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Central Bankers: Inflation is God’s Work – Ludwig von Mises Institute Canada

Central Bankers: Inflation is God’s Work – Ludwig von Mises Institute Canada.

Friday, February 21st, 2014 by  posted in Uncategorized.

Inflation is always somebody else’s fault. Ludwig von Mises called out finger pointing central bankers and politicians decades ago in his book, Economic Policy. “The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.”

In the fall of 2007, Gideon Gono blamed his country’s inflation rate of 4,500 percent on “the differences that Zimbabwe has had with its former colonial master, the UK,” and added, “we are busy laying the foundations for a serious deceleration programme.” Deceleration? A year later inflation was 231 million percent.

Money printing didn’t have anything to do with it according to the central banker. Droughts began to be more frequent in the 2000’s and Gono believed  ”there is a positive correlation between the drought and inflation.” Dry weather, he told New African magazine, has, “got a serious bearing on our inflation level.”

In Gono’s dilluded mind,inflation was about the weather, lack of support from other nations, and political sanctions. He had nothing to do with the hyperinflation in his country. “No other [central-bank] governor has had to deal with the kind of inflation levels that I deal with,” Gono told Newsweek. “[The people at] my bank [are] at the cutting edge of the country.”

These days in Argentina its not the weather and political sanctions causing prices to rise, its businesses engaging in commerce. President Cristina Fernández de Kirchner is urging her people to work “elbow-to-elbow” with her government to stop companies from looting the people with high prices. Two weeks ago the government devalued the peso by 20 percent but it is private businesses that are stealing from working people with price increases.

Posters of retail executives have been plastered around Buenos Aires. For instance, Wal-Mart Argentina’s president Horacio Barbeito has his mug on a poster with the caption, “Get to know them, these are the people who steal your salary.”

Kirchner’s cabinet chief Jorge Capitanich calls economists who point to government policies as inflation’s culprit “undercover agents.”  He implies that these economists are the tools of business. “Argentines should know that independent, objective economists don’t exist,” Capitanich claims. “I want to say emphatically that when unscrupulous businessmen raise prices it has absolutely nothing to do with macroeconomic variables.”

In 2012 the president of Argentina’s central bank, Yale-educated Mercedes Marcó del Pont, said in an interview, “it is totally false to say that printing more money generates inflation, price increases are generated by other phenomena like supply and external sector’s behaviour.”

So while its central bank prints, the Kirchner government has enlisted the citizenry to work undercover in the fight against rising prices. A free smartphone application is encouraging Argentines to be citizen-cops while they shop.

The app is a bigger hit than “Candy Crush” and “Instagram.” President Kirchner wants “people to feel empowered when they shop.” And, they do. “You can go checking the prices,” marveled Analia Becherini, who learned of the app on Twitter. “You don’t even have to make any phone calls. If you want to file a complaint, you can do it online, in real time.”

“Argentina’s government blames escalating inflation on speculators and greedy businesses,” reports Paul Byrne for the Associated Press, “and has pressured leading supermarket chains to keep selling more than 80 key products at fixed prices.”

However, businesses aren’t eager to lose money selling goods. Fernando Aguirre told Chris Martenson that with price inflation running rampant, “Lots of stores don’t want to be selling stuff until they get updated prices. Suppliers holding on, waiting to see how things go, which is something that we are familiar with because that happened back in 2001 when everything went down as we know it did.”

In his Peak Prosperity podcast with Aguirre, Martenson makes the ironic point that when governments print excessive amounts of money, goods disappear from store shelves. In a hyper-inflation the demand for money drops to zero as people buy whatever they can get their hands on. Inflation destroys the calculus of profit and loss, destroying business, and undoing the division of labor.

Aguirre reinforced Martenson’s point. Describing shelves as “halfway empty,” in Argentina he said,  “The government is always trying to muscle its way through these kind of problems, just trying to force companies to stock back products and such, but they just keep holding on. For example, gas has gone up 12% these last few days. And there is really nothing they can do about it. If they don’t increase prices, companies just are not willing to sell. It is a pretty tricky situation to be in.”

Tricky indeed.  “It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption,” Mises wrote in Human Action. “One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of illusory or apparent profits.”

Inflation is also rampant at the other end of South America.  Venezuela inflations is clocking in at 56 percent. Comparing the two countries, Leonardo Vera, a Caracas-based economist told the FT, “Argentina still has some ammunition to fight the current situation, while Venezuela is running out of bullets.”

Fast money growth has also led to shortages such as “newsprint to car parts and ceremonial wine to celebrate mass,” reports the FT.

Venezuelan president Nicolás Maduro is using the government’s heavy hand to introduce a law capping company profits at 30 percent. Heavy prison sentences await anyone found hoarding, overcharging, or “destabilising the economy.”  Hundreds of inspectors have been deployed to enforce the mandates.

The results will be predictable. “With every new control, the parallel, or black market, dollar will keep going up, and so will the price and scarcity of milk, oil, and toilet paper,” says Humberto García, an economist with the Central University of Venezuela.

Don’t expect the printing to stop any time soon. Central bankers believe they are doing God’s work. “To ensure that my people survive, I had to print money,” Gideon Gono toldNewsweek. “I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the U.S. to please print money. The whole world is now practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.”

It seems disasters wrought by inflationary policies must be experienced again and again, as “Inflation is the true opium of the people,” Mises explained, “administered to them by anticapitalist governments.”

