Guest Post: Bubbles And Central Banks – Is There A Connection? | Zero Hedge
Guest Post: Bubbles And Central Banks – Is There A Connection? | Zero Hedge.
Submitted by Dr. Frank Shostak, via The Cobden Centre blog,
According to the popular way of thinking, bubbles are an important cause of economic recessions. The main question posed by experts is how one knows when a bubble is forming. It is held that if the central bankers knew the answer to this question they might be able to prevent bubble formations and thus prevent recessions.
On this, at the World Economic Forum in Davos Switzerland on January 27, 2010, Nobel Laureate in Economics Robert Shiller argued that bubbles could be diagnosed using the same methodology psychologists use to diagnose mental illness. Shiller is of the view that a bubble is a form of psychological malfunction. Hence the solution could be to prepare a checklist similar to what psychologists do to determine if someone is suffering from, say, depression. The key identifying points of a typical bubble according to Shiller, are,
- Sharp increase in the price of an asset.
- Great public excitement about these price increases.
- An accompanying media frenzy.
- Stories of people earning a lot of money, causing envy among people who aren’t.
- Growing interest in the asset class among the general public.
- New era “theories” to justify unprecedented price increases.
- A decline in lending standards.
What Shiller outlines here are various factors that he holds are observed during the formation of bubbles. To describe a thing is, however, not always sufficient to understand the key factors that caused its emergence. In order to understand the causes one needs to establish a proper definition of the object in question. The purpose of a definition is to present the essence, the distinguishing characteristic of the object we are trying to identify. A definition is meant to tell us what the fundamentals or the origins of a particular entity are. On this, the seven points outlined by Shiller tell us nothing about the origins of a typical bubble. They tell us nothing as to why bubbles are bad for economic growth. All that these points do is to provide a possible description of a bubble. To describe an event, however, is not the same thing as to explain it. Without an understanding of the causes of an event it is not possible to counter its emergence.
Now if a price of an asset is the amount of money paid for the asset it follows that for a given amount of a given asset an increase in the price can only come about as a result of an increase in the flow of money to this asset.
The greater the expansion of money is, the higher the increase in the price of an asset is going to be, all other things being equal. We can also say that the greater the expansion of the monetary balloon is, the higher the prices of assets are going to be, all other things being equal. The emergence of a bubble or a monetary balloon need not be always associated with rising prices – for instance if the rate of growth of goods corresponds to the rate of growth of money supply no change in prices will take place.
We suggest that what matters is not whether the emergence of a bubble is associated with price rises but rather with the fact that the emergence of a bubble gives rise to non-productive activities that divert real wealth from wealth generators. The expansion of the money supply, or the monetary balloon, in similarity to a counterfeiter, enables the diversion of real wealth from wealth generating activities to non productive activities.
As the monetary pumping strengthens, the pace of the diversion follows suit. We label various non-productive activities that emerge on the back of the expanding monetary balloon as bubble activities – they were formed by the monetary bubble. Also note that these activities cannot exist without the expansion of money supply that diverts to them real wealth from wealth generating activities.
From this we can infer that the subject matter of bubbles is the expansion of money supply. The key outcome of this expansion is the emergence of non wealth generating activities.
It follows that a bubble is not about strong asset price increases but about the expansion of money supply. In fact, as we have seen, bubbles – i.e. an increase in money supply – can take place without a corresponding increase in prices. Once we have established that an expansion in money supply is what bubbles are all about, we can further infer that the key damage that bubbles generate is by setting non-productive activities, which we have labelled as bubble activities. Furthermore, once it is established that formation of bubbles is about the expansion in money supply, obviously it is the central bank and the fractional reserve banking that are responsible for the formation of bubbles. As a rule, it is the central bank’s monetary pumping that sets in motion an expansion in the monetary balloon.
Hence to prevent the emergence of bubbles one needs to arrest the monetary pumping by the central bank and to curtail the commercial banks’ ability to engage in fractional reserve banking – i.e. in lending out of “thin air”. Once the pace of monetary expansion slows down in response to a tighter central bank stance or in response to commercial banks slowing down on the expansion of lending out of “thin air” this sets in motion the bursting of the bubbles. Remember that a bubble activity cannot fund itself independently of the monetary expansion that diverts to them real wealth from wealth generating activities. (Again bubble activities are non-wealth generating activities).
