
Submitted by Michael Snyder of The Economic Collapse blog,
Is the coming financial collapse going to be inflationary or deflationary? Are we headed for rampant inflation or crippling deflation? This is a subject that is hotly debated by economists all over the country. Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation. Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts. So what is the truth? Well, for the reasons listed below, we believe that we will see both.
The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis. This will happen so quickly that many will get “financial whiplash” as they try to figure out what to do with their money. We are moving toward a time of extreme financial instability, and different strategies will be called for at different times.
So why will we see deflation first? The following are some of the major deflationary forces that are affecting our economy right now…
The Velocity Of Money Is At A 50 Year Low
The rate at which money circulates in our economy is the lowest that it has been in more than 50 years. It has been steadily falling since the late 1990s, and this is a clear sign that economic activity is slowing down. The shaded areas in the chart represent recessions, and as you can see, the velocity of money always slows down during a recession. But even though the government is telling us that we are not in a recession right now, the velocity of money continues to drop like a rock. This is one of the factors that is putting a tremendous amount of deflationary pressure on our economy…
The Trade Deficit
Even single month, far more money leaves this country than comes into it. In fact, the amount going out exceeds the amount coming in by about half a trillion dollars each year. This is extremely deflationary. Our system is constantly bleeding cash, and…
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Japan Has Officially Gone Insane
by Zero Hedge - May 23rd, 2013 10:05 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
On one hand:
- BOJ OFFERS TO BUY 300B YEN DEBT WITH MORE THAN 10YR MATURITY
- BOJ OFFERS TO BUY 600B YEN IN 5-10YR GOVT DEBT
and on the other
- ABE SAYS BOJ ISN’T DIRECTLY BUYING GOVERNMENT DEBT
We give up: absolute schizophrenia is now required by anyone who wishes to follow the daily lies these central bankers spew with impunity.
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As Of This Moment Ben Bernanke Own 30.5% Of The US Treasury Market… And Will Own All By 2018
by Zero Hedge - May 23rd, 2013 9:37 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
As is well-known by everyone, the Fed monetizes the US deficit on a daily basis, thanks to the 45 minutes of POMO love each day when it buys Treasuries from Dealers. Of course, the Fed monetizes bonds from across the entire curve (mostly the longer end), which is why it is somewhat complicated to express the amount of risk transfer the Fed takes on every time the S&P posts an uptick as a result of yet another bond purchase by the hedge fund with the largest fixed income portfolio in the history of the world. However, one simple way of expressing just this risk is through the use of ten year equivalents: Ten-year equivalents are the amount of 10-year notes that must be held by the Fed in order to remove the same amount of interest rate risk from the market as its current holdings. What this methodology allows is to represent the Fed’s holdings of all marketable securities on a linear continuum, and represent the remainder, or those bonds held by the private sector, on the side.
So what may come as a surprise to most, is that as of this week’s H.4.1 update, the amount of ten-year equivalents held by the Fed increased to $1.583 trillion from $1.576 trillion in the prior week, which reduces the amount available to the private sector to $3.637 trillion from $3.668 trillion in the prior week. And also, thanks to maturities, and purchase by the Fed from the secondary market, there were $5.219 trillion ten-year equivalents outstanding, down from $5.244 trillion in the prior week.
What this means simply is that as of this moment, the Fed has, in its possession, a record 30.32% of all outstanding ten year equivalents, or said in plain English: duration-adjusted government bonds. It also means that the amount of bonds left in the hands of the private sector has dropped to a record low 69.68% from 69.95% in the prior week.
America may or may not be becoming increasingly socialist and/or nationalized, but there is no doubt about it: its bond market most certainly is.
Chart of total ten year equivalents, broken down by Private sector and the Fed (courtesy of StoneMcCarthy):
The percentage of the entire US bond market currently owned by the Fed (courtesy of StoneMcCarthy):…
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China’s Bird Flu Goes Airborne
by Zero Hedge - May 23rd, 2013 9:12 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
As if China was not suffering enough from a slumping economy, the South China Morning Post now reports that the H7N9 ‘bird flu’ virus that has infected 131 people (and killed 36) so far can be transmitted not only by close contact but by airborne exposure. Domestic reports suggest the virus appears to be brought under control largely through restrictions at bird markets but the team at the University of Hong Kong has also found that pigs can be infected (cue ‘when pigs can fly’ pun). The findings suggest that there may be many more cases that have been detected or reported since “people may be transmitting the virus before they know they’ve even got it.”
