Tag Archives: Quantitative Easing

Former Fed Chairman Ben Bernanke hired by hedge fund Citadel

By Andre Damon
April 18, 2015
World Socialist Web Site

 

Ben S. Bernanke, the former Federal Reserve chairman who funneled trillions of dollars in government funds to Wall Street, has been hired by Chicago-based hedge fund Citadel LLC, where he will presumably make millions of dollars.

Bernanke’s new job constitutes little more than a kickback for services rendered to Wall Street and the financial elite more generally. As a result of policies he implemented during his eight years as Fed chairman, the profits of Wall Street banks and hedge funds, including that of his new employer, have soared to record highs.

If the United States were a genuine democracy, the announcement of Bernanke’s new job would prompt vituperative public denunciations by senators and congressmen; hearings would be held, documents would be subpoenaed, and federal bribery charges would be drawn up against him.

Yet, since the story broke Thursday, the silence has been deafening. Not a single public official has prominently commented on the development, and major newspapers responded to the news with, at most, a shrug of the shoulders.

While Bernanke’s pay package has not been publicly disclosed, commentators noted that it is likely to be at least seven figures. In the fourteen months since he left office, Bernanke has raked in hundreds of thousands of dollars in speaking fees, charging $200,000 per appearance, more than he made in a year at his job at the Federal Reserve. The New York Times noted that his clients included “hedge fund managers like David A. Tepper of Appaloosa Management, private equity executives like Michael E. Novogratz of the Fortress Investment Group and other financial institutions.”

During the course of the 2008 bank bailout, which Bernanke played a leading role in orchestrating, the US government loaned nearly $7 trillion to the financial system, which was used to prop up over $30 trillion in financial assets—more than twice the yearly output of the United States.

It is also noteworthy that, during Bernanke’s tenure, not a single bank executive was criminally prosecuted for helping to cause the 2008 financial crisis, despite ample evidence of criminal wrongdoing demonstrated by a series of voluminous congressional reports.

Under Bernanke’s watch, the Fed initiated its so-called quantitative easing money-printing operation, which quadrupled the size of the Federal Reserve’s balance sheet, injecting some three trillion dollars into the financial system.

These policies have fueled a massive run-up in the values of financial assets, causing the wealth of the financial oligarchy to soar.

Since 2009, the Dow Jones Industrial Average has nearly tripled in value. In the same period, members of the Forbes list of 400 richest people in the US have nearly doubled their net worth, which has hit a total of $2.9 trillion, or about one fifth of the United States’ gross domestic product. Over the same period, the incomes of a typical household in the US fell by more than ten percent.

Bernanke’s new employer has benefited handsomely from the policies implemented under Bernanke and continued under his successor, Janet Yellen. Citadel’s manager, Ken Griffin, made a staggering $1.1 billion in 2014, making him the fourth-highest-earning hedge fund manager in the US that year. The firm manages $24 billion, and its clients had a rate of return of 18 percent last year.

According to the Times, “Bernanke said he was sensitive to the public’s anxieties about the ‘revolving door’ between Wall Street and Washington and chose to go to Citadel, in part, because it ‘is not regulated by the Federal Reserve and I won’t be doing lobbying of any sort.’” Bernanke declared that he decided to go to work for a hedge fund, not a bank, because “I wanted to avoid the appearance of a conflict of interest… I ruled out any firm that was regulated by the Federal Reserve.”

Amazingly, no one within the media establishment, least of all the Times, has even questioned Bernanke’s absurd and self-serving defense of his shameless bribe taking. The fact is that the Fed functioned to inflate the values of all financial assets: transferring social wealth from the poor to the rich. Hedge funds benefited from this process no less than banks.

Bernanke joins a long list of fed officials, financial regulators and politicians who have cashed in on their services to Wall Street:

• In November 2013, former Treasury Secretary Timothy Geithner joined the hedge fund Warburg Pincus, where he now serves as president and managing director.

• Last month, former Federal Reserve governor Jeremy C. Stein was hired as an advisor for the hedge fund BlueMountain Capital. He had resigned from the Fed the previous May.

• Peter Orszag, the former head of the Office of Management and Budget under Obama, joined Citigroup in 2011.

• Alan Greenspan, who was Bernanke’s predecessor at the Federal Reserve, signed on as an advisor to the hedge fund Paulson & Co in 2008.

• David H. McCormick, who served as Undersecretary for International Affairs at the Treasury Department, is now co-president of Bridgewater Associates, the world’s largest hedge fund.

• William M. Daley, who served as White House Chief of Staff between 2011 and 2012, became the managing partner of Swiss hedge fund Argentière Capital in 2014.

