Saturday, 22 November 2014

Guess Who Has Been Spending An Ever Larger Share of U.S. Dollars During The Last 34 Years

The U.S. government of course, both Republicans and Democrats alike.

Friday, 21 November 2014

Whenever Monetary Inflation Outpaces Consumer Price Inflation....

...other prices will be pushed up instead as a result.

The Short Version of the "Austrian" True Money Supply (TMS), as of 10 November 2014

The short version of the Austrian True Money Supply for the U.S. increased 0.49% on last week for the week ending 10 November 2014. At $10.4324 trillion, a new high for the second week in a row, the money supply is now up $549.1 billion, or 5.56%, year to date.

The 1-year growth rate increased sharply for the week to 7.29%, up from 6.57% last week and the highest reported for five weeks. The growth rate however remains significantly lower than the 8.30% longer term average since 1980 and has plummeted since the +10% growth rate reported in early 2013.


Components of The Short Version of The Austrian True Money Supply


The Austrian True Money Supply
This weekly publication is based on a short cut version of the Austrian True Money Supply as some components are published on a monthly basis only and as the difference between the short and the "full" version is negligible. The two series can be compared as follows (as of October):

As the the charts demonstrate, the two series are close to identical on a monthly basis. It is also interesting to note that, on a monthly basis, both series expanded at the slowest year on year pace in October since November 2008. This observation should be viewed as an important supplement to the weekly comments in this report as it serves to further highlight the declining growth rate in the Austrian True Money Supply.

For monthly comments on the money supply, I suggest you have a look at the writings of Michael Pollaro. His latest report can be accessed here, here are two charts from that report:

A Leading Economic Indicator and The Stock Market - Disconnection Taken To New Highs

Can it really be the case that the stock market is independent of economic developments? I admit, I'm starting to sound a bit like a broken record, but better safe than sorry. The truth is yes, the stock market can act independently for a while as low interest rates and an ever increasing money supply channels return-starved funds to the stock market casino away from the more risk averse options. 

But the reality of the real economy hits Wall Street with a big hammer from time to time, knocking the stock market down to a more sensible relationship with the overall economy. Better be on main street and not Wall Street when that time comes soon again.

Thursday, 20 November 2014

Paying Lip Service to "Too Big To Fail"

As bank assets continue to hit new highs on a quarterly basis, fueled by money supply growth and the various QE programs, the number of banks continues to slide.

Compared to Q2 2008, there are today (as of Q3 2014) 1,501, or 21.0%, fewer banks operating in the U.S. During the same period, total assets for all banks operating in the U.S. surged by some $3.8 trillion to $14.8 trillion, an increase of 34.7%. As a result, total assets for each bank has increased 70.6% on average during the Q2 2008 to Q3 2014 period.

The above development is not a new trend however as it has been ongoing for at least the last 30 years.

The observant reader would perhaps wonder how this is possible as "too big too fail" (TBTF) has been a recurring item on the regulators agenda. As the Fed will naturally bail out large banks next time around as well (remember that the Federal Reserve banks are owned by the member banks, meaning the banks own the money printing press located in the trading room at the New York Federal Reserve Bank), one plausible conclusion seems to be that regulators are only paying lip service to this "problem". 

TBTF is, by the way, not a problem at all: just let them fail and let new investors pick up the wrecks. The real problem is fractional reserve banks operating with very little capital and an explicit bail-out put option, courtesy of the Fed. 


One Key Reason Banks Will Continue to Merge and Its Implications

U.S. Banks Are Now Operating With 100% Reserves - Is Full-Reserve Banking The Next Step?

Wednesday, 19 November 2014

The Short Version of the "Austrian" True Money Supply (TMS), as of 3 November 2014

Here's a bit of a late and short update due to spending the last week in NYC. I did notice that the increase in the U.S. money supply appears to have pushed other prices up in addition to asset prices.

The short version of the Austrian True Money Supply for the U.S. increased 0.61% on last week for the week ending 3 November 2014. At $10.3820 trillion, a new high, the money supply is now up $498.7 billion, or 5.05%, year to date.

