The Perversity Of Negative Interest

By Keith Weiner – Re-Blogged From Gold Eagle

Today, we want to say two things about negative interest rates. The first is really simple. Anyone who believes in a theory of interest that says “the savers demand interest to compensate for inflation” needs to ask if this explains negative interest in Switzerland, Europe, and other countries. If not, then we need a new theory (Keith just presented his theory at the Austrian Economics conference at King Juan Carlos University in Madrid—it is radically different).

Perverse Inventives

Second, negative interest perversely incentivizes some very perverse behaviors.

For example, suppose you could borrow at -1% and just hold the cash. Your asset stays the same, while your liability is going down. You are making a positive return for doing nothing productive! It should be obvious to an 8th grader, though perhaps not a PhD economist, that there is something wrong with this. Grossly, monstrously wrong.

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Repocalypse: The Little Crisis that Roared

That didn’t take long. I just published an article showing how the Fed had responded with a quarter of a trillion dollars to save the economy from what it claimed was a mere blip. Since then, the recession-causing Repocalypse I’ve warned of has roared around the world, forcing the Fed to amplify its response again.

The Fed’s planners just cannot outrun the little monster they created. It is growing as quickly as they increase their running speed. In the article I just alluded to, I also stated,

Gold Price Pre-Fed Update

President Roosevelt made owning gold for American citizens, with minor exceptions, illegal in 1933. See Executive Order # 6102. Begin the DOW to gold ratio analysis in 1933.

Many people have discussed the Dow to gold ratio. It fell from over 40 in the year 2000 when the DOW (11,750) was expensive, and gold sold for less than $300. In those days paper assets (DOW, bonds, S&P500 stocks) looked like they would rise forever.

Everything changes.

By 2011 the DOW (12,800) had fallen 10% from its 2007 high and gold peaked at an all-time high over $1,900. The ratio dropped to about 7.

The ratio rises and falls in long waves.

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In Case Of A Future Banking System Breakdown

By Stefan Gleason – Re-Blogged From Silver Phoenix

The banking system may not be as sound we’ve been led to believe. It continues to get propped up through central bank interventions, which strongly suggests it wouldn’t be able to stand on its own.

Last Thursday, the Federal Reserve injected another $115 billion into financial markets via “temporary operations.” The Fed is targeting the repo market in particular, through which banks lend to each other on an overnight basis.

For some reason, banks have grown weary of committing liquidity to each other in what should be one of the safest lending markets on the planet.

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Fed Can’t See The Bubbles Through The Lather

Recently, there has been a parade of central bankers along with their lackeys on Wall Street coming on the financial news networks and desperately trying to convince investors that there are no bubbles extant in the world today. Indeed, the Fed sees no economic or market imbalances anywhere that should give perma-bulls cause for concern. You can listen to Jerome Powell’s upbeat assessment of the situation in his own words during the latest FOMC press conference here. The Fed Chair did, however, manage to acknowledge that corporate debt levels are in fact a bit on the high side. But he added that “we have been monitoring it carefully and taken appropriate steps.” By taking appropriate steps to reduce debt levels Powell must mean slashing interest rates and going back into QE. The problem with that strategy being that is exactly what caused the debt binge and overleveraged condition of corporations in the first place.

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What’s The Price Of Gold In The Gold Standard

By Keith Weiner – Re-Blogged From Gold Eagle

Let’s revisit a point that came up in passing, in the Silver Doctors’ interview of Keith. At around 35:45, he begins a question about weights and measures, and references the Coinage Act of 1792. This raises an interesting set of issues, and we have encountered much confusion (including from one PhD economist whose dissertation committee was headed by Milton Friedman himself).

Gold, Paper and Redeemability

Back in the 18th century, three facts were obvious and not questioned. One, gold and silver are money. Two, the paper receipt evidencing the deposit of money is not, itself, money. And three, depositors had the right to get their money back plus interest.

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Gold And Silver Prices To Head Dramatically Higher

By Mike Gleason – Re-Blogged From Gold Eagle

Mike Gleason: David, we had you back on at the beginning of the year and you shared some amazing insights on palladium, and we’ll get to that in a bit because that market is still very interesting. But first off, you’ve been watching the Fed balance sheet closely here and I wanted to get your comments about that to begin with. Now, after the extraordinary expansion, which followed the 2008 financial crisis and a few rounds of QE, the Fed began contracting the money supply in 2017. You’ve been making the case that the withdrawal of liquidity could trigger another catastrophe.

So, let’s start with the basics here. If you would, please explain the history of the Fed’s balance sheet, and why it is something investors should be carefully watching.

David Jensen: Yeah, I think that the root of it all, the reason we’re watching so closely is the tremendous imbalance between the amount of cash, liquid cash that’s in the system versus the amount of debt. And the Fed has run interest rates from around 20% in 1980 down to 0% or 0.25% here a couple of years ago. And what they’ve done is expanded the greatest debt bubble in history. The total debt in the U.S., now on all levels according to the Fed’s flow of funds report is about $72 trillion. And to serve as that $72 trillion of debt that’s in extent, there’s only $14 trillion of liquid currency in deposits and in physical cash. So, what we’re seeing now is that the Fed needs to continually to expand the money stock with the money supply. The money supply is the annual change or the addition to the outstanding money stocked addition to the $14 trillion that’s out every year. And they need to add a substantial amount so that the debt can be serviced and so that the economy can continue to move forward.

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