Former regulators are far from the only ones cashing in. This week, Deval Patrick, the former governor of Massachusetts, signed on as a managing director at private equity firm Bain Capital. In 2013, David Petraeus, the former director of the Central Intelligence Agency, got a job at private equity company Kohlberg Kravis Roberts.

As the Washington Post put it, “There’s a metronomic quality to it. Anytime a public official leaves office, they write a book, maybe take a fellowship somewhere, and then, after a suitable amount of time has passed, take a job on Wall Street.”

The uniform regularity with which supposed federal regulators take jobs with the very industries they were in charge of policing underscores the fundamental reality that, far from seeking to restrain the illegal and criminal activities of the banks and hedge funds, the so-called regulators simply run interference for Wall Street, in exchange for millions of dollars in pay and perks after they leave office.

Government Corruption Has Become Rampant

By WashingtonsBlog
March 31, 2015
Washington’s Blog

 

CorruptionThe Cop Is On the Take

Government corruption has become rampant:

  • Senior SEC employees spent up to 8 hours a day surfing porn sites instead of cracking down on financial crimes
  • NSA spies pass around homemade sexual videos and pictures they’ve collected from spying on the American people
  • Investigators from the Treasury’s Office of the Inspector General found that some of the regulator’s employees surfed erotic websites, hired prostitutes and accepted gifts from bank executives … instead of actually working to help the economy
  • The Minerals Management Service – the regulator charged with overseeing BP and other oil companies to ensure that oil spills don’t occur – was riddled with “a culture of substance abuse and promiscuity”, which included “sex with industry contacts
  • Agents for the Drug Enforcement Agency had sex parties with prostitutes hired by the drug cartels they were supposed to stop
  • The former chief accountant for the SEC says that Bernanke and Paulson broke the law and should be prosecuted
  • The government knew about mortgage fraud a long time ago. For example, the FBI warned of an “epidemic” of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this. For example, the Federal Reserve turned its cheek and allowed massive fraud, and the SEC has repeatedly ignored accounting fraud. Indeed, Alan Greenspan took the position that fraud could never happen
  • Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not. The Treasury Secretary also falsely told Congress that the bailouts would be used to dispose of toxic assets … but then used the money for something else entirely
  • Warmongerers in the U.S. government knowingly and intentionally lied us into a war of aggression in Iraq.  The former head of the Joint Chiefs of Staff – the highest ranking military officer in the United States – said that the Iraq war was “based on a series of lies”. The same is true in Libya and other wars
  • The Bush White House worked hard to smear CIA officersbloggers and anyone else who criticized the Iraq war

The biggest companies own the D.C. politicians.  Indeed, the head of the economics department at George Mason University has pointed out that it is unfair to call politicians “prostitutes”.  They are in fact pimps … selling out the American people for a price.

Government regulators have become so corrupted and “captured” by those they regulate that Americans know that the cop is on the take.   Institutional corruption is killing people’s trust in our government and our institutions.

Indeed, America is no longer a democracy or republic … it’s officially an oligarchy.

The allowance of unlimited campaign spending allows the oligarchs to purchase politicians more directly than ever.    Moreover, there are two systems of justice in Americaone for the big banks and other fatcats, and one for everyone else.

But the private sector is no better … for example, the big banks have turned into criminal syndicates.

Liberals and conservatives tend to blame our country’s problems on different factors … but they are all connected.

The real problem is the malignant, symbiotic relationship between big corporations and big government.

Growing warnings of another financial disaster

By Nick Beams
March 25, 2015
World Socialist Web Site

 

bankerGlobal financial markets are on the road to another crash, with consequences even more serious than the collapse of September 2008. There have been a series of dire warnings from within the ruling class itself that present monetary policies have created massive financial bubbles with devastating consequences.

In an interview with the Financial Times, James Bullard, the head of the Reserve Bank of St Louis, and a non-voting member of the Federal Open Market Committee, said the Fed had to start normalizing interest rate policy as soon as possible. Continuing the present near-zero rate would feed into an asset price bubble which would “blow up out of control.”

Bullard and others are pointing to what has now become an obvious fact, that the combined effects of quantitative easing (i.e., printing money) and interest rate cuts by central banks are powering a feeding frenzy in global equity and bond markets.

Last week, an analysis of the S&P 500 Index from the Office of Financial Research, attached to the US Treasury Department, concluded that the US stock market had entered a situation comparable to patterns seen in 1929, 2000 and 2007. That is, a major downturn, if not a crash, was looming. Entitling his report “Quicksilver Markets”, the author noted: “Quicksilver markets can turn from tranquil to turbulent in short order.”

