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2018-10-18 07:00 by Karl Denninger
in Monetary , 30 references
[Comments enabled]  

The minutes are out and this caught my eye:

In their consideration of monetary policy at this meeting, participants generally judged that the economy was evolving about as anticipated, with real economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Committee's objective. Based on their current assessments, all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. Almost all considered that it was also appropriate to revise the Committee's postmeeting statement in order to remove the language stating that "the stance of monetary policy remains accommodative." Participants discussed a number of reasons for removing the language at this time, noting that the Committee would not be signaling a change in the expected path for policy, particularly as the target range for the federal funds rate announced after the Committee's meeting would still be below all of the estimates of its longer-run level submitted in the September SEP. In addition, waiting until the target range for the federal funds rate had been increased further to remove the characterization of the policy stance as "accommodative" could convey a false sense of precision in light of the considerable uncertainty surrounding all estimates of the neutral federal funds rate.

Oh really?

Neutral today is at least 6.23%.

Why?  Because that's the federal deficit as a percentage of the economy in real dollars of debt.  Not the phony-baloney "deficit" published that excludes unfunded entitlement spending, the real amount of Federal Debt advancement over one fiscal year compared against the size of the economy in that same fiscal year.

That means the rate of monetary inflation is at least 6.23% and therefore the neutral Fed Funds rate is at least that rate.

Now it may be higher because other unbacked credit emission takes place in the economy as well, but there is plenty of argument over the other issuers.  States, at least in theory, cannot do so -- that is, they're allegedly supposed to retire all their debt.  In practice they don't but Constitutionally they are not permitted to run fiscal deficits.  In addition unbacked credit issuance to private entities also counts, but whether something like a credit card debt is truly unbacked is a function of some debate.

There is no such argument, however, when it comes to the Federal Treasury debt.  Every dollar of that is unbacked and every dollar of it is reported every single day in either direction so ascertaining the minimum "neutral" rate is trivial.

The Fed's claim otherwise is a lie -- but you may wish to contemplate what you think the economy and market would do if the Fed Funds rate was to be immediately reset to 6.25% -- because that would be "neutral."

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2018-10-12 07:00 by Karl Denninger
in Monetary , 118 references
[Comments enabled]  

So they said at 7:41 on 10/11.

Ok.  I happen to agree by the way because, as was noted in one of the first few pages of LeverageNobody, in a free market, ever lends money at a loss on purpose.

This doesn't mean people don't do dumb things; they do -- all the time.

But nobody holds a bonfire on their back porch with $100 bills.

So what is the nominal short-term (e.g. 13 week T-bill) rate of interest required today to have a positive real rate?

That's easy -- more than 6.23%.

That is the forward real rate must be greater than the federal budget deficit in nominal terms as a percentage of the economy or you are lending money intentionally at a loss.

Yet the entire bubble machine game since the 1990s has been predicated on intentionally lending at a loss, with the game being a simple one: How do you con people world-wide into buying Treasuries at a coupon rate that is less than the budget deficit of the Federal Government on an annual basis?

You can only do it by lying and outright coercion.

There is no other way because nobody will do it on purpose otherwise.

The stock market is overvalued by an enormous amount as a direct consequence of this because a "forward P/E" is inherently a declaration of leverage.

Go look at the top of The Market Ticker masthead.  Take said leverage out of the system and then account for the expected overshoot and that's about where it trades.

The entire so-called "recovery" since 2009 has been one fraud-laced leverage game.

These games always end and they always end in crashes because nobody -- and I do mean nobody -- ever comes out and actually puts forward the two basic facts: Nobody ever intentionally lends at a loss and The actual rate of monetary inflation is trivially measurable as the advance in Federal Debt against GDP.

Therefore in order for there to be a positive real rate of return on any such security the short-term, near-zero time rate for such lending must be higher than the rate of monetary inflation and for the entire time that it is not all advance in the price of financial assets is a bubble and fraudulent.