Click image for interactive map of ‘bird flu’ infections…
For more information on individual patients infected: blue, patients infected with the H7N9 virus under treatment; red, those infected with H7N9 who have died; yellow, those who have fully recovered; and pink, those infected other types of the Influenza A virus, including H1N1.
The H7N9 bird flu virus can be transmitted not only through close contact but by airborne exposure, a team at the University of Hong Kong found after extensive laboratory experiments.
…
“We also found that the virus can infect pigs, which was not previously known,” said Dr Maria Zhu Huachen, a research assistant professor at HKU’s School of Public Health.
…
It was found the virus could spread through the air, from one cage to another, albeit less efficiently.
…
This means there may be more cases than have been detected or reported.
…
“People may be transmitting the virus before they even know that they’ve got it,” Zhu said.
…
She said the government had collaborated with HKU on intensive surveillance of both birds and pigs. Zhu added that people who regularly had close contact with live poultry or pigs should take precautions, have routine body checks and report their case immediately if they feel unwell.
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All I Want For Christmas Is The S&P (The Las Vegas Period)
by Zero Hedge - May 23rd, 2013 8:41 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
From Paul Mylchreest of Monument Securities
We are approaching a critical point (again) in the “battle royal” between the forces of inflation and deflation. Deflationary forces are threatening to overwhelm the reflationary push-back of the world’s central banks – although this is not reflected in most equity markets (especially the US). Open-ended QE was only announced by the Fed last Autumn, but the impact on (market-based) inflation expectations plateaued within months and has started turning down.
I am no fan of QE, but the Fed is discussing scaling back its preferred reflationary policy tool when the economic cycle is at one of the weaker points since the recovery began in early-2009. This is probably a bluff, or would be a temporary measure at most. With recent support for scaling back from the BIS and IMF, it’s questionable whether there’s a coordinated attempt to talk the dollar up…just as BRICS nations are stepping up their efforts to undermine it (see “Encore” section)? Or is talk of bubbles impacting their fervour?
In equities, previously reliable valuation models based on ISM/PMIs are breaking down – likely due to QE. Correlations between equity markets and various other financial assets and economic indicators are also diverging as the S&P 500 powers ever higher. Currently, few people seem to (even) entertain the notion that western equity markets could see a short-term correction. Maybe that’s “correct” – in light of the mechanics of “full-blown” QE as explained in the report – but it is worryingly reminiscent of bubble mentality.
As we show in the report, the monetary system in the US has changed dramatically since the 2008 collapse of Lehman and the implementation of QE. This goes right to the heart of how NEW MONEY IS CREATED (QE not loans), who creates it (the Fed not the banks) and who gets to use it first (banks not borrowers).
As far as it’s possible to tell, this change appears to have had a very positive impact on equities via the banking system. The chart below shows the surprisingly close correlation between the S&P 500 and the “deposit to loan gap” in US commercial banks. The “deposit to loan gap” is a direct result of QE programmes and currently amounts to more than US$2 trillion. These excess deposits create an…
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Japanese Stocks Open +1.5%; Bonds Half-Way To Limit Down
by Zero Hedge - May 23rd, 2013 8:04 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
It seems the correlation to USDJPY has started to disintegrate and what is more worrisome for the BoJ is the linkage between JGBs and the Nikkei 225. Equities in Japan are about to open to a modest bounce around 1.5% but JGB prices are down around 0.50 (half the limit-down price moves). So, the problem for the BoJ is – do you let JGBs flop to maintain your equity market’s appearance of normality? Or are Japanese stocks about to be as implicitly repressed as the bond market? It would appear TPTB are doing their best to ramp the JPY to keep this bounce alive (USDJPY opening just shy of 102.50).