There are growing fears of a “liquidity crunch” if all the major investors and speculators, which operate on basically similar financial models, try to make an exit at the same time, only to find that there are no buyers.

According to a report in the Financial Times on Tuesday, some fund managers have warned “not since the collapse of Lehman Brothers in September 2008 and the freezing of money markets in August 2007 has there been such widespread concern over the structure of fixed income [i.e., bond] markets.” It said that prices of bonds had risen appreciably as investors had “gorged” on the cheap money provided by the low-interest rate regime of central banks and warned that there could be a “liquidity crunch” if they “collectively run for the exits.”

The same situation has developed in corporate and government bond markets, which have surged ahead on cheap money, making commonplace the previously extremely rare phenomenon of negative yields. (The price of the bond moves in the opposite direction to the yield.)

Negative yields mean that investors are in effect paying governments for the privilege of lending them money. The phenomenon is the result of a situation in which, despite the fact that bondholders would make a loss if they held the high-priced bond to maturity, they can still make a capital gain because the outflow of central bank finance will push bond prices still higher. They can simply sell the bond to another investor, who is himself operating under the assumption that he can do the same.

In effect, corporate and bond markets have been turned into a giant Ponzi scheme where profits can continue to be made so long as money continues to pour in. In other words, the modus operandi of what started as a criminal venture in the US during the 1920s has now become the central operating principle of the global multi-trillion dollar financial markets.

The official justification for this system advanced by its promoters is that these measures are necessary to stimulate economic growth. Such claims are refuted by facts and figures. The world economy as a whole is characterized by growing deflationary trends coupled with stagnant or low growth rates.

Yesterday it was announced that in Britain consumer prices for February had failed to show a rise for the first time in 55 years, a sure indicator of economic contraction. At the same time, a key indicator of manufacturing activity in China fell to an 11-month low. Decreases occurred in the key areas of new orders, export orders, employment and output prices.

The day before in Europe, projections prepared by the European Central Bank found that its quantitative easing program, aimed at pumping more than €1 trillion into financial markets over the next 18 months, would do virtually nothing to boost employment. The jobless rate will continue to remain at above 10 percent even after the program has been completed.

The main effect of the QE measures has been to boost European stock markets, which so far this year have risen at a faster rate than in the US, even as European economic output still remains below where it was in 2007, with investment in the real economy down by more than 25 percent on pre-crisis levels.

While the corporate and financial aristocracy continues to enrich itself, the conditions for the working class are subject to an unending austerity drive. The dictates of the financial oligarchy with respect to Greece are the consummate expression of what is a global program: the forcible impoverishment and starvation of ever-wider sections of the population.

In the aftermath of the devastation of the Great Depression of the 1930s, the political representatives of the ruling classes—desperately fearful of socialist revolution—claimed that they could regulate the worst effects of the profit system through so-called Keynesian measures based on government spending to simulate growth and secure a return to “normalcy.”

For a very short period, in historical terms, these policies seemed to bring success. However, they rested on the strength of US capitalism and the boost that its more productive methods provided for the global economy as a whole.

The situation today has been completely transformed. The US economy is no longer the center of economic expansion but is the headquarters of global parasitism. The central position in the world economy is no longer occupied by corporations such as Ford and General Motors, but by Goldman Sachs, JPMorgan Chase and their equally parasitic counterparts internationally, which are not engaged in the creation of new wealth but in its appropriation, often through outright criminal methods.

The utter bankruptcy of the entire profit system is exemplified by the policy debate now taking place in ruling financial and economic circles. It is between those who maintain that the cheap money policies of the central banks must be continued lest a disaster result, and those who insist the taps have to be turned off, and the system purged, if necessary through bankruptcies and financial collapses, in order to try to prevent an even bigger catastrophe.

The various defenders of the profit system, in the media, academic circles and in pseudo-left organisations such as Syriza in Greece, maintain that the perspective of a planned world socialist economy is not possible and therefore the only alternative is to try to “save capitalism from itself”.

In fact, the perspective of international socialism is the only viable and realistic answer to the historic crisis of capitalism. To be realized, it must be made the basis of the political program for which the international working class begins to fight.

 

 

Why a Stronger Dollar will Lead to Deflation, Recession and Crisis

“Margin Call from Hell”

By Mike Whitney
March 14, 2015
Counter Punch

 

banker“There are no nations…. no peoples…. no Russians.. no Arabs…no third worlds…no West. There is only one holistic system of systems, one vast and immane, interwoven, interacting, multi-variate, multi-national dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels. It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today.”