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2018-10-07 07:00 by Karl Denninger
in Monetary , 299 references
[Comments enabled]  

Oh Bill Still!  Oh former Libertarian candidate for President who proclaimed this on stage:

"Crashes are caused by just one thing, and that's bubbles.  Bubbles are caused by just one thing and that's banks being in complete and total control of the quantity of the american monetary system in complete and total contradiction of the American Constitution."

But now, Mr. Still has found his #MAGA hat and his wife is worse, shilling his videos all over the Internet supporting outright monetary fraud and, in addition, shilling for herself with MLM "dietary supplements"!

Principles?  What are those?  Gee, did you forget what you actually said Mr. Still?

Well, let me remind you what the facts are from the US Treasury's own web site:

DatePublic DebtSoc. Sec./MedicareTotal
9/28/201815,761,154,524,132.405,754,903,659,047.7821,516,058,183,180.20

9/29/2017

14,673,428,663,140.905,571,471,352,912.5720,244,900,016,053.50
Difference1,087,725,860,991.50183,432,306,135.211,271,158,167,126.70

Now the GDP of the nation stands, as of last read, at $20,411,900,000,000.

Four quarters ago it stood at $19,588,100,000,000, a difference over the last year of $823,800,000,000.

In other words GDP is actually negative because the expansion of federal debt is greater than the expansion in GDP in dollars.

This is a matter of arithmetic -- not politics.

The problem is that in real terms you need to earn at least 6.23% to break even on a government (or any other) bond.  At any rate of return under 6.23% you are losing money in real terms if you buy such a security.  Of course right now Treasuries are all earning less than this (a lot less!) yet the above is a mathematical fact.

That is, in actual monetary terms the real inflation rate is 6.23%, not 2%.  The Fed can lie and the BLS and BEA can lie with their CPI tables but arithmetic does not lie and each dollar of monetary expansion by the federal government is a dollar of inflation -- period.

This sort of misdirection can be gotten away with for a while.  It was in the 2000s, and in the 1990s.  But it cannot be gotten away with forever because the damage in purchasing power done to everyone by this behavior is both real and immediate and it is this very behavior by governments and private banks that cause both bubbles and the resulting crashes.

Trump knows this and does not care.  He believes he will be out of office before it all blows up in his face.  Bush believed that too, and he was wrong.  Obama ran the same crap after the 2008 crash and got away with it for the eight years he was in office.

Trump will not get away with it.  We are running a 6.23% fiscal deficit during an expansion in the economy.  That's outrageously large and in fact belies the truth -- there is no expansion at all; the economy is in fact contracting and yet the false signals being sent to employers and others leads them to do uneconomic things like borrow money to buy back stock.

It is this very uneconomic behavior that in fact leads to crashes because it causes the valuation of assets to be falsely priced far above their actual value due to the perception that this insanity can and will go on forever, and thus whenever you wish to sell you will be able to at a higher price.

When reality comes calling prices do not "correct" they crash because there is utterly no underpinning for the valuation metric that you have been using and due to the effects of compounding actual valuations are half or less of where prices are trending!

It is stupid to continue to prance around and call this sort of economic distortion "good", but that's what I expect from our lying, fake-news media and serial liars and bubble blowers such as Larry Kudlow.

But the true test of whether someone is actually nothing more than 2-bit ***** or believes what they say comes when someone who has made public speeches on the insanity of such behavior and in fact ran a campaign for the highest office in America on this very basis turns on a dime and supports the people doing it now.

**** you Mr. President and Congress both -- you're setting up the worst collapse and crash since the 1930s.  Double-**** you, however, to those who have claimed in the past to be supporters of monetary and fiscal truth but have discarded same due to a putrid and fraudulent infestation in Washington DC that happens to be buttering one's bread via Youslob horsecrap and MLM schemes.

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There are few more self-destructive things a human can undertake than denying provable facts.

Only a few things qualify as "provable facts", and it is important to separate out hypothesistheory and opinion from fact.  Mathematics and physics are two areas of discipline that have massive amounts of their subject matter within the realm of provable facts.

