Adeptly managed by the central bank and the government, the Argentine peso has been plunging in perfect form, an activity it is very, very good at. And so on Thursday, it plunged 4.1% on the black market, hitting 14 ARS/USD for the first time. With the official rate at 8.39 ARS/USD, the gap between the two soared to a record of 5.61 pesos. A sign that any remaining trace-amounts of confidence in the peso were evaporating. It was the steepest plunge since January 24, when the central bank devalued the peso by 15%. ‘Expect the government to take action to bring this rate down – fast,’ wrote Bianca Fernet, stilettos-on-the-ground American economist in Buenos Aires and contributor to Wolf Street. This ‘Argentine monetary policy,’ as she explained in The Bubble, would include: Forcing state-owned agencies to sell dollar bonds locally Closing the cambios and other currency dealers for a few days Raising interbank lending rates, forcing banks to sell assets locally. On Friday, the peso recovered a smidgen, and the reported ‘blue dollar’ rate dipped below 14 ARS/USD, after the central bank had reportedly blown $10 million of its foreign exchange reserves to prop it up. But it desperately needs those reserves – now below $29 billion – to service its foreign-currency debt, part of which it defaulted on once again on July 31. ‘They are reporting a lower rate than the real rate; reporting a rate above 14 is evidently not permitted,’ Bianca told me, perhaps tongue in cheek because that’s the only way to take Argentina. Then she added, ‘The brokers are trading at 14.35 right now.’ On Monday, brokers were selling the dollar at 14.1 ARS/USD, illegal and un-permitted as that may be.
This post was published at Wolf Street on August 25, 2014
If Janet Yellen had not earned her Ph. D. in economics, she could have been a great short-order cook at Waffle House. Yellen is as long-winded as Bernanke. She lards her speeches with footnotes, just as he did. She is as evasive as Greenspan, but she uses academic jargon and peripheral statistics to do her work. Her first Jackson Hole speech shows how adept she is. First, some background. The FED said in December 2012 that an unemployment rate of 6.5% was one of the two benchmarks to use as a way to evaluate when to raise interest rates. The other was CPI growth at 2%. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The CPI increase, July 2013 to July 2014, was 2%. In short, both of the targets have been reached. So, will the FED raise rates? Which rates? How? The European Central Bank has contracted the monetary base for over a year, and long-term bond rates have fallen. Meanwhile, the short-term ECB rate has dropped like a stone since October 2013. To avoid dealing with this problem — the #1 policy problem facing the FED — Yellen is waffling. Her speech was pure waffles and syrup.
This post was published at Gary North on August 25, 2014
One issue the financial media is willing to ignore, but has been foremost in my mind for many years is the utter recklessness of the Federal Reserve’s ‘monetary policy.’ Below is a chart the public will never see on CNBC, or anywhere else, but I believe is vital to understand the threat that Washington and Wall Street currently present to the world at large. You’re looking at what academic-quack economists have done to the global reserve currency to save the hides of the banking elite, who for decades have acted as if Wall Street was their private fiefdom.
The FOMC calls this ‘monetary policy’ but for me something completely different comes to mind: legalized counterfeiting. Unfortunately, for years the baby-boomer generation (and their children; the Gen-Xers) have sought pleasure in immediate consumption. It’s hard to blamethem since the Fed destroyed their incentive to save by lowering the Fed Funds Rate to nearly 0% in December 2008. This rate can never be raised (despite the Fed rhetoric) without blowing up the budget deficit, sinking the economy in the process. For decades American’s, (and just about everyone else) have taken full advantage of the debt generously provided by the banking system to leverage their income, and now far too many people are hooked on cheap credit and just one paycheck away from insolvency, as are their employers.
This post was published at Gold-Eagle on August 24, 2014
The currency wars being waged among the world’s nations at this time are going to continue for quite some time, according to Jim Rickards, author of Currency Wars. In this DJ FX Trader podcast posted at the Wall Street Journal, Rickards explains how nations around the world will likely continue their currency devaluations in order to gain an edge in their international trading.
The ‘bad idea’ to attempt to resolve the national debt problem by minting a trillion-dollar platinum coin. Supporters say the US Treasury would be able to deposit said coin with the Federal Reserve to act as an asset, backing part of the outstanding debt.
As Jim notes, this is not an honest approach to discussing the root problem – which is based in the monetary system, itself.
Besides that, the idea is preposterous and just shows how crazy this system has become. Things don’t hold value because someone says they have value. A thing has value based on the public/market demand for that thing.