– Arthur Jensen’s speech from Network, a 1976 American satirical film written by Paddy Chayefsky and directed by Sidney Lumet

The crisis that began seven years ago with easy lending and subprime mortgages, has entered its final phase, a currency war between the world’s leading economies each employing the same accommodative monetary policies that have intensified market volatility, increased deflationary pressures, and set the stage for another tumultuous crack-up. The rising dollar, which has soared to a twelve year high against the euro, has sent US stock indices plunging as investors expect leaner corporate earnings, tighter credit, and weaker exports in the year ahead. The stronger buck is also wreaking havoc on emerging markets that are on the hook for $5.7 trillion in dollar-backed liabilities. While most of this debt is held by the private sector in the form of corporate bonds, the stronger dollar means that debt servicing will increase, defaults will spike, and capital flight will accelerate. Author’s Michele Brand and Remy Herrera summed it up in a recent article on Counterpunch titled “Dollar Imperialism, 2015 edition”. Here’s an excerpt from the article:

“There is the risk for a sell-off in emerging market bonds, leading to conditions like in 1997. The multitrillion dollar carry trade may be on the verge of unwinding, meaning capital fleeing the periphery and rushing back to the US. Vast amounts of capital are already leaving some of these countries, and the secondary market for emerging bonds is beginning to dry up. A rise in US interest rates would only put oil on the fire.

The World Bank warned in January against a “disorderly unwinding of financial vulnerabilities.” According to the Financial Times on February 6, there is a “swelling torrent of ‘hot money’ cascad[ing] out of China.” Guan Tao, a senior Chinese official, said that $20 billion left China in December alone and that China’s financial condition “looks more and more like the Asian financial crisis” of the 1990s, and that we can “sense the atmosphere of the Asian financial crisis is getting closer and closer to us.” The anticipated rise of US interest rates this year, even by a quarter point as the Fed is hinting at, would exacerbate this trend and hit the BRICS and other developing countries with an even more violent blow, making their debt servicing even more expensive.” (Dollar Imperialism, 2015 Edition” Michele Brand and Remy Herrera, CounterPunch)

The soaring dollar has already put the dominoes in motion as capital flees the perimeter to return to risk-free assets in the US. At present, rates on the benchmark 10-year Treasury are still just slightly above 2 percent, but that will change when US investment banks and other institutional speculators– who loaded up on EU government debt before the ECB announced the launching of QE–move their money back into US government bonds. That flush of recycled cash will pound long-term yields into the ground like a tent-peg. At the same time, the Fed will continue to “jawbone” a rate increase to lure more capital to US stock markets and to inflict maximum damage on the emerging markets. The Fed’s foreign wealth-stripping strategy is the financial equivalent of a US military intervention, the only difference is that the buildings are left standing. Here’s an except from a Tuesday piece by CNBC:

“Emerging market currencies were hit hard on Tuesday, while the euro fell to a 12-year low versus the U.S. dollar, on rising expectations for a U.S. interest rate rise this year. The South African rand fell as much as 1.5 percent to a 13-year low at around 12.2700 per dollar, while the Turkish lira traded within sight of last Friday’s record low. The Brazilian real fell over one percent to its lowest level in over a decade. It was last trading at about 3.1547 to the dollar…

The volatility in currency markets comes almost two years after talk of unwinding U.S. monetary stimulus sent global markets reeling, with some emerging market currencies bearing the brunt of the sell-off…

Emerging market (EM) currencies are off across the board, as markets focus back on those stronger U.S. numbers from last week, prospects for early Fed tightening, and underlying problems in EM,” Timothy Ash, head of EM (ex-Africa) research at Standard Bank, wrote in a note.

“In this environment countries don’t need to give investors any excuse to sell – especially still higher rolling credits like Turkey.” (Currency turmoil as US rate-hike jitters bite, CNBC)

Once again, the Fed’s easy money policies have touched off a financial cyclone that has reversed capital flows and put foreign markets in a downward death spiral. (The crash in the EMs is likely to be the financial calamity of the year.) If Fed chairman Janet Yellen raises rates in June, as many expect, the big money will flee the EMs leaving behind a trail of bankrupt industries, soaring inflation and decimated economies. The blowback from the catastrophe is bound to push global GDP into negative territory which will intensify the currency war as nation’s aggressively compete for a larger share of dwindling demand.

