| What? Me worry?
Federal Reserve is presently demonstrating the ease with which it can
meet cash illiquidity. It has been creating wagonloads of new currency
the demand of short term borrowers in the financial markets. Because
of the lack of liquidity some lenders were forced to raise interest
rates which is a strict no-no in the Fed playbook. For several
days the Fed has been pumping new money into the system in a $75
dollar daily range. To clrify the magnitude of this sum it's $1 million
multiplied by 75,000 . . .EACH DAY! And just to make sure the market
calms down the Fed says it will keep the money spigot wide open until
10th - maybe beyond.
Not much is being said about the negative reaction
this causes the pitiful little band of SAVERS who are searching for
interest levels at least a smidgeon above the price inflation rate. This is not happening. The
aim is LOW interest rates,
remember? That's great for people and corporations which much
borrow against their future earnings, but a kick in the teeth for
people trying to save for the probable "rainy day."
are a lot of financial bubbles out there floating around in search of a
few days ago we wondered aloud if the 90th anniversary of a
shocking stock market crash portends ominous
financial/monetary activity next month. Not necessrily, we
doncluded, but October history in Wall Street is riddled
with troubling events.
Commentator Michael Snyder seems to agree:
we about to see U.S. financial markets go crazy? That is what
Goldman Sachs seems to think, and it certainly wouldn’t be the first
time that great financial chaos has been unleashed during the month of
October. When the stock market crashed in October 1929, it
started the worst economic depression that we have ever
witnessed. In October 1987, the largest single day percentage
decline in U.S. stock market history rocked the entire planet.
And the nightmarish events of October 2008 set the stage for a “Great
Recession” that we still haven’t fully recovered from. So could it be possible
that something similar may happen in October 2019?"
As we said above, not neccessarily.
So why bring it up? Because negative signals are popping up all
over the globe and some financial bubbles may pop soon if the best laid
plans of the Federal Reserve and other central banks fall short.
Can't we trust
bankers and political leadership to prevent a recession?
No. At the insistence of the voting majority the system has run
too far off the tracks to get back to anything resembling normalcy
without a painful correction to clean out the deadwood. The only
question is, WHEN?
interest is great for borrowers, but a lousy deal for savers.
The Social Security Conundrum
Low interest rates are not only bad news for
people who find comfort and security in bank savings, but Social
Security recipients are also going to get disappointing news about
their inflation-based increase in 2020. The Treasury Department
is about to set the inflation adjustment on the present annualized
price inflation rate, which is very low. Social security payments
won't increase much next year.
The old fasioned scheme called for customers with
spare cash to lend it to a banker. The banker loaned out as much
as he dared at an interest rate higher than he paid the depositer for
the use of the money. In those days banks owned big vaults with
sturdy doors or large safes. People liked the
idea of their cash being safely locked up in the bank. They
also enjoyed seeing the deposits and interest
compound as time rolled by. Many savings deposits yielded
as much as 3 percent per annum. The bank would lend the money on
mortgages and other instruments at 5 percent. It could operate at
a profit on the 2 percent spread between the interest collected by
borrowers and the interest paid lenders (depositors). This was
more than a century ago when money was actual wealth and not today's
promise of wealth. (Fiat currency.)
People then understood that money was metal
and that the more convenient paper notes were not, although they could
be redeemed in money whenever the holder wished.
Trump is ticked off because the Fed cut the basic rate only 1/4
The Federal Reserve hath acted. It announced Wednesday a quarter per
cent cut in the basic interest rate making it cheaper to borrow money.
Whether another cut will be necessary before the end of the year the
Fed isn't saying. The cut means that prudent people who are trying to
build up savings account are given a kick in the pants. They'll
be lucky to see their cash stash break even with price inflation.
President Trump is unhappy with reports of an economic
slowdown. He would prefer to ride to re-election on the wings of a
booming economy and favors a loose money policy in which consumers are
tempted to borrow from their future. He's on record as favoring a zero
percent interest rate - or lower - if necessary. Theoretically, this
means would-be savers would actually pay a bank to store their cash
savings. This would turn the old-fashioned American habit of financial
prudence upside down. But it's Modern Monetary Theory (MMT) and thought
to be the wave of the future.
Mr. Trump fails to note the danger of constantly
pumping cheap debt-based currency into the economy. It's like
continuing to transfuse blood into a body whose system is already
The world is about whether or not the world is heading for
a recessionary period. Some say "the big one" - a fullblown
depression - awaits us. Many lean toward a recession of the
2008-9 variety heading this way. Ever the optimists President
Trump and his allies say the economy is performing swimmingly, knowing
that any talk of a slump prior to the 2020 election will not boost his
measure the economy in terms of dollars, how's it doing?
the dollar is not a reliable measuring tool. It has fallen
sharply in terms of the amount of precious metals it will buy. An
ounce of pure silver costs $18.58 today - far more costly than it was
only a few weeks ago. If it reaches $20.00 experts
say it could bounce much higher.