The so-called economic recession associated with the burst of bubble activities is in fact good news for wealth generators since now more wealth is left at their disposal. (An economic bust, which weakens bubble activities, lays the foundation for a genuine economic growth). Note again that it is the expansion in the monetary balloon that gives rise to bubble activities and not a psychological disposition of individuals in the market place.
Psychology and economics
Psychology was smuggled into economics on the grounds that economics and psychology are inter-related disciplines. However, there is a distinct difference between economics and psychology. Psychology deals with the content of ends. Economics, however, starts with the premise that people are pursuing purposeful conduct. It doesn’t deal with the particular content of various ends.
According to Rothbard,
A man’s ends may be “egoistic” or “altruistic”, “refined” or “vulgar”. They may emphasize the enjoyment of “material goods” and comforts, or they may stress the ascetic life. Economics is not concerned with their content, and its laws apply regardless of the nature of these ends.
Psychology and ethics deal with the content of human ends; they ask, why does the man choose such and such ends, or what ends should men value?
Therefore, economics deals with any given end and with the formal implications of the fact that men have ends and utilize means to attain these ends. Consequently, economics is a separate discipline from psychology. By introducing psychology into economics one obliterates the generality of the theory, and renders it useless. The use of psychology is counterproductive as far as economic analyses are concerned.
Summary and conclusions
Contrary to Shiller, in order to establish that a bubble is forming we don’t need to apply the same methodology employed by psychologists. What we require is the establishment of a correct definition of what bubbles are all about. Once it is done, one discovers that bubbles have nothing to do with some kind psychological malfunction of individuals – they are the result of loose monetary policies of the central bank.
Furthermore, once we observe an increase in the rate of growth of money supply we can confidently say that this sets the platform for bubble activities – for an economic boom.
Conversely, once we observe a decline in the rate of growth of money supply we can confidently say that this lays the foundations for the burst of bubble activities – an economic bust.
Battlefield America | project chesapeake
Battlefield America | project chesapeake.
By: Tom Chatham
Those that are aware of the machinations unfolding in America today see a potentially deadly situation beginning to unfold. The talk of detention camps and foreign soldiers being prepositioned. The Stalinist purge of many top ranking military officers and arming of government agencies to insane levels. The slow deterioration of our industrial capability and ability of families to feed themselves. The erosion of civil liberties and government attacks on patriotic Americans. The massive spy network established to contain and control the population. The failure to guard our borders and dismantling of our military. All of these actions lead in one direction.
For those who think that a financial collapse causing the loss of their savings and livelihood are the worst that could happen, they might want to consider this possibility.
The global elite that have their hand on all the switches know how individualistic and enterprising many Americans are. If this country were destroyed economically and our infrastructure were destroyed we have the ability to rebuild it all over time. Many of the global players know that a small core of Americans can never be subjugated and could cause many problems for years to come if left to their own devices. In a country as big as America it would be almost impossible to round up all of them so something more drastic may be needed.
Let us not forget the goal of some to return the Earth to a population of 500 million. This means the eradication of 6.5 billion people. Why would Americans think they are exempt from this depopulation event.
It has been said before that the goal of an economic collapse would be to not only take America down to third world levels but even lower so Americans would have no chance to rebuild and cause the globalists any serious problems in the future. Even with a collapse much of our infrastructure and knowledge and raw materials would still be available to rebuild.
The goal of Agenda 21 is to return large portions of the land to wilderness and eliminate the human element in these places. When you start to look at the things that some want to happen here a frightening picture begins to form.
– Destroy economy and peoples wealth
– Destroy infrastructure and return land to wilderness
– Destroy peoples ability to rebuild
– Destroy population to return to sustainable global levels
The only things under human control that could do all of these things is a global pandemic of biblical proportions or a major world war. Either or both could be in the works at this time.
The elite have made no secret that they wish to destroy American hegemony at all costs. A pandemic would certainly accomplish many of the goals listed but it is not guaranteed. Even some survivors would be capable of rebuilding some of the nation and that possibility is not acceptable.
The other option is a major war. As any person who knows the history of WWII and the destruction of Europe knows, destruction of people and materials through warefare is very effective. The end of WWII saw the U.S. as the most powerful nation left standing because we came out of it relatively unscathed. Our vaults were full of gold and our factories were second to none.