The crisis in the emerging markets is entirely the doing of the Federal Reserve whose gigantic liquidity injections have paved the way for another global recession followed by widespread rejection of the US unit in the form of “de-dollarization.” Three stock market crashes and global financial meltdown in the length of decade and a half has already convinced leaders in Russia, China, India, Brazil, Venezuela, Iran and elsewhere, that financial stability cannot be achieved under the present regime. The unilateral and oftentimes nonsensical policies of the Fed have merely exacerbated inequities, disrupted normal business activity, and curtailed growth. The only way to reduce the frequency of destabilizing crises is to jettison the dollar altogether and create a parallel reserve currency pegged to a basket of yuans, dollars, yen, rubles, sterling, euros and gold. Otherwise, the excruciating boom and bust cycle will persist at five to ten year intervals. Here’s more on the chaotic situation in the Emerging Markets:

“The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar. […] The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries. Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are ‘short dollars’, in trading parlance. They now face the margin call from Hell…. Stephen Jen, from SLJ Macro Partners said that ‘Emerging market currencies could melt down. There have been way too many cumulative capital flows into these markets in the past decade. Nothing they can do will stop potential outflows, as long as the US economy recovers. Will this trend lead to a 1997-1998-like crisis? I am starting to think that this is extremely probable for 2015.’” (Fed calls time on $5.7 trillion of emerging market dollar debt, Ambrose Evans Pritchard, Telegraph)

As the lone steward of the reserve currency, the Fed can boost global liquidity with a flip of the switch, thus, drowning foreign markets in cheap money that inevitably leads to recession, crises, and political unrest. The Fed was warned by Nobel Prize-winning economist, Joseph Stiglitz, that its loosy goosy-monetary policies, particularly QE, would have a ruinous effect on emerging markets. But Fed Chairman Ben Bernanke chose to shrug off Stiglitz’s advice and support a policy that has widened inequality to levels not seen since the Gilded Age while having no noticeable impact on employment , productivity or growth. For all practical purposes, QE has been a total flop.

On Thursday, stocks traded higher following a bleak retail sales report that showed unexpected weakness in consumer spending. The news pushed the dollar lower which triggered a 259 point rise on the Dow Jones. The “bad news is good news” reaction of investors confirms that today’s market is not driven by fundamentals or the health of the economy, but by the expectation of tighter or looser monetary policy. ZIRP (Zero interest rate policy) and the Yellen Put (the belief that the Fed will intervene if stocks dip too far.) have produced the longest sustained stock market rally in the post war era. Shockingly, the Fed has not raised rates in a full nine years due in large part to the atmosphere of crisis the Fed has perpetuated to justify the continuation of wealth-stripping policies which only benefit the Wall Street banks and the nation’s top earners, the notorious 1 percent.

The markets are bound to follow this convoluted pattern for the foreseeable future, dropping sharply on news of dollar strength and rebounding on dollar weakness. Bottom line: Seven years and $11 trillion in central bank bond purchases has increased financial instability to the point that any attempt to normalize rates threatens to vaporize emerging markets, send stocks crashing, and intensify deflationary pressures.

If that isn’t an argument for “ending the Fed”, then I don’t know what is.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

 

QE Inventor: It’s EASY to Create a Full-Blown Recovery, But Central Banks Chose to Make Banksters Rich Instead of Helping Main Street

By WashingtonsBlog
March 6, 2015
Washington’s Blog, March 5, 2015
QE Is a Sham
bankerRichard Werner (economics professor at University of Southampton) is the inventor of quantitative easing (QE).

Werner previously said that QE has failed to help the economy. (Former long-time Fed chair Alan Greenspan agreesNumerous academic studies confirm this. And see this.)

But Werner is now taking off the gloves …

He said recently:

  • It’s easy for central banks to take steps which would quickly create “full-blown recovery” for the economy
  • But the central bankers are instead choosing to act in a way which creates massive profits for the big banks, instead of stabilizing the economy. Werner blames the revolving door between central bankers and private bankers
  • The central banks have twisted the whole concept of easing … pretending that they’re trying to help the economy, when they’re doing something else entirely
  • Credit should be extended to the productive economy – businesses which create goods and services – and not to financial speculators or high levels of consumer debt.  Extending credit to small businesses former creates prosperity; lending to financial speculators only leads to economic instability and soaring inequality; and when too high a percentage of lending goes to luxury consumer consumption, it’s bad for the economy
  • Banks create money and credit out of thin air when they make loans (background)
  • It’s a myth that interest rates drive the level of economic activity. The data shows that rates lag the economy

Indeed, economists also note that QE helps the rich … but hurts the little guy. QE is one of the main causes of inequality (and see this and this). And economists now admit that runaway inequality cripples the economy. So QE indirectly hurts the economy by fueling runaway inequality.

A high-level Federal Reserve official says QE is “the greatest backdoor Wall Street bailout of all time”. And the “Godfather” of Japan’s monetary policy admits that it “is a Ponzi game”.