In terms of
gold the weakness of the dollar is even greater. One dollar today
is worth only 1,534th of a troy ounce. In days of yore, such as
just prior to the great stock market crash of 1929, one dollar would
buy 1/20th of a troy ounce of gold. (The official Mint price was
$20.67 until raised by the Roosevelt administration to $35.00 in 1934.)
euro the dollar is stronger.
A euro can be bought for a fraction
under $1.10! In the recent past it has taken as much as $1.14 to
buy one euro.
commentators speak of the "stronger dollar" it depends on how it is
measured. At the moment the U.S. dollar is quite strong
against other fiat currencies, but quite weak in the knees when
measured against precious metals. There is no possibility that
creating more dollars from thin air can improve its purchasing power
over precious metals, although its parity may waffle considerably when
measured against other fiat currencies.
Preserving one's wealth, consequently,
is a challenge.
data indicate that wealthier Americans have cut back
on their consumerism and spending,
which could be a signal that a recession is right around the
corner. A popular theory is the economy can't keep
forward unless consumers support it by spending more money on things
they may not need. Since consumers are said to provide 70 percent
of the Gross Domestic Product, we are all caught between a rock and a
hard place. Putting the brakes on spending in order to trim our
heavy debt loads becomes downright unpatriotic. On the other
hand, if we all - rich and poor - cut back on spending we could
cause the economy to lapse into a recessionary tailspin.
What to do?
Ninety years ago Wall
Street was flashing
signs of trouble. Everybody had piled into the stock market "on
margin" and were certain they'd soon be rolling in wealth. One
could buy stocks with just a little down and the hope their shares
would rise to the rafters in value and they could sell at a handsome
profit. Bootblacks and taxi drivers were swapping stock tips in
the street. It was a heady time, but the Roaring Twenties were
about to come to a screeching halt in late October, 1929.
Next month marks
the 90th anniversary of the
great Wall Street crash. History may not repeat itself, of
course, and the present financial system is now different than it was
in 1929. But there's an eerie feeling of apprehension afoot in
the global economy and much uncertainty about where it's leading.
caution flag is certainly
waving and the alleged cutback in consumer spending by the well-to-do
may be a cue for the rest of us to rein in our outlays. The
old adage "Live within your means" will cushion economic
Democratic promises of the 1932
campaign were not kept.
honest look at the Democrat political campaign of 1932 clearly shows
Democrats may have deliberately misled the voters. Here are the
first three planks of the
Democratic Party platform of 1932:
immediate and drastic reduction of governmental expenditures by
abolishing useless commissions and offices, consolidating departments
and bureaus and eliminating extravgance, to accomplish a saving of not
less than 25 percent of the cost of Federal government.
Maintenance of the national credit by a Federal budget annually
sound currency to be maintained at all hazards."
Upon taking office in 1933 President
Roosevelt threw the campaign promises overboard and steered the Ship of
State sharply to the political left. To this day there is a general
impression that the New Deal was the best thing that ever happened to
the USA. Whereas the people were once responsible for the government
under which they lived we saw the government assume responsibility for
the people. The world's largest welfare state was born.
is no dumbell when it comes to understanding the whims of people with
President Trump has caught a whiff of economic recession in the
air and is tweeting his head off about it, assuring everyone within
earshot that the present economy is in pretty good shape, thank you,
and privately hoping that a recession will not hit until after the
November, 2020, elections.
He understands perfectly well that consumer activity accounts for about
70 perent of the Gross Domestic Product (GDP) and that consumer
willingness to take on debt accounts for large measure of the
Michael Lebowitz and Jack Scott have tried to untangle general
understanding of the signals that portend recessions, but the general
public is most likely to take its cue from the daily media
"We can follow all the economic data and trends diligently, but consumption accounts for over 70% of U.S.
economic growth. Therefore, recessions ultimately tend to be the
effect of changes in consumer behavior.
If the narrative du jour is enough to trouble even a small percentage
of consumers, the likelihood of a recession increases. The
evidence of such a change will eventually turn up in sentiment surveys,
and when it does, the problem has already taken root. This is not a
dire warning of recession but rather offers consideration of a
legitimate second-order effect that potentially threatens this
record-long economic expansion.
"While the media focuses on the inversion narrative, alerting the
public to recession warnings and driving consumers to re-think their
planned purchases, we care more about when the yield curve will
steepen. The steepening curve caused by aggressive Fed action
after a curve inversion is the tried and true recession warning.
For more, please read Yesterday’s
Perfect Recession Warning May Be Failing
& Jack Scott
Bottom line: The more talk you hear of lowering interest
rates, cutting payroll taxes, capital gains taxes, the more sure you
can be sure political leaders are trying to keep recession
bay. They understand perfectly that when consumers feel more
dollars will come into their pockets the more willing they will be to
spend it. It's when they sense that money is in short supply they
tend to lay out less of it. When that happens the recession bells