That cannot be allowed to happen again in America so the next war must bring total destruction to this land.
America will likely be exposed to an attack so fierce that nothing will remain to rebuild. A force that occupies the nation and systematically reduces the population through a series of initiatives from bullets to chemical weapons to starvation will help to accomplish the Agenda 21 result. If the globalists really want to reduce the world population do you really think they will leave all Americans standing?
They will destroy or remove any and all equipment that allows people to survive and care for themselves long term. They will remove any resources that they can use and destroy the rest. Essentially a scorched earth policy will unfold in America that leaves a barren wilderness unable to sustain any large group of people. When that is accomplished the destroyers will likely go home to some large degree. The mineral resources here are well known and can be extracted any time the globalists want in the future.
When they are done all that will remain of this nation will be a vast wilderness with a few scattered people with no ability to confront the globalists. It will be much as it was when the Europeans fist set foot here.
For those willing to sacrifice and do the hard work it may still be possible to salvage the nation from this destruction. For those with the indomitable spirit to go on and rebuild it is possible for this phoenix to rise again from the ashes. But for that to happen, some things will have to be preserved from the destruction to allow a new start.
– raw materials such as scrap metal and chemicals
– knowledge in the form of professionals and books
– equipment for building in the form of machining equipment
– basic medical equipment
– equipment for casting and refining
– equipment to make copper wire
– farm equipment and implements that can be duplicated
– livestock that can be bred and expanded
– seed stocks that can be grown and processed
– equipment to process fibers for cloth and rope
– electrical equipment such as generators and communications gear
No one person could store all of these things so it must fall on multiple groups with various knowledge and abilities to preserve this core of technological abilities. These items would have to be literally buried to escape detection and destruction for the duration of the event. That is possible if done in time and right now time grows short.
For many it would be easy to hide some resources for later use to rebuild and enjoy a rustic lifestyle without all of the technology. The only problem with that is eventually you may be faced with the spectre of the destroyers returning and any lone homesteads with little technological means would be easy prey for another assault. The only way to rebuild and expand with the ability to defend is to establish communities that are connected and technologically capable.
The scenario laid out here is not a happy one but it is survivable if actions are taken in time. Only the hardiest of individuals would likely live through something like this but they are the ones that history calls nation builders. To dismiss this scenario as impossible is to do so at your own peril should events come to pass. Something is impossible until it’s not.
Economies Don’t Die – Monty Pelerin’s World : Monty Pelerin’s World
Economies Don’t Die – Monty Pelerin’s World : Monty Pelerin’s World.
This country will die. History will record the cause as due to an event worse than the Great Depression. That diagnosis will be wrong.
Economies do not die except when they are murdered. Free markets are self-equilibrating, healing themselves unless they are prevented from doing so.
The very purpose of government intervention is to produce outcomes that otherwise would not occur. Intervention is always an attempt to overcome the natural equilibrium at which an economy would settle. Its very purpose is to thwart the intentions of individuals who make up the economy. Intervention is intended to alter the natural healing process.
Every so-called “economic” problem can be traced back to prior political intervention(s). Political actions deemed necessary today result from damages inflicted by prior government interventions.
Damages and distortions are cumulative. Once begun, politicians are unable/unwilling to stop intervening as the pain of allowing the economy to return to equilibrium increases with each intervention. Eventually an economy’s ability to grow and recuperate is impaired:
- Prices become inflated and distorted by liquidity and regulatory interventions. They no longer reflect true supply and demand.
- Capital is mis-allocated as a result of false interest rate signals. Eventually this capital is seen as unprofitable and is abandoned.
- Cheap lending and low lending standards encourage imprudent and eventually unsustainable levels of debt.
These distortions decrease an economy’s efficiency. General economic metrics like GDP eventually grow more slowly as a result, prompting calls for more political intervention. Eventually the distortions and disincentives grow to a point where standards of living and economies stagnate and then retrogress.
These relationships are as old as civilization itself. Politicians know, but they find it politically advantageous to ignore. The political class believes itself to be superior and entitled. They consider themselves to be above the law. For them, citizens are sources of plunder, to be exploited so that they may hold onto power and wealth.