And – as counter-intuitive as it sounds – QE actually hurts the economy and leads to deflation in the long-run.

Record global stock prices reflect growth of financial parasitism

By Nick Beams
February 27, 2015
World Socialist Web Site

 

This week has seen global stock prices approach record highs under conditions where the German government took the unprecedented step of issuing bonds at a negative yield. The two interrelated developments point to an explosive growth of financial parasitism.

World equity markets are close to their highest levels in history, as measured by the FTSE All-World Index. The FTSE 100, Britain’s index of leading shares, surpassed its previous high, achieved at the end of 1999 on the eve of the bursting of the dot.com share market bubble, to join Wall Street’s Dow and the German DAX in record territory.

This is an extraordinary phenomenon given that large areas of the global economy, most notably Europe and Japan, are either stagnant or in recession; China and the so-called “emerging markets,” which have been the main centre of global growth, are slowing down; and the much-vaunted US growth is still below historical trends.

All of the major reports on the state of the world economy in the recent period—from the World Bank, the International Monetary Fund, and the Organisation for Economic Cooperation and Development—have downgraded previous growth projections and warned that the economy is increasingly characterised by a vicious cycle.

Investment has fallen to historic lows because of the lack of demand and profit opportunities. The decline in investment is leading, in turn, to a further decline in demand and profit expectations.

Notwithstanding these powerful trends, the stock markets continue to power on, providing a graphic demonstration of the degree to which the accumulation of wealth by global financial elites has become divorced from the actual process of production.

One of the main factors boosting Wall Street in recent days was the estimation, following the testimony by US Federal Reserve Chairwoman Janet Yellen to the US Congress, that the central bank was in no hurry to start lifting official interest rates, ensuring that the flow of cheap money into financial markets would continue.

European markets also took heart from Yellen’s remarks and were boosted as well by the approach of the European Central Bank’s money-printing “quantitative easing” (QE) program, slated to begin next week.

In addition, they were warmed by the news that the European Union and the financial oligarchy it represents had obtained the Syriza-led Greek government’s abject capitulation, including the renunciation of the pseudo-left party’s election promises to fight the EU’s austerity program. The Greek developments, ensuring the further impoverishment of the Greek working class, was a source of satisfaction not only because of its implications for Greece, but also for the message they sent across Europe that any demand for an end to austerity would meet the same fate.

The emergence of negative bond yields, underscored by the German government’s issuance of five-year notes at a negative rate, signifies that the bond market is being transformed into a gigantic Ponzi scheme, in which the ability to make money depends on the continuous flow of new cash—largely emanating from central banks—into the financial system. It is increasingly operating according to the “bigger fool” principle. While it may be considered foolish to invest in a high-priced bond that offers a negative yield, speculators bet that there is an even bigger fool who will buy the bond when its price rises even further.

When negative yields first made their appearance, it was thought they were a transitory phenomenon, the result of the search for a “safe haven” for cash. But now they are becoming a permanent feature of the financial landscape.

Besides Germany, five-year bonds issued by Denmark, Finland, the Netherlands and Austria, as well as corporate bonds issued by Nestlé and Shell, have come with negative yields.

The immediate impetus for the growth in negative yields is the decision by the European Central Bank to begin bond purchases from March 1 at the rate of €60 billion per month for at least the next 16 months.

Speaking to the Financial Times, Divyang Shah, a global strategist at IFR Markets, said: “It should not be ruled out that, once the ECB QE program begins, we will see German 10-year yields trade through zero and into negative territory.” Swiss 14-year bonds were already trading at negative yields, so such an outcome could not be ruled out, he said, adding that “instead of safe haven-related demand we have QE-related demand.”

The yield on the German 10-year bond yesterday touched a record low of 0.28 percent, with 10-year yields in France, Portugal and Spain also falling to record levels.

The truly explosive growth of financial parasitism, expressed in the negative yield phenomenon, is highlighted by data compiled by JPMorgan Chase. It estimates that in the past year alone the value of negative-yielding bonds in Europe has escalated exponentially—from $20 billion to $2 trillion, a hundred-fold increase. It is calculated that at least one-third of all European bonds now show negative yields. Nothing remotely resembling this has been seen in economic history.

One of its immediate effects is to destroy the financial modus operandi of pension funds and insurance companies. Throughout their history, they have invested in government debt in order to secure a steady and safe rate of return over the long term, often under legal requirements to do so. However, this strategy is increasingly unviable, and in order to meet their commitments, they are being forced to make riskier investments or join the bond market speculation.

The rise of financial parasitism has decisive economic and political implications. As the whole of economic history demonstrates, and the events of the past decade have again revealed, the maintenance of this house of cards cannot continue indefinitely.