The practice of central banking is the same around the world. The only difference is in degree. Before he destroyed the Zimbabwean dollar Gono looked to America for inspiration. “Look at the bridges across the many rivers in New York and elsewhere,” Gono told New African, “and the other infrastructure in the country that were built with high budget deficits.”

The Zimbabwe, Argentina, and Venezuela inflations may seem to be something that happens to somebody else. But Mr. Aguirre makes a point when asked about 2001, when banks in Argentina, after a bank holiday, converted dollar accounts into the same number of pesos. A massive theft.

“Those banks that did that are the same banks that are found all over the world,” Aguirre says. “They are not like strange South American, Argentinean banks–they are the same banks. If they are willing to steal from people in one place, don’t be surprised if they are willing to do it in other places as well.”

 

Douglas E. French is a Director of the Ludwig von Mises Institute of Canada. Additionally, he writes for Casey Research and is the author of three books; Early Speculative Bubbles and Increases in the Supply of Money, The Failure of Common Knowledge, and Walk Away: The Rise and Fall of the Home-Owenrship Myth. French is the former president of the Ludwig von Mises Institute in Auburn, Alabama.

Expert Warns of Hyperinflation: “The American Way Of Life Will Be Destroyed”

Expert Warns of Hyperinflation: “The American Way Of Life Will Be Destroyed”.

Mac Slavo
February 17th, 2014
SHTFplan.com

If there’s one thing that’s certain about what’s happening in the world right now  it’s that uncertainty is pervading every aspect of the global economy. From fabricated employment statistics and consumer spending reports to obscene levels of debt and a failing domestic monetary policy, the writing is on the wall.

According to top Casey Research analyst Marin Katusa, who has met with energy ministers and business leaders in over 100 countries, it’s only a matter of time before the world’s reserve currency goes the way of the German Reichsmark and Zimbabwe Dollar.

What we’re talking about here is nothing short of an outright collapse of our banking system, hyperinflation of the US dollar, and a complete destruction of the world as we have come to know it.

This is a must-watch for those trying to understand what’s happening with the economic landscape, how to position yourself for an unprecedented paradigm shift in how Americans live their lives, what to expect as this crisis unfolds, and how to find opportunities when everyone else is in panic mode.

If the petro-dollar ends, the American way of life will be something that will be destroyed.

The inflation will be over 100% because Americans are getting their lifestyle subsidized by the rest of the world.

This is a very complicated issue… but to be summed up quickly, the world has already started trading commodities and oil, not in the petro-dollar.

And if the petro-dollar finally does die, the American way of life is gone.


(Full interview and transcript via Future Money Trends)

When that happens – when the rest of the world finally turns its back on the United States – you’d better be positioned in the right assets… tangible assets.

Failure to do so will leave you exposed to a financial collapse unlike anything we’ve ever seen in America.

You want to invest in gold… and that’s why you really want to invest in tangible assets… because the bank system will crash.

And I’m not trying to be a doom and gloom guy, this is just factual.

You want to invest in silver, and gold, and companies that produce what the rest of the world wants, which is gold and silver.

It should be clear that China, Russia, oil-producing nations and emerging markets are positioning themselves for exactly what Marin Katusa describes. They have already established unilateral agreements to replace their petro-dollar transactions with either their own currencies or gold. When the timing is right, they’ll pull the plug, at which point all hell will break loose.

The only assets that will survive the destruction will be physical goods such as those commodities essential to survival – food, energy, water, etc.

On the monetary front, when the dollar becomes worthless, confidence in the system itself will be lost on a global scale. We saw similar effects in 2008, when banks refused to lend to businesses, individuals and even themselves for fear of counter party risk. This will leave only one viable mechanism of exchange that will be trusted by trading partners. If you happen to own some, then while everyone else is trying to figure out how to acquire food or pay for other needs, you’ll be thriving.

Insiders and the well informed like Doug Casey, Rick Rule, and Eric Sprott who want to protect and preserve their wealth are already diversifying out dollar-denominated assets. Foreign governments are doing the same, to the tune of billions of dollars being used to buy up assets in the gold production and mining sector (something sovereign wealth funds also did back in late 2008 at the height of the crisis):

The money now is showing up. For example, Rick [Rule] went and got Korean money, and then also Chinese Money. That’s a billion and a half dollars that is coming in to this sector. K.K.R, a major fund, has now put up a billion and a half dollars to set up shop in Calgary for the junior resource sector. You see a lot of funds now, starting to say, “hey, we are getting back in to the junior resource sector because it is so cheap.”

If you go to the BRI website, they talk about all of the big shareholders. You have Tocqueville, Sprott, Sun Valley, KCR…

There’s a reason that well known investment firms run by contrarians like Sprott and Casey are buying gold. Because they know what is coming down the pike.

Yellen is going to continue where Bernanke left off, with the troubles. And the reality is, this is going to make a stronger bull market for gold and silver, and it’s going to be even a better market for the junior resource sector.

If gold and silver are heading to new highs it’s because something has gone terribly wrong in our economy and financial markets.

That being said, if gold is rising and the dollar is collapsing then in all likelihood we’ll see stratospheric price increases in everything from food to fuel, so preparing a contingency plan for this scenario is absolutely critical.