The economic crisis is coming. It will occur because feckless, venal “leaders” consider the personal cost of stopping their actions to be greater than continuing. That may be true for them, but it is not true for the country.
Sadly, much of the electorate is as corrupt as the political class as Angelo M. Codevilladiscusses below. The economic collapse is inevitable. It may also be deserved.
Democracy has no cure for a corrupt demos. Politicians’ misdeeds taint them alone, so long as their supporters do not embrace them. But when substantial constituencies continue to support their leaders despite their having broken faith, they turn democracy’s process of mutual persuasion into partisan war.
Consider: In 1974 President Richard Nixon lied publicly and officially to cover up his subordinates’ misdeeds. His own party forced him to resign. In 1998 President Bill Clinton lied under oath in an unsuccessful attempt to cover up his own. But his party rallied around him and accused his accusers. In 2013 President Barack Obama lied publicly and officially to secure passage of his most signature legislation. But when the lies became undeniable, his party joined him in maintaining that they had not been lies at all.
The point is that Nixon’s misdeeds harmed no one but himself because no one excused them. But Clinton’s and Obama’s misdeeds contributed to the corruption of American democracy because a substantial part of the American people chose to be partners in them.
The difference between the mentalities of Republicans circa 1974 and of Democrats twenty-five and forty years later is the difference between a society before and after democratic corruption. Forty years ago, just as in our time, the President of the United States headed a coalition of groups with material and ideological interest in his Administration. But, back then, the beneficiaries of power were willing enough to subordinate their interests to the greater good of maintaining the bounds of democratic partisanship. In our time, however, the constituents of Democratic Administrations so identify their own status and benefits with “the greater good” that the very notion of bounds to their own partisanship makes no sense.
Today’s Democrats argue that, some deceptive language aside, President Obama had every right to implement his view of medical care for America, as well as other things, because he was elected twice having promised something of the sort. But, in 1974, Republicans could have argued that Nixon had been elected twice, the second time by the largest margin in US history, specifically to undo the 1960s. In fact, Nixon’s lies about what he knew of his subordinates’ misdeeds were entirely irrelevant to the purpose for which he had been elected. Why should the Republican constituencies who had worked so hard have given up on the Nixon Administration? Why did Barry Goldwater, Mr. conservative himself, go to the White House to tell Nixon he had to resign?
Quite simply because he knew – everyone seemed to know, then – that respect for the truth is what enables a democratic society that resolves its differences by mutual persuasion, and that absent that respect society devolves into civil war. Nixon’s lie had not imperiled the workings of American government. But it had transgressed the essential principle. Thenceforth, no one could take him at his word. All would have to regard him as acting for himself or his party, alien to the rest. And if his party stuck with him, the rest of America would have to regard that party as alien.
Bill Clinton’s 1998 lie under oath, and then on national television proved so by DNA analysis of his own sperm, placed him precisely in Nixon’s position. But his party, by sticking with him, reversed the essential principle to which the Republicans of 1974 had adhered. Its constituencies had worked hard to reverse Ronald Reagan’s 1980s. They had raised taxes, institutionalized abortion, and vastly expanded government. By this time, they had convinced themselves that the rest of America is composed of inferior people. Why should they have jeopardized their position just because their man had fellatio in the Oval Office and lied about it?
Thus by placing their own material and ideological interests above the truth, the Democrats took upon themselves a license to lie – not just about personal matters, which was their argument at the time – but about whatever might serve their purpose.
Obama’s premeditated, repeated, nationally televised lies about the “Affordable Care Act” are integral, indeed essential, to his presidency and to the workings of the US government. The outcome of two national elections depended on it.
Even more significant is his contention that he never said what he said, and that what he said was true anyhow. In interpersonal relations, such a contention is an insult that makes civility impossible; because to continue to treat with someone who makes such affronts is self-degradation of which few are capable. In political life, such an insult is a declaration of war.
The deadly problem is that Barack Obama is not just an individual, nor even the head of the US government’s executive branch. He is the head of the party to which most government officials belong, the party of the media, of the educational establishment, of big corporations – in short of the ruling class. That class, it seems, has so taken ownership of Obama’s lies that it pretends that those who are suffering from the “Affordable Care Act” don’t really know what is good for them, or that they are perversely refusing to suffer for the greater good.