- *AMARI SAYS ‘ABENOMICS’ IS PROGRESSING STEADILY (this is progress?)
- *AMARI SAYS BOJ IS COMMUNICATING CLOSELY WITH MARKETS (we suspect the market is communicating back even more)
As The Telegraph’s Jeremy Warner noted:
What the subsequent violent gyrations in markets indicate is that any hint of applying the brakes risks generating a fresh financial crisis, which in turn would render the economic recovery still born. Both financial markets and the real economy have become addicted to “quantitative easing”, such that they can’t do without it.
…
Central bankers dream of getting back to “normal” – normal interest rates, a normal balance sheet, and so on. But that point isn’t going to come any time soon. They are stuck on a money printing treadmill, and there appears no way off.
Japanes stocks made it to the 38.2% retrace just like the S&P 500 did and faded…
Careful what you wish for on the rebound… JGBs heading for limit-down (inverted below to show correlation)
and longer-term – JGBs have some room to the downside as the BoJ loses control…
JPY being dumped hard to keep the dream alive…
Charts: Bloomberg
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Is America’s Economy Being Sovietized?
by Zero Hedge - May 23rd, 2013 7:29 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
Submitted by Brandon Smith of Alt-Market blog,
The foundation of the Soviet model of trade and investment was centralization under the guise of “universal public ownership”. The entire goal of communism in general was not to give more social and political power to the people, but to extinguish alternative options and focus power into the hands of a select few. The process used to reach this end result can vary, but the goal always remains the same. In most cases, such centralization begins with economic hegemony, and it is in our fiscal structure that we have the means to see the future. Sovietization in our financial life will inevitably lead to sovietization in our political life.
Does the U.S. economy’s path resemble the Soviet template exactly? No. And I’m sure the very suggestion will make the average unaware free market evangelical froth at the mouth. However, as I plan to show, the parallels in our fundamentals are disturbing; the reality is that true free markets in America died a long time ago.
The Tyranny Of Planned Economy
The characteristics of a free market society defy the use of centralized planning. Adam Smith’s original concept of free market trade stood as an antithesis to what was then referred to as “mercantilism,” a select few “joint stock companies” (corporations) monopolizing production while using government ties to destroy any new competition. Unfortunately, there are to this day economists and politicians who believe that corporate centralization is a “natural” function of a free market. In reality, corporate monopolies are an unnatural creation of collusion between governments and big-money interests designed to suffocate any entrepreneurship outside of their sphere of influence. Over time, as we now see in the United States today, government power and corporate power begin to hybridize, until one can barely be distinguished from the other.
The bottom line is that you cannot have planned structures, monopolized production or controlled capital flow within an economy and still claim it to be a “free market. There are no exceptions to this rule.
The Soviet system was the ultimate in centralization. Every aspect of financial life was dictated by the communist government, from industrial input and output to investment to food production and rationing to wages and retail prices. Some people might argue that this structure is a…
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IRS’ Lois Lerner Put On Involuntary Paid Vacation
by Zero Hedge - May 23rd, 2013 6:56 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
The IRS’ Lois Lerner may not be the most proficient when it comes to hiding years of alleged conservative group persecution, or subsequently pleading the fifth and avoiding self-incrimination in what she dubs is a perfectly legal misunderstanding even as she makes on the record statements defending her innocence, but when it comes to being put on “involuntary” paid leave, she shows private sector efficiency and results. According to Bloomberg, “Lerner is being replaced on an acting basis, the IRS said today. Lerner has been placed on paid administrative leave, said a Democratic aide who was informed of the decision. The move wasn’t voluntary, the aide said.” So whereas taxes paid by conservatives were being used to fund her witchhunt of other conservatives, going forward the government worker, who oddly enough is being replaced “despite having done nothing wrong”, will be paid to do nothing. Sound like a hole in one mission accomplished for this administration.
And who will be replacing Lerner?
The IRS announced that Ken Corbin, a deputy director in another division of the tax agency that processes individual and business returns, will be acting director of exempt organizations.