The scenario described here, as noted by Marin Katusa, is not just doom and gloom. It’s fact. The system as we know it is under pressure from all sides. When it implodes you’d better be ready.

The World Complex: Setting up a people for hyperinflation–the Canadian example

The World Complex: Setting up a people for hyperinflation–the Canadian example.

The World Complex is not a fan of Stephen Harper and His Government (see here, for instance). But I am forced to conclude that he may be a cannier economist than I originally gave him credit for.

When a country destroys its debts by inflation, it ruins its creditors. The proper progressive approach is to ruin them all equally–thus it is imperative that there be no avenue by which creditors might protect themselves. At the same time, the government wishes no doubt to have its citizens continue to honour its currency, worthless though it might be.

During the Wiemar hyperinflation, despite the frenzied printing, the sum total of foreign currency that could be purchased by all the marks in circulation fell precipitously. There is a Keynesian argument to be made that the Germans didn’t print quickly enough! Of course, having Germans individually destroying the currency in great amounts by putting it to such uses as cigarette rolling papers and firewood didn’t help either.

It’s not always nice to have money to burn.

And consider this–using the currency in lieu of hard-to-locate toilet paper may clog pipes.

Canada recently unveiled polymer bills. Just the perfect cross between plastic and paper money. And the brilliant part is, they are perfect in a hyperinflationary environment.

Plastic. Not really suitable for use as cigarette wrappers or firewood. You wouldn’t want to be burning it indoors, anyway.

And as far as toilet paper–although it is a little uncomfortable, the microtexture on the bills does seem to be helpful for cleaning up the really tough spots. And although the bills have not been field-tested for flushability, the beauty of the polymer bills is that you can just wash them and reuse! Or spend, if you prefer.

The only problem the beta testers have reported is that the bills are a little small to be used comfortably.

Posted by at 12:03 AM  

Bitcoin and Gold: Currency versus Money

Bitcoin and Gold: Currency versus Money.

Bitcoin holders — especially those who bought in during the crypto-currency’s recent surge past $1,000 — are a bit shell-shocked this week:

 

Bitcoin prices plunge as problems persist

Bitcoin prices plunged again Monday morning after Mt.Gox, the major exchange for the virtual currency, said technical problems require it to continue its ban on customer withdrawals. 

Mt.Gox said it has discovered a bug that causes problems when customers try to use their account to make a transfer or payment of bitcoins to a third party. It said the problem is not with Mt.Gox software but affects all transfers of bitcoins to third parties.

The exchange said it was suspending withdrawals and third-party payments until the problem is fixed, although trading in bitcoins continues.

A bug is allowing a third party receiving a bitcoin transfer to make it look as if the transfer did not go through, which can lead to improper multiple transfers, Mt.Gox said.

Bitcoin prices on Mt.Gox plunged from about $693 just early Monday to $510 at 6 a.m. ET, soon after the statement was posted. Prices had been as high as $831 just after 7 p.m. Thursday before Mt.Gox’s halt of withdrawals was first disclosed early Friday morning.

Mt.Gox tried to put the best face on the technical problems in its latest statement, noting that the technology is “very much in its early stages.”

“What Mt.Gox and the Bitcoin community have experienced in the past year has been an incredible and exciting challenge, and there is still much to do to further improve,” it said.

This is one of those “teaching moments” that the President likes to point out. But the lesson isn’t that bitcoin in particular or crypto-currencies in general are fatally flawed. It is that they are currencies, not money or investments, and the differences between these three concepts is crucial to doing asset management right.

An investment is something that, if successful, generates cash flow and potentially capital gains, but if less successful can produce a capital loss. Money, in contrast, is capital. It is what you receive when you sell an investment and/or where you store the resulting wealth until you decide to buy something with it. Money does not generate cash flow and does not “work” for you the way an investment does. Instead, it preserves your capital in a stable form for later use.

“Sound” money exists in limited quantity and doesn’t have counterparty risk – that is, its value doesn’t depend on someone else keeping a promise – so it tends to hold its value over long periods of time. Gold and silver, for instance, have functioned as sound money for thousands of years. As you’ve no doubt heard many times, the same ounce of gold that bought a toga in ancient Rome will buy a nice suit today. Ditto for oil, wheat and most of life’s other necessities.

Currency, meanwhile, is the thing we use for buying and selling. It can also be money, as in past societies where gold and silver coins circulated. But it doesn’t have to be. Paper dollars, euro, and yen are representations of wealth rather than wealth itself and are only valuable because we trust the governments managing them to control their supply and banks to give us back our deposits on demand. Such currencies are not very safe but are extremely convenient, so even people who understand the inherent flaws of today’s currencies keep some around for transacting.

As for bitcoin, for a while the more excitable in the techie community seemed to think that crypto-currencies could function not just as currency but as money, i.e., as a form of savings, because the supply of bitcoin was limited by the algorithm that creates it. But they were overlooking counterparty risk. Since the vast majority of bitcoins in circulation are stored electronically and transmitted over the Internet, they’re only valuable if those media function correctly. Let a system fail, as Mt. Gox apparently has, and the bitcoins in that system are either unavailable (in which case their immediate value is zero) or suddenly very risky, in which case they’re obviously not a good savings vehicle.

Is this a deal-breaker for crypto-currencies? No. In many ways bitcoin is a better currency than the dollar because it can’t be inflated away by a desperate government or confiscated in the coming wave of bank bail-ins.