This class, in short, has placed itself as far beyond persuasion as Obama himself. Democracy by persuasion having become impossible, we are left with democracy as war.
The Federal Reserve Is Monetizing A Staggering Amount Of U.S. Government Debt
The Federal Reserve Is Monetizing A Staggering Amount Of U.S. Government Debt.
The Federal Reserve is creating hundreds of billions of dollars out of thin air and using that money to buy U.S. government debt and mortgage-backed securities and take them out of circulation. Since the middle of 2008, these purchases have caused the Fed’s balance sheet to balloon from under a trillion dollars to nearly four trillion dollars. This represents the greatest central bank intervention in the history of the planet, and Janet Yellen says that she does not anticipate that it will end any time soon because “the recovery is still fragile”. Of course, as I showed the other day, the truth is that quantitative easing has done essentially nothing for the average person on the street. But what QE has done is that it has sent stocks soaring to record highs. Unfortunately, this stock market bubble is completely and totally divorced from economic reality, and when the easy money is taken away the bubble will collapse. Just look at what happened a few months ago when Ben Bernanke suggested that the Fed may begin to “taper” the amount of quantitative easing that it was doing. The mere suggestion that the flow of easy money would start to slow down a little bit was enough to send the market into deep convulsions. This is why the Federal Reserve cannot stop monetizing debt. The moment the Fed stops, it could throw our financial markets into a crisis even worse than what we saw back in 2008.
The problems that plagued our financial system back in 2008 have never been fixed. They have just been papered over temporarily by trillions of easy dollars from the Federal Reserve. All of this easy money is keeping stocks artificially high and interest rates artificially low.
Right now, the Federal Reserve is buying approximately 85 billion dollars worth of U.S. government debt and mortgage-backed securities each month. We are told that the portion going to buy U.S. government debt each month is approximately 45 billion dollars, but who knows what the Fed is actually doing behind the scenes. In any event, by creating money out of thin air and using it to remove U.S. Treasury securities out of circulation, the Federal Reserve is essentially monetizing U.S. government debt at a staggering rate.
But Federal Reserve officials continue to repeatedly deny that what they are doing is monetizing debt. For instance, Federal Reserve Bank of Atlanta President Dennis Lockhart strongly denied this back in April: “I object to the view that the Fed is monetizing the debt”.
How in the world can Fed officials possibly deny that they are monetizing the debt?
Well, because the Fed is promising that it is going to eventually sell back all of the securities that it is currently buying.
Since the Fed does not plan to keep all of this government debt on its balance sheet indefinitely, that means that they are not actually monetizing it according to their twisted logic.
Try not to laugh.
And of course that will never, ever happen. There is no possible way that the Fed will ever be able to stop recklessly creating money and then turn around and sell off 3 trillion dollars worth of government debt and mortgage-backed securities that it has accumulated since 2008. Just look at the chart posted below. Does this look like something that the Federal Reserve will ever be able to “unwind”?…
Remember, just the suggestion that the Fed would begin to slow down the pace of this buying spree a little bit was enough to send the financial markets into panic mode a few months ago.
If the Fed does decide to permanently stop quantitative easing at some point, stocks will drop dramatically and interest rates will skyrocket because there will be a lot less demand for U.S. Treasuries. In fact, interest rates have already risen substantially over the past few months even though quantitative easing is still running.
Right now, the Fed is supplying a tremendous amount of the demand for U.S. debt securities in the marketplace. According to Zero Hedge, Drew Brick of RBS recently made the following statement about the staggering amount of government debt that is currently being monetized by the Fed…
“On a rolling six-month average, in fact, the Fed is now responsible for monetizing a record 70% of all net supply measured in 10y equivalents. This represents a reliance on the Fed that is greater than ever before in history!“
Overall, the Federal Reserve now holds 32.47 percent of all 10 year equivalents, and that percentage is rising by about 0.3 percent each week.
If the Federal Reserve does not keep doing this, the financial markets are going to crash because they are being propped up artificially by all of this funny money.
But if the Federal Reserve keeps doing this, it is going to become increasingly obvious to the rest of the world that the Fed is simply monetizing debt and is starting to behave like the Weimar Republic.
The remainder of the planet is watching what the Federal Reserve is doing very carefully, and they are starting to ask themselves some very hard questions.