A major bankruptcy, produced by a sudden shift in the value of one or another of the major currencies, for example, (such as took place earlier this year with the dramatic leap in the value of the Swiss franc), a corporate default, a sudden shift in sentiment due to an interest rate rise, or one of any number of seemingly accidental events can trigger a chain reaction that brings the entire rotten financial edifice crashing down.

Furthermore, because trillions of dollars have been injected into the financial system by central banks over the past six years, the consequences have the potential to be even more serious than those that followed the collapse of Lehman Brothers in September 2008.

The consequent closures, sackings and mass unemployment and the intensification of the assault on social services will fuel the eruption of social and political struggles that will be met with an immediate and ruthless response from the financial oligarchy. That is the lesson of Greece.

Acutely aware that they have no economic solution to the crisis of the profit system, the ruling elites in every country have spent the past six years boosting police and security forces to deal with the inevitable outbreak of mass struggles.

The international working class must likewise make its own preparations. They centre on the fight for an independent socialist and internationalist program aimed at the overthrow of the financial oligarchy, and the construction of a revolutionary party to lead this struggle.

2015 is the year the global debt delusion implodes, says capital investment guru

By J. D. Heyes
February 4, 2015
Natural News

 

2015A capital investment expert who chose to shutter his short-only hedge fund during the depths of the Great Recession of 2008-09 has warned in a recent interview that 2015 is likely the year in which the U.S. dollar takes a steep decline.

In his interview with King World News, Bill Fleckenstein, president of Fleckenstein Capital, also warned that the dollar “is an Internet stock that’s on borrowed time.”

“People are going to lose confidence in the central banks and there is going to be an ugly dislocation when that happens,” he continued. “Will they come back for another round (of money printing)? I’m sure the Fed will come with QE [quantitative easing] again when it turns out this one doesn’t work.”

Continuing, he said that, at the moment, there are people who believe in “the fantasy of central banks delivering economic Nirvana,” and that they are capable of keeping financial markets elevated indefinitely, as well as “those of us who say that this is going to end in disaster…”

Fleckenstein said that, once financial sectors begin to tumble, the market won’t be far behind, and momentum towards a crash will build. And he says the time is coming — soon.

Crashing sooner rather than later?

“But I think it (disaster) will (start to unfold) pretty soon because the dominos that are going to fall from the oil patch will mean credit problems in fixed income markets, be it government or fracking, exploration or drillers — anyone who used too much debt because they thought it was so cheap and ridiculous and nothing could go wrong,” he said. Oil prices are, at present, lower than they have been in years, largely due to a glut on the global market triggered by unprecedented growth in the U.S. energy sector.

“I think there are going to be a lot of dominos that will cascade on the back of that,” Fleckenstein told King World News. “The reason I alluded (earlier) to how fast oil broke (to the downside) was because that shows you in this environment that we live in, especially with algorithmic and computerized trading — how quickly you could have a rout in the stock market. In the space of virtually no time you could see stocks drop 25 or 30 percent. I know the whole thing is a fantasy.”

There have been other critics of quantitative easing, which is best described as a rather unconventional monetary policy used to stimulate economies by central banks, simply by printing money out of thin air.

Alan Metzler, a historian of the Federal Reserve and a Carnegie Mellon economist, said the police of QE was misguided largely because it did not accomplish one of its primary goals — increased bank lending.

“With $3.5 trillion in excess reserves sitting in the banking system, what good can the Fed do by adding to it that the banks couldn’t do on their own? The answer is nothing. Whatever has happened in the economy isn’t being caused by quantitative easing,” he told Fortune magazine in July.

He also said the failure of the policy is evident by the fact that corporate investment remains at lower-than-average levels. Corporations instead have taken advantage of historically low interest rates to buy back stock and issue debt, but they are not using much of that money to invest in growing their companies.

Who’s right?

Jim Bianco, president of Bianco Research, added in the Fortune piece that QE has “had somewhere between zero and no effect” on the economy.

As some predict the dollar’s collapse, the dollar, meanwhile, has soared to new heights. MarketWatch reported January 2:

The U.S. dollar soared Friday, building on big gains scored in 2014, on expectations the Federal Reserve will raise interest rates while the European Central Bank and Bank of Japan continue to loosen monetary policy in the year ahead.

The ICE dollar index… rose to 91.11, up from 90.27 in late North American trade on Wednesday and marking its highest level since March 2006, according to FactSet data. The index rose almost 13% in 2014, to mark its best yearly gain since 2005.

Who’s right?