People who understand crypto-currencies and own a small amount of bitcoin for transactional purposes are probably unfazed by the latest speed bump. And people who had their life savings in it have received a valuable lesson in the nature of money.

Venezuela Accuses AFP Of “Manipulating” News Coverage; Shuts Down Colombian TV Station | Zero Hedge

Venezuela Accuses AFP Of “Manipulating” News Coverage; Shuts Down Colombian TV Station | Zero Hedge.

Having described Venezuela as “absolutely calm” today – when it was anything but; the fact that Venezuelan President Nicolas Maduro has the stones to accuse Agence France Press of “manipulating” news coverage is stunning.

  • *VENEZUELA ASKS INFO MINISTER TO TAKE ACTIONS AGAINST AFP NEWS

Furthermore, Maduro has taken a TV station off-air that competed with Telesur (the state-owned TV station). Of course, we should not worry as Maduro has explained the violence is all protesters’ fault and that he will propose his “peace plan” tomorrow.

 

Via Bloomberg,

Venezuela’s President Nicolas Maduro asked his information minister in a national address to take unspecified actions against AFP France Press. Maduro accused AFP of “manipulating” news coverage

 

Decision to take Colombian TV station NTN24 off the air in Venezuela was made by the government, Maduro says

 

“The NTN24 station tried to compete with Telesur and yesterday created confusion about the possibility of a coup. Off the air”: Maduro

 

I denounce AFP for manipulating information, and I’ve asked the information minister to speak clearly with their correspondents”: Maduro (Telesur is TV network owned by Venezuelan government)

 

And here is Maduro presenting his perspective of the troublemakers from his Twitter account:

RT @tmaniglia: Peaceful opposition creating “a small” fire in the center of Caracas pic.twitter.com/ObTqlvIEPv

— Nicolás Maduro (@maduro_en) February 13, 2014

RT @tmaniglia: peaceful opposition with its face covered trying to knock down a door in the center of Caracas pic.twitter.com/hfIN6O08ZV

— Nicolás Maduro (@maduro_en) February 13, 2014

RT @tmaniglia: Photo 1 the opposition demonstration today in Caracas http://t.co/q1abSlM98h

— Nicolás Maduro (@maduro_en) February 13, 2014

And yet he also told us that things were “absolutely calm”?

A Tale Of Two Extremes: Global Inflation In One Chart | Zero Hedge

A Tale Of Two Extremes: Global Inflation In One Chart | Zero Hedge.

While Europe, and the bulk of the Developed World is struggling to dig out of its unprecedented credit crunch (in which central banks are the only source of credit money which instead of entering the economy is stuck in the capital markets via the reserve pathway) and resulting deflation, the rest of the Emerging Market world is doing just fine. If by fine one means inflation at what Goldman calls, bordering on “extreme levels.” This is shown in the chart below which breaks down the Y/Y change in broad prices across the main DM and EM countries, and which shows that when talking about inflation there are two worlds: the Emerging, where inflation is scorching, and Developing, where inflation is in a state of deep freeze.

What is notable here is that despite hopes for a convergence between the inflationary trends in the Developed (downside extremes) and Emerging (upside extremes) world for the past year, what has happened instead is an acceleration of the process especially in recent weeks as EMs have been forced to devalue their currencies at an ever faster pace in order to offset the impact of the taper, leading to surging inflation as Turkey, Argentina, and Venezuela among many others, have found out the hard way in just the past month.

And as inflation in EM nations continues to roil ever higher not only does the implicit exporting of deflation to the DM accelerate, but it means that their societies approach ever closert to the tipping point when the citizens decide they have had just about enough with their government and/or their currency and decide to change one and/or the other. Hopefully, in a peaceful matter.

Here’s What It Looks Like When Your Country’s Economy Collapses | Zero Hedge

Here’s What It Looks Like When Your Country’s Economy Collapses | Zero Hedge.

Submitted by Adam Taggart of Peak Prosperity,

Argentina is a country re-entering crisis territory it knows too well. The country has defaulted on its sovereign debt three times in the past 32 years and looks poised to do so again soon.

Its currency, the peso, devalued by more than 20% in January alone. Inflation is currently running at 25%. Argentina’s budget deficit is exploding, and, based on credit default swap rates, the market is placing an 85% chance of a sovereign default within the next five years.

Want to know what it’s like living through a currency collapse? Argentina is providing us with a real-time window.

So, we’ve invited Fernando “FerFAL” Aguirre back onto the program to provide commentary on the events on the ground there. What is life like right now for the average Argentinian?

Aguirre began blogging during the hyperinflationary destruction of Argentina’s economy in 2001 and has since dedicated his professional career to educating the public about his experiences and observations of its lingering aftermath. He is the author of Surviving the Economic Collapse and sees many parallels between the path that led to Argentina’s decline and the similar one most countries in the West, including the U.S., are currently on. Our 2011 interview with him “A Case Study in How An Economy Collapses” remains one of Peak Prosperity’s most well-regarded.

Chris Martenson:  Okay. Bring us up to date. What is happening in Argentina right now with respect to its currency, the peso?