The 1-year growth rate fell to 6.57%, down from 6.90% last week. The downward trend in the growth rate hence continues. The growth rate has averaged 7.43% during the last three months which is substantially lower than the 8.30% longer term average.

Wednesday, 12 November 2014

A Particular Problem Facing Economics

One of the problems in the world of ideas, particularly in the social sciences, is that the insight behind old ideas can get lost as new ideas crowd the intellectual landscape. Often, the historian of ideas has the thankless task of reminding his colleagues that what they think some long-dead writer said is not, in fact, what he was talking about at all.

Tuesday, 11 November 2014

Gold Price to M2 Ratio Dips Below Longer Term Average

Gold price as of 10 November 2014

Ron Paul and Ludwig von Mises on War and Central Banking

What Drives Corporate Profits in the U.S.?

And guess what will happen when that driver slows down. Mr P/E will not be too happy either then.

Saturday, 8 November 2014

On This Measure, U.S. Depository Institutions are Substantially Less Solid than....

....they were on 10 September 2008, just a few days before Lehman collapsed. Back then, this ratio was 21.7%. Today, the ratio has declined to 15.6%. 

When reading the chart, remember that the money supply is a liability for depository institutions (the majority of the money supply is deposited with commercial banks).

Friday, 7 November 2014

The Short Version of the "Austrian" True Money Supply (TMS), as of 27 October 2014

The short version of the Austrian True Money Supply for the U.S., the measure of the money supply applied in this weekly report, decreased 0.48% on last week for the week ending 27 October 2014. At $10.3191 trillion, the money supply is now up $435.8 billion, or 4.41%, year to date.

The year on year growth rate in the money supply increased to 6.90% for the week, up from 6.64% last week, but remains substantially lower than the 8.30% longer term average.

Compared to the same period last year, the year on year growth rate continued to drop and is currently 1.46 percentage point lower.

The 5-year annualised growth rate dropped again this week, shredding 1.90 percentage point compared to the same week last year. This was the 48th consecutive week in a row with a declining growth rate and the drop in the growth rate during the last two weeks are the biggest since the growth rate first started falling week ending 2 December 2013.

As I've been regularly pointing out for a while in this weekly post, the drop in the 5-year annualised growth rate is seriously resembling that preceding the "end" of the previous money cycle.

It is important to remember that the drivers of the money supply are different during these two periods. Up to 2008, money supply growth was driven by banks. This time around the driver has been the Fed monetizing the vast expansion of government debt, though bank credit once again started shooting up at the beginning of this year. This difference has repercussions for anyone entertaining bubble-spotting.

A few things appear clear to me however in this money cycle: 1) The actions by the Fed has created artificially high prices in treasuries which has pushed corporate bonds in the same direction, 2) The 90.31% increase in the money supply since Lehman filed for chapter 11 on 15 September 2008 has pushed the U.S. stock market to bubble levels and 3) The money supply growth, the mother of all bubbles, seen in recent years is itself an unsustainable bubble. The increase has inflated prices and distorted the will of the free market across the board and will have serious consequences in one way or another as the growth rate continues to fall.

This is extremely interesting times to monitor the money supply and to see how things play out. Stay put.

Meanwhile, the growth rate in the "overall monetary stimuli" is declining fast due to the Fed taper (QE3 ended last month)....

...and the U.S. Stock Market Risk Indicator is at an all time high as of October (and has moved even higher during the first week of November)...

...and deflationary pressures started to appear months ago.


Growth In Lending Increases Even As Banks' Equity Ratios Approach 2008 Levels

Something for The Week End: Inside The Bank That Ran Out of Money

Which bank will it be next time around?