Prior to 1971, government spending was constrained by both interest rates and the fact that there was some semblance of a gold-backed currency via Bretton Woods. But today, we have neither constraint – the Fed’s zero percent interest rate policy combined with the current, purely fiat monetary system has created the unstoppable spending spree that has led us to these extreme levels of debt. If there is anything left at all as a bar against further spending, it is the debt ceiling. But even that is now being threatened with a proposal to remove it entirely.
The just announced appointment of Jacob Lew as Treasury Secretary. Jim is holding judgement in order to see if there will be any honest discussion regarding the real problems of the monetary system.
CNBC’s European Squawk Box had an interesting interview session with author and economist, Richard Duncan. Looking back over the last 40 prosperous years, ever since the last remaining link between the US dollar and gold was removed, the world has evolved into a form of financial creditism. Duncan notes that the central banks of the world have been able to provide easy credit and the world has greatly benefited. However, there comes a point where borrowers are unable to take on more debt. If the government does not step in and provide QE or some other kind of spending programs, there will be another Great Depression. Duncan even goes on to say that, in fact, a depression is unavoidable and inevitable, but it can be delayed if the government decides to benefit society further by spending on 21st century technologies in the nano science and medical fields, for example.
Another interesting part of this segment that should be noted is where the panel brings up the comparison of the present situation with the past, where central banking policy was to raise interest rates rather abruptly in order to curb reckless borrowing. “When you throw money into the system ….. the good guys out there won’t borrow and spend because they’re too cautious. It’s the bad guys who come in and borrow and spend. … There’s lots of bad guys around, we can see them all over the place – we know they’re there!” Touché.
When the economy of a country faces economic stress, that country’s central bank usually tries to take steps to recover by adjusting or boosting inputs to GDP. GDP is based on:
– Consumer consumption – Investments in housing and business – Government spending – Net exports (Exports minus Imports)
When the country reaches a level where there is high unemployment and excessive debt, it leads to a situation where consumer consumption is weak and no one is investing in housing or business because they are uncertain about the future. Government spending can sometimes overcome this, but it comes with higher taxes or borrowing costs which become politically unpopular.
Therefore, as a last-ditch effort to boost GDP, a country will embark on currency debasement in order to increase its net exports. The currency is devalued by inflating the money supply. The local citizens suffer because their own money buys less goods as things become more expensive at home.
However, as a country’s currency becomes weak in relation to its trading partners’ currencies, it makes its products and services cheaper for foreigners, and thus more attractive to buyers in other countries. As foreigners buy more, the affect is a rising GDP.
But this is only a temporary situation. Other countries begin to experience problems because their imports are rising relative to their exports. This hits their own GDP and now they have to take similar steps – debasing their currency to remain competitive.
Rickards explains that there have been two major global currency wars already – one from 1921 to 1936 and the other from 1967 to 1987 and that we are now in the third global currency war. This war has three main participants – the U.S., China and Europe – although many countries around the world are severely affected by the currency games being played out and make their own contributions to the overall picture as well.
Rickards also gives four possible outcomes of this currency war:
Multiple reserve currencies. Instead of the U.S. dollar being the preferred reserve currency of the world, countries would hold several denominations from currencies around the globe. But imagine having to deal with the policies of several central banking activities – it’s bad enough dealing with those of the Fed.
SDRs. Special Drawing Rights have been the instrument of the IMF. SDRs are backed by a basket of different currencies from different countries around the world. However, the SDR’s value floats – that is, it is adjusted according to global exchange rates. Furthermore, the IMF is able to print SDRs at will. Thus, there really is no difference between any other currency of the world, except it’s worse with the SDR – the IMF controls the SDR and the people controlling the IMF are appointed, not democratically elected.
A return to the gold standard. Here Rickards discusses some of the things to think about prior to a return to the gold standard, like what definition of the money supply (M0, M1, M2, etc.) to use as the base money supply on which to base on the gold supply? Additionally what ratio should be used between paper and gold? And finally, what regulations should be in place for exceptions to be made in certain circumstances?
Chaos. If nothing is done to stem the current path towards currency debasement, a catestrophic collapse could devistate the world as we know it.
There’s also an interesting chapter explaining how currency and capital markets have become so complex that they are quickly approaching a breaking point. Current risk models used by most firms are inadequate to account for the existing risk and thus most are unaware of the true problems underlying the system and thus are unprepared for the inevitable catastrophe.
Here’s an interview with James Rickards where his book is discussed:
And here’s an audio interview discussing the book, whether or not America needs the Fed and whether or not a gold standard is a possible answer to today’s economic issues.