 

Fernando Aguirre:  Well, actually pretty recently, January 22, the peso lost 15% of its value. It has devalued quite a bit. It ended up losing 20% of its value that week, and it has been pretty crazy since then. Inflation has been rampant in some sectors, going up to 100% in food, grocery stores 20%, 30% in some cases. So it has been pretty complicated. Lots of stores don’t want to be selling stuff until they get updated prices. Suppliers holding on, waiting to see how things go, which is something that we are familiar with because that happened back in 2001 when everything went down as we know it did.

 

Chris Martenson:  So 100%, 20% inflation; are those yearly numbers?

 

Fernando Aguirre:  Those are our numbers in a matter of days. In just one day, for example, cement in Balcarce, one of the towns in Southern Argentina, went up 100% overnight, doubling in price. Grocery stores in Córdoba, even in Buenos Aires, people are talking about increase of prices of 20, 30% just these days. I actually have family in Argentina that are telling me that they go to a hardware store and they aren’t even able to buy stuff from there because stores want to hold on and see how prices unfold in the following days.

 

Chris Martenson:  Right. So this is one of those great mysteries of inflation. It is obviously ‘flying money’, so everyone is trying to get rid of their money. You would think that would actually increase commerce. But if you are on the other end of that transaction, if you happen to be the business owner, you have every incentive to withhold items for as long as possible. So one of the great ironies, I guess, is that even though money is flying around like crazy, goods start to disappear from the shelves. Is that what you are seeing?

 

Fernando Aguirre:  Absolutely. Shelves halfway empty. The government is always trying to muscle its way through these kind of problems, just trying to force companies to stock back products and such, but they just keep holding on. For example, gas has gone up 12% these last few days. And there is really nothing they can do about it. If they don’t increase prices, companies just are not willing to sell. It is a pretty tricky situation to be in.

 

Chris Martenson:  Are there any sort of price controls going on right now? Has anything been mandated?

 

Fernando Aguirre:  As you know, price controls don’t really work. I mean, they tried this before in Argentina. Actually, last year one of the big news stories was that the government was freezing prices on food and certain appliances. It didn’t work. Just a few days later those supposedly “frozen” prices were going up. As soon as they officially released them, they would just double in price.

 

Chris Martenson:  Let me ask you this, then: How many people in Argentina actually still have money in Argentine banks in dollars? One of the features in 2001 was that people had money in dollars, in the banks. There was a banking holiday; a couple of weeks later, banks open up; Surprise, you have the same number in your account, only it’s pesos, not dollars. It was an effective theft, if I could use that term. Is anybody keeping money in the banks at this point, or how is that working?

 

Fernando Aguirre:  Well, first of all, I would like to clarify for people listening: Those banks that did that are the same banks that are found all over the world. They are not like strange South American, Argentinean banks – they are the same banks. If they are willing to steal from people in one place, don’t be surprised if they are willing to do it in other places as well.

Click the play button below to listen to Chris’ interview with Fernando Aguirre (36m:42s):

 

Crazy Abenomics Orgy In Japan Is Ending Already – Pounding Hangover Next | Zero Hedge

Crazy Abenomics Orgy In Japan Is Ending Already – Pounding Hangover Next | Zero Hedge.

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Kudos to the Bank of Japan. Its heroic campaign to water down the yen has borne fruit. The Japanese may not have noticed it because it is not indicated in bold red kanji on their bank and brokerage statements, and so they might not give their Bank of Japandemonium full credit for it, but about 20% of their magnificent wealth has gone up in smoke in 2013. And in 2014, more of it will go up in smoke – according to the plan of Abenomics.

What folks do notice is that goods and services keep getting more expensive. Inflation has become reality. The scourge that has so successfully hallowed out the American middle class has arrived in Japan. The consumer price index rose 1.6% in December from a year earlier. While prices of services edged up 0.6%, prices of goods jumped 2.6%.

It’s hitting households. In December, their average income was up 0.3% in nominal terms from a year earlier. But adjusted for inflation – this is where the full benefits of Abenomics kick in – average income dropped 1.7%. Real disposable income dropped 2.1%.

Abenomics is tightening their belts. But hey, they voted for this illustrious program. So they’re not revolting just yet. But they’re thinking twice before they extract with infinite care their pristine and beloved 10,000-yen notes from their wallets. And inflation-adjusted consumption expenditures – excluding housing, purchase of vehicles, money gifts, and remittances – dropped 2.3%.

But purchases of durable goods have been soaring. Everyone is front-loading big ticket items ahead of April 1, when the very broad-based consumption tax will be hiked from 5% to 8%. Pulling major expenditures forward a few months or even a year or so is the equivalent of obtaining a guaranteed 3% tax-free return on investment. That’s huge in a country where interest rates on CDs are so close to zero that you can’t tell the difference and where even crappy 10-year Japanese Government Bonds yield 0.62%. It’s a powerful motivation.

And it has turned into a frenzy. In December, households purchased 32.2% more in durable goods than the same month a year earlier, in November 25.2%, in October 40.4%. These front-loaded purchases have been goosing the economy in late 2013. But shortly before April 1, they will grind to a halt. The Japanese have been through this before.

In 1996, after the consumption tax hike from 3% to 5% was passed and scheduled to take effect on April 1, 1997, consumers and businesses went on a buying binge of big-ticket items to dodge the extra 2% in taxes. The economy boomed. But it ended in an enormous hangover. In the spring 1997, as the tax hike took effect, business and consumer spending ground to a halt, and the economy skittered into a nasty recession that lasted a year and a half!