Why should they continue to use our dollars to trade with one another when the Fed is wildly creating money out of thin air and rapidly devaluing the existing dollars that they are holding?
And why should they continue to lend us trillions of dollars at ultra-low interest rates that are way below the real rate of inflation when the U.S. government is already drowning in debt and the money that will be used to pay those debts back will be steadily losing value with each passing day?
The Federal Reserve is in very dangerous territory. If the Fed wants the current system to continue, it is going to have to stop this reckless money printing at some point or else the rest of the world will eventually decide to stop participating in it.
If the Fed wants to go ahead and make quantitative easing a permanent part of our system, then eventually it will need to go all the way and start monetizing all of our debt.
Right now, the Fed is stuck in the middle of a “no man’s land” where it is monetizing a significant amount of U.S. government debt but it is trying to sell everyone else on the idea that it is not really monetizing debt. This is a state of affairs that cannot go on indefinitely.
At some point, the Fed is going to have to make a decision. And for now the Fed seems to be married to the idea that eventually things will get back to “normal” and they will stop monetizing debt.
Even Janet Yellen is admitting that quantitative easing “cannot continue forever”.
However, she also said on Thursday that it is important not to end quantitative easing too rapidly, “especially when the recovery is still fragile“.
Well, at this point quantitative easing has been going on in one form or another for about five years now.
Will it ever end?
And when it does, how bad will the financial crash be?
Meanwhile, with each passing day the faith that the rest of the world has in our dollar and in our financial system continues to erode.
If the Fed continues to behave this recklessly, it is inevitable that the rest of the globe will begin to move even more rapidly away from the U.S. dollar and will become much more hesitant to lend us money.
Ultimately, the Federal Reserve is faced with only bad choices. The status quo is not sustainable, ending quantitative easing will cause the financial markets to crash, and going “all the way” with quantitative easing will just turn us into the Weimar Republic.
But anyone with half a brain should have been able to see that this debt-based financial system that the Federal Reserve is at the heart of was going to end tragically anyway. The 100 year anniversary of the Federal Reserve is coming up, and the truth is that it should have been abolished long ago.
The consequences of decades of very foolish decisions are catching up with us, and this is all going to end very, very badly.
I hope that you are getting ready.
Brazil Amazon destruction rises 28 per cent – Americas – Al Jazeera English
Brazil Amazon destruction rises 28 per cent – Americas – Al Jazeera English.
|Deforestation in Brazil’s Amazon region has risen 28 percent over the past year, the country’s environment minister says.
Making the announcement in the capital Brasilia on Thursday, Izabella Teixeira said she was calling an emergency meeting to try to remedy the situation.
“We confirm a 28 percent increase in the rate of deforestation, reaching 5,843sq km,” she said quoting provisional statistics for August 2012 through July this year.
Extensive farming and soya-bean production in the northern state of Para and the central-western state of Mato Grosso were key factors behind the rise, Teixeira said, citing increases for the two states of 37 and 52 percent respectively.
Teixeira said she would meet Amazon regional environment secretaries of state next week to demand explanations and measures to deal with the situation on her return from a UN climate change summit in Warsaw.
Teixeira also criticised the apparent ineffectiveness of monitoring by federal state authorities.
“The Brazilian government does not tolerate and does not accept any rise in illegal deforestation,” she said, insisting that the country was firmly committed to drastically reducing deforestation.
Although large in percentage terms, the rise in absolute terms is the second smallest in recent years as 2012 saw 4,571sq km of deforestation, following an even more disturbing 6,418sq km in 2011.
The worst year on record was 2004, when 27,000sq km of forest was lost.
Environmentalists blame the increase on a loosening of Brazil’s environmental laws. They also say that the government’s push for big infrastructure projects like dams, roads and railways is pushing deforestation.
Paulo Adario, coordinator of Greenpeace’s Amazon campaign, said it was scandalous that there was such an increase in the destruction.
“The government can’t be surprised by this increase in deforestation, given that their own action is what’s pushing it,” he said.
“The change in the Forest Code and the resulting amnesty for those who illegally felled the forest sent the message that such crimes have no consequences.”
Brazil, a major global agricultural producer, is caught between environmental pressures and the interests of large-scale farmers.
The country’s forestry code requires landowners in the Amazon to devote 80 percent to native forests. But enforcement has been lax.