Corbin, who has been at the IRS since 1986, is a “proven leader during challenging times,” acting commissioner Danny Werfel wrote in a message to employees today.
“He has strong management experience inside the IRS handling a wide range of processing issues and compliance topics as well as taxpayer service areas,” Werfel wrote. “Combined with his track record of leading large work groups, these skills make him an ideal choice to help lead the Exempt Organizations area through this difficult period.”
Werfel became acting commissioner yesterday, assigned by President Barack Obama and Treasury Secretary Jacob J. Lew to come up with a strategy for improving the agency within 30 days.
So… they are shutting the IRS down?
As for Wefel, we hope he at least knows how to plead the fifth correctly in 2-4 years if/when he too is called to testify before Congress for auditing everyone who made over $100,000, or whatever passes for the definition of an “unfair fat cat” at a time when total US debt will be $22 trillion, when the Fed has been discredited, when…
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Are Covert Operations Underway In The Global Currency Wars?
by Zero Hedge - May 23rd, 2013 6:34 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
In an age of economic policy activism, including widespread quantitative easing and associated purchases of bonds and other assets, Amphora’s John Butler reminds us that it is perhaps easy to forget that foreign exchange intervention has always been and remains an important economic policy tool. Recently, for example, Japan, Switzerland and New Zealand have openly intervened to weaken their currencies and several other countries have expressed a desire for some degree of currency weakness. In this report, Butler summarizes the goals and methods of foreign exchange intervention and places today’s policies in their historical context; but moreover he discusses the evidence of where covert intervention – quite common historically – might possibly be taking place: perhaps where you would least expect it… And if the currency wars continue to escalate as they have of late, it seems reasonable to expect that covert interventions will grow in size, scope and frequency.
Via John Butler’s The Amphora Report:
Back in 2001, some prominent economists wrote a paper, published in the American Economic Association’s prestigious Journal of Economic Literature, titled “Official Intervention in the Foreign Exchange Market.” In this paper, the authors discuss the efficacy of foreign exchange intervention and, perhaps surprisingly, they include a brief section on covert intervention specifically, of which the following is an excerpt:
Most actual intervention operations in the foreign exchange market have been—and still are—largely secret, not publicly announced by monetary authorities…
…
A further explanation may be that although monetary authorities intervene in order to target the value of a foreign currency, since the fundamentals of the foreign currency are not necessarily equal to this objective, the monetary authorities do not have an incentive to reveal their intervention operations as no announcement on their activities will be credible … [S]ecrecy of intervention may be an attempt to affect the exchange rate … without triggering a self-fulfilling attack on the currency.
…
Looking around various FX rates, there is some evidence that covert intervention has been taking place in Asia. Occasional, sharp overnight moves on unusually high volume have taken place in the Korean won, Taiwan dollar, Indonesian rupiah, Malaysian ringitt and Vietnamese dong. This is of course only circumstantial evidence but it would be odd were profit-maximising economic agents to behave…
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Chart Of The “Keynesian Normal”: America’s Tragic Divergence
by Zero Hedge - May 23rd, 2013 5:56 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
There is a saying that debt can’t buy growth. When it comes to the US, that saying is absolutely correct: only lots and lots of debt can “buy growth.”
As the chart below shows, since officially leaving the gold standard in 1971, annual GDP growth has outpaced the growth of federal debt on just 11 occasions, and of these half were during the dot com boom of the late 1990s. Obviously this chart would look far worse if instead of just federal debt – which is merely a portion of total we used total credit market debt (which is some three time greater). But for illustrative purposes, merely Federal debt will suffice, because the parabolic “endphase” divergence between the two indexed lines – one showing GDP growth, the other debt growth – says more about the final outcome of this tragic Keynesian experiment than 1000 meandering, meaningless, trolling essays written by Nobel-prize winning economists ever could.
As Brent Johnson at Santiago Capital notes, “We are now supposed to believe that during the biggest credit crunch of the last century, the economy is going to start growing FASTER than debt & reduce this spread?”
But don’t worry, even as America drowns in debt, we really owe it to ourselves, even if in a few years all of it will be held by the Federal Reserve.
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