First indications of a repeat performance are already visible. The Japan Automobile Manufacturers Association (JAMA) forecast last week that sales of automobiles, after an already lousy 2013, would plunge 9.8% this year to 4.85 million units, the lowest since 2011 when the earthquake and tsunami laid waste to car purchases.

In response, automakers will curtail production for domestic sales. Other makers of durable goods – those that still manufacture in Japan – will prepare for the hangover in a similar manner. Housing and construction will get hit. Retailers will get hit too. During the last consumption tax hike, many large retailers tried to keep their chin above water by not passing the 2% tax hike on to their customers but shove it backwards up the pipeline to their suppliers. This time, having learned its lesson, the government is insisting on inflation, and it passed legislation last year that would force retailers to stick their customers with an across-the-board 3% price increase.

In 2014, the hangover will be even worse than in 1997. Businesses and consumers are dodging a hike of three percentage points, not two percentage points. Hence, the motivation to front-load is even stronger, the payoff greater, and the subsequent falloff steeper. This, on top of the already toxic concoction of stagnant wages and rising prices. Oh, and the plight of the retirees, whose savings and income streams are gradually getting eaten up by inflation. The glories of Abenomics.

But there are beneficiaries. Japan Inc. benefits from lower cost of labor. The government, without having to reform its drunken ways, might somehow be able to keep its out-of-control deficits and its mountain of debt from blowing up in the immediate future. Throughout, the Bank of Japan, which is buying up enough government bonds to monetize the entire deficit plus part of the mountain of existing debt, will remain in control of the government bond market, what little is left of it – even if it has to buy the last bond that isn’t totally nailed down. But for the real economy the party is now ending, and by spring, a pounding hangover will set in. 

According to Japan’s state religion of Abenomics, devaluing the yen would boost exports and cut imports. The resulting trade surplus would jumpstart the economy and induce Japan Inc. to invest at home. It would save Japan. But the opposite is happening. Read…. Why Japan’s Trade Fiasco Worries Me So Much

What Blows Up First? Part 3: Subprime Countries

What Blows Up First? Part 3: Subprime Countries.

by John Rubino on January 27, 2014 

One of the reasons the rich countries’ excessive money creation hasn’t ignited a generalized inflation is that today’s global economy is, well, global. When the Fed dumps trillions of dollars into the US banking system, that liquidity is free to flow wherever it wants. And in the past few years it has chosen to visit Brazil, China, Thailand, and the rest of the developing world.

This tidal wave of hot money bid up asset prices and led emerging market governments and businesses to borrow a lot more than they would have otherwise. Like the recipients of subprime mortgages in 2006, they were seduced by easy money and fooled into placing bets that could only work out if the credit kept flowing forever.

Then the Fed, spooked by nascent bubbles in equities and real estate, began to talk about scaling back its money printing*. The hot money started flowing back into the US and out of the developing world. And again just like subprime mortgages, the most leveraged and/or badly managed emerging markets have begun to implode, threatening to pull down everyone else. A sampling of recent headlines:

Contagion Spreads in Emerging Markets as Crises Grow

Investors Flee Developing World

Erosion of Argentine Peso Sends a Shudder Through Latin America

The Entire World is Unraveling Before Our Eyes

Chinese Debt Debacle Supports Soros’ ‘Eerie’ Portrayal

Venezuela Enacts “Law of Fair Prices”

Argentina Returns to Villa Miseria

Indian Rupee Falls to 2-Month Low; Joins Emerging Market Sell-Off

Turkey’s ‘Embarrassing’ Intervention Fails to Curb Lira Sell-Off

Prudent Bear’s Doug Noland as usual gets it exactly right in his most recent Credit Bubble Bulletin. Here are a few excerpts from a much longer article that should be read by everyone who wants to understand the causes and implications of the emerging-market implosion:

Virtually the entire emerging market “complex” has been enveloped in protracted destabilizing financial and economic Bubbles. In particular, for five years now unprecedented “developed” world central bank-induced liquidity has spurred unsound economic and financial booms. The massive investment and “hot money” flows are illustrated by the multi-trillion growth of EM central bank international reserve holdings. There have of course been disparate resulting impacts on EM financial and economic systems. But I believe in all cases this tsunami of liquidity and speculation has had deleterious consequences, certainly including fomenting systemic dependencies to foreign-sourced flows. In seemingly all cases, protracted Bubbles have inflated societal expectations.

For a while, central bank willingness to use reserves to support individual currencies bolsters market confidence in a country’s currency, bonds and financial system more generally. But at some point a central bank begins losing the battle to accelerating outflows. A tough decision is made to back away from market intervention to safeguard increasingly precious reserve holdings. Immediately, the marketplace must then contend with a faltering currency, surging yields, unstable financial markets and rapidly waning liquidity generally. Things unravel quickly.

The issue of EM sovereign and corporate borrowings in dollar (and euro and yen) denominated debt has speedily become a critical “macro” issue. More than five years of unprecedented global dollar liquidity excess spurred a historic boom in dollar-denominated borrowings. The marketplace assumed ongoing dollar devaluation/EM currency appreciation. There became essentially insatiable market demand for higher-yielding EM debt, replete with all the distortions in risk perceptions, market mispricing and associated maladjustment one should expect from years of unlimited cheap finance. As was the case with U.S. subprime, it’s always the riskiest borrowers that most intensively feast at the trough of easy “money.”