Honest people call the parts of these disciplines that are within the ability to prove laws. Unlike laws made by men that are often ignored these are simply inviolate -- period.  The laws of thermodynamics prohibit a "free lunch", basically; they state that while energy may be transformed from one type to another, and other parts of physics make clear that matter and energy can also be transformed you never get out everything you put in; there is always loss to the environment that you can neither use or avoid.  Newton's laws of motion tell us how momentum, mass, force and velocity interact; how energy, in short, is carried and dissipated in an object that moves or is contacted by one that is moving.

Likewise the laws of mathematics tell us that 2 + 2 = 4, that 2(x + 3) = 2x + 6, that the square root of 9 is 3 and more. These are called laws because every single time the same result will be obtained -- here, there, on Mars or somewhere in Interstellar space.

Here's the reality of money:

Money is only valuable because it is, in relative terms, scarce.  Money is really nothing more than a unit of accounting that's convenient in the physical world.

We could (and perhaps should) account for production in the physical world, and its value, in some invariant physical unit.  I happen to like BTUs (or Joules) of energy required to produce a thing or contained within a thing, because it is an invariant and therefore not subject to tampering.  Accounting for it under production rather than the recoverable (e.g. "stored") energy in a good or service means that improvements in productivity (e.g. discovery of a new, "cheaper" way to make gasoline, for example) makes the value of each unit (a gallon, for example) less and accessibility greater.  This is what productivity improvement is supposed to do -- it advances the common benefit to everyone because it makes useful goods and services more accessible to everyone.

So let us assume that among everything in the economy there is 100,000 Joules of energy represented in a given period of time.  Yes, I know this is a ridiculously small number, but adding more zeros doesn't change anything other than scale, and 100,000 is a nice convenient number.

We will also assume that there is $100,000 -- that is, one hundred thousand dollars, in said economy.

It would be reasonable to assume that the average cost of transacting for one Joule of represented production of a good or service would be one dollar.  There would be items in the economy that are of relatively more value in terms of dollars-per-Joule, and some with less, but on average that would be the expected clearing price.

Now let's remember that money is fungible (that is, exchangeable) with credit (which is just another word for "debt"); that is, a promise to make something tomorrow.  They both are accepted in the economy as exactly the same thing, even though they demonstrably are not.

Now here's the problem: Bill and some others (e.g. the MMT charlatans) assert that the government can simply create money.

But that's not true.  The "creation" he refers to is in fact credit because the government did not first produce anything.

Consider what happens if you double the amount of "money" in the system from $100,000 to $200,000, given that 100,000 Joules of production takes place.

The average clearing price of a good or service produced with those Joules will double from $1 to $2. It cannot be otherwise because equations always balance; this is what the laws of mathematics tell us.

Now does it matter whether you borrow or "create" in this regard?  Only in one respect: The prospect of having to repay (potentially with interest) is a check and balance on borrowing that is utterly absent if you "create."

But in terms of the economic impact today, at the point in which you put the new "money" into the system the two acts are exactly identical. 

Both do immediate violence to the purchasing power of every unit of currency or credit that exists in the system at that instant in time.

It cannot be otherwise because the laws of mathematics, which state that equations always balance, are not suggestions!

As a consequence there is no possible way for the government to spend more than it takes in via taxes without distorting the economy and destroying the purchasing power of the people.

"Creating" is exactly the same thing as shaving coins -- it is counterfeiting and is economically indistinguishable at the moment of the act from borrowing by emitting unbacked credit.

Borrowing, in point of fact, other than the interest, actually has a benefit in that when the amount borrowed unbacked is repaid it is destroyed and thus the inflationary impact is reversed.  Of course in today's world we don't repay government debt ever and so that reversal never takes place, but that someone cheats doesn't mean that the underlying premise is wrong -- it just means you cheated.