Thursday, 6 November 2014

A Tale of Two Islands

Imagine a group of ten people getting stranded empty-handed, but with enough fresh water to last them a week or so, on a remote island they decide to name Prosperity Island, or Prosperity for short. A mere mile south, another group of ten people get stranded on another island, identical to the other island in all aspects. Like the other group, they arrive empty-handed, except for having enough water also lasting for a week. This group names the island Poverty. Both groups’ consolation price is that the islands have plenty of fish in their waters and coconuts grow in their plenty’s up in the treetops on both islands. After a quick trip in the nearby areas on the islands, the two groups decide it’s time to catch some fish as all are starving. Without any tools, they jump into the water to catch fish with their bare hands. After the initial scare, the fish returns to the shores and the two groups are able to catch just enough fish to satisfy their hunger.

The next morning the group on Prosperity decides to wake up early in the morning and hunt hard all day to catch enough fish to last them a couple of days. If they do, this will free up enough time to build some landing nets, a much more efficient way of catching the slippery fish. On Poverty, the group lays no plans and continues to catch fish by hand while waiting for happier days to arrive in the form of a rescue. On Prosperity, fishing is not going as well as planned, but they end up with enough fish to last them a day and a half. As it would take two days to build the landing nets, they decide to restrict their consumption of fish so that the fish saved will last for a full two days. Two days later, the nets are completed and all the fish has been consumed. They go to bed satisfied, though the hunger is starting to creep in. On Poverty, life goes on as has now become usual, catching fish by hands to satisfy the hunger for that day. 

The sun arises once again and the group settled on Prosperity is eager to try out their newly built tools for catching fish. And it’s a winner! After just two hours of work, they have caught enough fish to feed them for the next four days. After celebrating with a few hours of one of the most pleasant of goods, leisure, they decide to make a ladder to enable them to get to the top of the trees to collect coconuts. Their water supplies will run out in just three or four days’ time and now is the time to start preparing. Meanwhile, on Poverty Island, life goes on as usual, catching fish by hand. The better days are yet to arrive.

Two days pass and both groups will run out their original water supplies during the next two days. The people on Prosperity have saved up enough fish to last for the next four days and have collected plenty of coconuts rich in coconut milk which will quench their thirst at least for another four days when their original water supplies run out. The story is not so plenty on Poverty Island. They have not saved any fish and have not collected any coconuts and now they are about to run out of water supplies. They are left with no other choice than skip fishing, build a ladder and starve for the next two days, the time it takes to build the ladder. On Prosperity, the group has increasingly become tired of sleeping on the ground as it gets quite cold and moist at night. This has resulted in two people taken ill on both islands, which has made it harder than otherwise for the groups to feed themselves.

Two days later, the Poverty group has now completed building the much needed ladder and waste little time in getting to the top of the trees to pick some milk-packed coconuts. As their water ran out a few hours ago, they are now very thirsty in addition to being starved as they have not eaten for two days. Having quenched their thirst, they’re now exhausted. But as they are starving, the people not taken ill get into the water to catch some much needed food. Over on Prosperity, the group has now completed building a very small and simple, but comfortable hut, lifted off the ground and padded with soft leaves.

Over the next couple of weeks or so, life is becoming increasingly pleasant on Prosperity Island. They only spend a couple of hours a day catching fish as they’ve built more landing nets to catch the fish with and as the two that were previously ill have now fully recovered as they sleep above the cold and moist ground. Fetching coconuts is the simplest of tasks, though they had to spend half a day repairing the ladder the other day. As they had saved up both plenty of fish and coconuts, the half day spent repairing the ladder didn’t set them back much. They’ve now started building a canoe as they’ve spotted an island in the horizon they would like to explore. Matters are becoming increasingly worse at Poverty and the inhabitants are starting to wonder whether the name they gave to the island have turned out to be a self-fulfilling prophecy. Four more people have taken ill due to the cold and moist ground they all sleep on, leaving very few people to catch the fish they need to eat every day. Also, as the ladder was in a state of much needed repair, it also took longer to collect the coconuts for a few days, a task normally completed in a very short time every day whenever they can find the time. The ladder was eventually repaired by the few left capable of working, but this was at the expense of catching fish. As a result, they all went without any food for a couple of days. Many on the island have started running out of hope, spending much of the day complaining about their unlucky destiny and the lives they could have had if only things were different. Why hasn’t anyone come to rescue us they ponder. Do people not care?