So, too many high-risk borrowers – from vulnerable economies and Credit systems – accumulated debt denominated in U.S. and other foreign currencies – for too long. Now, currencies are faltering, “hot money” is exiting, Credit conditions are tightening and economic conditions are rapidly deteriorating. It’s a problematic confluence that will find scores of borrowers challenged to service untenable debt loads, especially for borrowings denominated in appreciating non-domestic currencies. This tightening of finance then becomes a pressing economic issue, further pressuring EM currencies and financial systems – the brutal downside of a protracted globalized Credit and speculative cycle.

In many cases, this was all part of a colossal “global reflation trade.” Today, many EM economies confront the exact opposite: mounting disinflationary forces for things sold into global markets. Falling prices, especially throughout the commodities complex, have pressured domestic currencies. This became a major systemic risk after huge speculative flows arrived in anticipation of buoyant currencies, attractive securities markets, and enticing business opportunities. The commodities boom was to fuel general and sustained economic booms. EM was to finally play catchup to “developed.”

Now, Bubbles are faltering right and left – and fearful “money” is heading for the (closing?) exits. And, as the global pool of speculative finance reverses course, the scale of economic maladjustment and financial system impairment begins to come into clearer focus. It’s time for the marketplace to remove the beer goggles.

No less important is the historic – and ongoing – boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.

At the same time, data this week provided added confirmation (see “China Bubble Watch”) that China’s spectacular apartment Bubble continues to run out of control. When Chinese officials quickly backed away from Credit tightening measures this past summer, already overheated housing markets turned even hotter. Now officials confront a dangerous situation: Acute fragility in segments of its “shadow” financing of corporate and local government debt festers concurrently with ongoing “terminal phase” excess throughout housing finance. China’s financial and economic systems have grown dependent upon massive ongoing Credit expansion, while the quality of new Credit is suspect at best. It’s that fateful “terminal phase” exponential growth in systemic risk playing out in historic proportions. Global markets have begun to take notice.

There are critical market issues with no clear answers. For one, how much speculative “hot money” has and continues to flood into China to play their elevated yields in a currency that is (at the least) expected to remain pegged to the U.S. dollar? If there is a significant “hot money” issue, any reversal of speculative flows would surely speed up this unfolding Credit crisis. And, of course, any significant tightening of Chinese Credit would reverberate around the globe, especially for already vulnerable EM economies and financial systems.

No less important is the historic – and ongoing – boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.

The crucial point here is that this crisis is not a case of one or two little countries screwing up. It’s everywhere, from Latin America to Asia to Eastern Europe. Each country’s problems are unique, but virtually all can be traced back to the destabilizing effects of hot money created by rich countries attempting to export their debt problems to the rest of the world. ZIRP, QE and all the rest succeeded for a while in creating the illusion of recovery in the US, Europe and Japan, but now it’s blow-back time. The mess we’ve made in the subprime countries will, like rising defaults on liar loans and interest-only mortgages in 2007, start moving from periphery to core. As Noland notes:

Yet another crisis market issue became more pressing this week. The Japanese yen gained 2.0% versus the dollar. Yen gains were even more noteworthy against other currencies. The yen rose 4.2% against the Brazilian real, 3.9% versus the Chilean peso, 3.5% against the Mexican peso, 3.9% versus the South African rand, 3.8% against the South Korean won, 3.0% versus the Canadian dollar and 3.0% versus the Australian dollar.

I have surmised that the so-called “yen carry trade” (borrow/short in yen and use proceeds to lever in higher-yielding instruments) could be the largest speculative trade in history. Market trading dynamics this week certainly did not dissuade. When the yen rises, negative market dynamics rather quickly gather momentum. From my perspective, all the major speculative trades come under pressure when the yen strengthens; from EM, to the European “periphery,” to U.S. equities and corporate debt.

It’s worth noting that the beloved European “periphery” trade reversed course this week. The spread between German and both Spain and Italy 10-year sovereign yields widened 19 bps this week. Even the France to Germany spread widened 6 bps this week to an almost 9-month high (72bps). Stocks were slammed for 5.7% and 3.1% in Spain and Italy, wiping out most what had been strong January gains.

Even U.S. equities succumbed to global pressures. Notably, the cyclicals and financials were hit hard. Both have been Wall Street darlings on the bullish premise of a strengthening U.S. (and global) recovery and waning Credit and financial risk. Yet both groups this week seemed to recognize the reality that what is unfolding in China and EM actually matter – and they’re not pro-global growth. With recent extreme bullish sentiment, U.S. equities would appear particularly vulnerable to a global “risk off” market dynamic.

To summarize: 
Developed world banks have lent hundreds of billions of dollars to emerging market businesses and governments. If these debts go bad, those already-impaired banks will be looking at massive, perhaps fatal losses. Meanwhile, trillions of dollars of derivatives have been written by banks and hedge funds on emerging market debt and currencies, with money center banks serving as counterparties on both sides of these contracts. They net out their long and short exposures to hide the true risk, but let just one major counterparty fail and the scam will be exposed, as it was in 2008 when AIG’s implosion nearly bankrupted Goldman Sachs and JP Morgan Chase.

Last but not least, individuals and pension funds in the developed world have invested hundreds of billions of dollars in emerging market stock and bond funds, which are now looking like huge year-ahead losers. The global balance sheet, in short, is about to get a lot more fragile.