Further, when rates are near zero there is no difference economically between "creating" and "borrowing"; it is only when rates rise that the difference shows up.  For this reason if "creating" would work we'd already have proof since we've "created" more than $8 trillion by the Federal Government alone since 2008 and yet there has been no strong, positive economic recovery impact.

The mathematical facts are that the only way to stop the destruction of purchasing power and thus economic damage is for the government at all levels to stop spending more than it takes in -- period.

Denying the laws of mathematics makes you either a fool or a charlatan.

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2015-07-07 07:00 by Karl Denninger
in Monetary , 1517 references
 

I have often commented about innumeracy among the American people, but nowhere do I find it more-distressing than among those who are of sound mind and reasonable (or better) education.

There really isn't any point in having any sort of debate on government reform, monetary reform or anything of the sort with those who deny arithmetic.  It is a complete waste of time to discuss that which cannot work and if your answers do not comport with arithmetic they cannot work.

When it comes to government spending it's quite simple: Government cannot spend, in nominal dollars, more than it taxes.  It does not matter one bit whether the money that government is using is theirs (that is, they're a "currency issuer") or whether the money is issued as debt or by pure fiat -- that is, debt-free.

The reason is as I've put forward for years now -- pretty much since I started writing this column, and which I spent a lot of ink on in LeverageTwo compound (exponential) functions will always diverge from one another.  If the smaller, that is the component of the larger, is growing faster than the whole it will eventually consume the entirety.

There are no exceptions to this, ever, because this is a fact of arithmetic just as 2 + 2 = 4.

Since a sub-part (e.g. government) can never exceed the whole (the entire GDP of the nation) yet the progression of growth of government spending that exceeds that of output (both in nominal terms) must inevitably do so there is no way such a path can succeed.

Ever.

Every single person who claims to have a high-school diploma knows this because you all learned it in school.

Our Congress refuses to face this -- both parties, not just one.  I have been told that deficit spending will not be stopped -- by Republican leaders, back in 2011 during the "debt ceiling" talks.

Since July 1st of 2011 to March 31st of this year total federal debt has increased by 26.6%.

Since July 1st of 2011 to March 31st of this year GDP has increased by 14.4%.

Federal Debt is increasing at a rate approximately twice that of economic output and this is beginning two years after the end of the "Great Recession"!

It is mathematically impossible to continue doing this; continuation of this policy will fiscally destroy the nation with mathematical certainty.

Yet despite this fact, and that you cannot argue with arithmetic, neither political party will stop it.

It does not matter whether you issue the currency as "debt" or not.  If you "print" the money then the destruction in real purchasing power happens just as it does if you issue as debt-backed currency.  This impairs economic growth in exactly the same way.

There is, in fact, a greater push-back in the form of compounding interest in that said interest also consumes more and more of your funds if you issue debt-backed currency.  It can be argued that this is a positive in that it (should) act as an inhibitor of bad government behavior, even though we have seen that it is entirely ineffective in the present tense.

However, if the government does not deficit spend, that is, if it does not take on debt then there is no impact on government sustainability irrespective of the monetary form.

There are plenty of reasons to like debt-free currency.  Philosophically if someone is going to get to the benefit of currency issuance it should be we the people through the government, not private banks.

But -- and this is key -- that debate is utterly immaterial until and unless deficit spending ceases and advancing it as an "answer" to debt-laden nations who are and continue to deficit spend is utter nonsense.  

Such debate on monetary form is irrelevant here, it is irrelevant in Greece, it is irrelevant everywhere that deficit spending (whether formally or simply through the expansion of debt) is taking place because if you do not stop advancing government spending in excess of economic output expansion your nation and its economic system are mathematically certain to fail.

America has one advantage over Greece and most of the rest of the EU: We have a piece of our federal, state and local government budgets we can whack off without destroying our economy.  We need only enforce existing laws. The answer is found in putting an end to medically-related monopolies and restraint of trade and were we to do it we'd be able to remove roughly $800 billion a year from federal spending alone.

The problem is that we have to take that step and stop the deficit spending now -- while we still can.

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