Back to Prosperity Island. More than a month has now passed since they first stranded on the island. They’ve now built three new huts giving all more privacy and space. They’ve also built a nice porch where they all join at night to spend some quality time together and lay out plans for the next day and the future. The canoe is all finished. They face two problems however; they’re getting tired of eating and drinking the same things every day and they’re having so much spare time they’re getting bored. The group decides to send out a small team to explore the island in detail to see if there is something else eatable on the island. A couple of the people decide to get their heads together to find new ways to spend their leisure time.

A few days later, the group on Poverty has not eaten since breakfast yesterday. Of the ten people, seven are now ill or in poor condition leaving just three to sustain the group. As they haven’t had the time nor the resources to repair the ladder which is by now completely broken, they’re increasingly becoming desperate for a zip of coconut milk. On Prosperity, the team sent out to explore the island has found a spot on the other side of the island rich in not only berries, but also bananas. They’ve also saved enough fish and coconuts to sustain them for a long time and have more than sufficient reserves in case of disaster. The time is now ripe to put the canoe to work and explore the island in the horizon as they’ve now also built paddles. Three of the group members jump into the boat, all very well aware of the risk the adventure entails. But they agree it’s worth it.

All hope now appears lost on Poverty Island. The few people busy feeding the group have increasingly become worn out and discouraged, not completely unrelated to their realisation that some people in the group are not really ill at all. One got so fed up hearing about their complaints and how hungry and thirsty they were that he left the group and settled by himself on the other side of the island. Later that day, while laying half asleep in the shadows near the beach, a member of the Poverty group stands up glazing towards the ocean. What is that, there is an object of some sort moving out there! They all stand up. A few minutes later it all becomes apparent. It’s a boat! As the trip was shorter than the Prosperity team initially thought, they arrive on Poverty Island with plenty of supplies, enough for one small meal for each with a nice big drink of warm coconut milk. After the meal and having shared their stories, the Prosperity team invites the whole group to come and join them on Prosperity Island. We have it all set up there, they explain, we only need to build a few more huts and fishing nets and maybe another ladder. It’s perfect, with more people we can get started on some more projects we’ve been considering.

After paddling back and forth for two days, all Poverty members arrive safely on Prosperity Island. The fish and coconut reserves have now been greatly depleted however having been shared between more people. As a result, the Prosperity people cut down on leisure to replenish the reserves and with the help of a few of the people from the Poverty group, they save up enough reserves for all. Over the next weeks, more huts are built and the porch for the evening get-togethers is doubled in size. They all lived happily ever after on Prosperity Island never setting foot again on Poverty Island.

-----THE END-----

The story is a draft excerpt from a book under construction about money supply and the economy (that I may or may not publish in due course...). The above story is inspired by the writings of Ludwig von Mises, Murray N. Rothbard and Peter Schiff.

European banking misery: pretending rather than mending, does no favours to lending

By Jakob Vestergaard

Today marks the operational start of the Single Supervisory Mechanism (SSM), charged with supervision of European banks. A milestone paving the way for the SSM was the comprehensive assessment of European banking, released last Sunday by the European Central Bank (ECB) and the European Banking Authority (EBA). Unfortunately, the assessment was more comprehensive than apprehensive – and does not bode well for the future of European banking.

To meet its objectives of strengthening bank balance sheets, enhancing transparency and building confidence, the comprehensive assessment carried out a “forward-looking examination of bank’s solvency”, based on an adverse scenario specified by EBA back in April. By now, the results are well-known: 25 out of 130 assessed institutions were identified to have a combined capital shortfall of €24.6 bn, but taking into account the capital raised by these institutions during the year, the number is down to €9.5 bn, distributed over 13 banks, predominantly Southern European, with only 8 of them actually having to take action (the remaining five already subject to restructuring). So, raise €10 bn in new capital, and European banking is well and fine? Not exactly.