So, just as pretty much everyone in the sound money community predicted, tapering will end sooner rather than later when a panicked Fed announces some kind of bigger and better shock-and-awe debt monetization plan. The European Central Bank, which actually shrank its balance sheet in 2013, will reverse course and start monetizing debt on a vast scale. As for Japan, who knows what they can get away with, since their government debt is, as a percentage of GDP, already twice that of the US.

The real question is not whether more debt monetization is coming, but whether it will come soon enough to preserve the asset price bubbles that are right this minute being punctured by the emerging market implosion. If not, it really is 2008 all over again.

The previous articles in this series:

What Blows Up First, Part 1: Europe

What Blows Up First, Part 2: Japan

“Money printing” in this case refers to currency creation in all its forms, electronic and physical.

 

THE OLIGARCH STORYLINE IS GROWING OLD AND TIRED « The Burning Platform

THE OLIGARCH STORYLINE IS GROWING OLD AND TIRED « The Burning Platform.

The headline from the MSM this morning was that consumer spending was really strong in December after a fantastic November.

Consumer spending rose a seasonally adjusted 0.4% last month, the Commerce Department said. Economists polled by MarketWatch had forecast a 0.2% gain. The advance in December follows an upwardly revised 0.6% increase in November. The pace of spending in the last two months of the year marked the strongest back-to-back gain since the first two months of 2012.

The lead into this story makes it sound like the consumer is healthy and doing fantastic. You have to go over to Zero Hedge to find a chart that says it all.

 

Does this chart show a healthy consumer? It shows me we’ve entered a world of pain. Buried in the propaganda spewed by the corporate legacy media is the FACT that real disposable income FELL in December. The consumer had to delve into their dwindling savings to create that STRONG spending in December and November. The savings rate was 5.1% in September and plummeted to 3.9% by December. Last December the savings rate was 8.7%.

Do the oligarchs realize their propaganda doesn’t pass the smell test? They desperately want the ignorant masses to believe consumer spending was strong in November and December. We know for a fact that retail sales absolutely sucked in November and December from the Commerce Dept report from two weeks ago. Sales declined at auto dealerships, furniture retailers, electronics stores, and home stores. We know for a fact that virtually every large retailer in the country has reported dreadful sales and profit results for their Christmas season. Wal-Mart issued a profit warning today. Target issued one two weeks ago. Macys, Sears, and JC Penney are closing stores.

A critical thinking individual might wonder how consumer spending could be really strong if every major retailer is reporting horrific results. Luckily for the oligarchs, critical thinking is a skill not used too much in this country. Edward Bernays’ students of propaganda in the government and MSM know this and utilize our ignorance to the max.

The MSM story mentioned that the increase is being driven by spending on services. Now we are getting to the truth. The average American is ramping up their consumption in Obamacare premiums, utility bills, tolls, sewer fees, and the myriad of other government driven costs. The average American is dipping into their savings to pay for the massive Obamacare premium increases. I guess that doesn’t make a good headline on Marketwatch.com.

Going to the actual data reveals a few more interesting tidbits about the strong consumer:

  • Total personal income, before inflation, in December was 1% below last year.
  • Total wages, before inflation, were up by a whole .6%.
  • No need to worry. Government entitlement transfers soared by $53 billion over the last year.
  • Bernanke did his part by making sure senior citizens and savers didn’t earn one nickle more than last year in interest.
  • You’ll be happy to know that even though wages barely budged, the government syphoned  off an additional $100 Billion of your money in taxes versus last December.
  • Disposable income was 2% lower than last December, before inflation.
  • Americans spent $400 billion more this December than last December by drawing down savings and borrowing. They didn’t spend this at retailers. They borrowed for 7 years to essentially rent new cars, paid more for food, energy, rent, tuition, and Obamacare premiums.

Does this present a picture of a strong consumer? My favorite piece of data from the government website is at the very bottom. It is Real per capita disposable income. It takes into consideration inflation and the fact that the US population grows by 2.2 million people per year. This info paints the real picture of the American consumer.

The real disposable personal income per person in this country was $36,877 in December. It was $38,170 last December. That is a 3.4% decline. And remember, that is using the hugely understated CPI. Now for the really good stuff. The real disposable personal income per person was $37,584 in May of 2008. We are now almost six years later and disposable income per person in this country is still lower than it was in 2008.

Obama proclaimed all the great things he had accomplished in his five years in office. If unemployment has plummeted and the economy is booming at 4%, how can this be so? It can’t. You’ve been fed a fake storyline. It’s like the American Dream. You have to be asleep to believe it.

And anyone peddling the storyline that 2014 will be better is a knave or a fool – or works for CNBC. Over 1.2 million people just got booted off  the long-term unemployment rolls. The SNAP program will be doling out $5 billion less of your tax dollars in 2014. The stock market appears to be a tad shakey. Obamacare premium increases will be pounding those employed. Small businesses will not be hiring. Retailers are firing thousands of employees. Energy prices will set new records. Droughts in the West will result in higher food prices. Home prices will fall as home sales stagnate.

Sounds like a recipe for a great 2014. The storyline has been played out. The people don’t believe anything the oligarchs say. We have been lost in a blizzard of lies, but we can see the truth off in the distance if we look hard enough.

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