The best answer is to simply diversify your assets, by keeping some dollar reserves, some land, some gold, some in the market and other assets. It’s never really been a good idea to put all of your economic eggs in one basket, especially in this, the “Year of Self-Reliance.”

Sources:

http://kingworldnews.com

http://fortune.com

http://www.marketwatch.com

http://www.naturalnews.com

Money for Stocks, Zilch for the Economy

Draghi’s “No-growth” QE

By Mike Whitney
January 24, 2015
Counter Punch

 

Let’s say you’re diagnosed with colorectal cancer. But instead of going to a professional for help, you decide to treat yourself with glycerol suppositories and high doses of Vitamin C.

Well, then, you’re probably going to die, right?

This same rule applies to economics. If you try to reduce unemployment and boost growth by doing something completely unrelated to the problem itself, like dumping trillions of dollars into financial assets, then you’re not going to get the results you want.

This is largely the problem we face today. All of the economies controlled by the western bank cartel–Australia, Canada, US, UK, Eurozone, and Japan—are suffering from chronic lack of demand, the likes of which could be easily remedied by following Keynes recommendation of “government directed investment”. But instead of putting people to work building bridges and fixing roads which would provide them with the money they need to spend at the shopping malls and car lots; our glorious bank masters have decided to subsidize all-manner of risky speculation by dropping rates to zero and pumping money into the financial markets.

The beneficiaries of this process, called Quantitative Easing, are the people who typically prosper from Central Bank policy: The Moocher Class.  Take a look at this chart from Bill Moyers. This is “who wins and who loses” with QE.

Average income growth in US recoveries: top 10% versus the bottom 90%. (Graph: Pavlina Tcherneva)
unnamed-3
See that small blue line heading straight down on the far right side. That’s you and me. We’re the victims of this policy. And, no, I am not going to bore you with a lot of blather about 1 percent-this and 1 percent-that. You’ve heard it a million times before, and don’t need to hear it from me.  But it IS important that you get a visual idea of how the policy works, because we’re not talking about a “free market” here. We’re talking about policy, the way the Central Bank rigs the system in order to transfer wealth to a specific group of powerful constituents. Let’s just call it political economy, because that’s what it is. The Fed keeps its thumb on the scale so its moneybags buddies can make out like bandits. That’s how it works.

Why does this matter?

Because on Thursday, European Central Bank president and former Goldman Sachs managing director Mario Draghi launched the latest iteration of QE. The ECB plans to buy 60 bln euros ($70B USD) in sovereign and agency bonds per month starting March 2015 until September 2016. That’s roughly €1.1 trillion altogether. So now global investors will be able to profit off stocks in the EU adding to their bulging cash-trove while widening the chasm between themselves and the lowly 99 percent.  Here’s part of the official statement from the ECB:

“(The ECB) decided to launch an expanded asset purchase programme encompassing the existing purchase programmes for asset-backed securities and covered bonds. Under this expanded programme the combined monthly purchases of public and private-sector securities will amount to 60 billion euros.

They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below but close to 2 percent over the medium term.”  (TEXT – ECB President Draghi’s statement on QE programme, Reuters)

Did you catch that part about how QE will “be conducted until we see a sustained adjustment in the path of inflation”?

That means the bond-splurge could go on forever. It’s completely open-ended. But what Draghi fails to mention is that QE has never succeeded in reaching the central bank’s 2 percent inflation target. Never. Not in the US, not in the UK, and not in Japan. In fact, we can’t be sure that QE boosts inflation at all.  Judging from past experience, it certainly doesn’t look like it.  So for Draghi to say that he’s going to keep his foot on the gas until he hits his target is like me saying “I’m going to keep step-dancing until Mom gets over her Lupus.”

Is there a connection between step-dancing  and lupus?

Nope. Nor is there connection between QE and inflation, except asset inflation that is, which explains why stocks have more than doubled in the last 5 years. But stock prices don’t show up in the CPI, so Draghi can dump as money as he likes into financial markets and it’s never going to show up in the data. Pretty clever, eh?

And there’s no proof that QE lowers interest rates either, so the idea that loading up on government bonds, increases lending is also false. Check this out from economist John Aziz at Pieria:

(The)  “presumption that central banks are lowering interest rates is at odds with the evidence. This graph via Matt O’Brien from last year shows that each time the Federal Reserve has commenced a program of quantitative easing interest rates have actually risen. ….:

FedTreasuries2jpg-thumb-615x418-109975

And each time the Federal Reserve has tapered its bond-buying programs, interest rates have fallen back lower.” (Does QE Lower or Raise Interest Rates: the Evidence, John Aziz, Pieria)

Can you believe it? So QE has had the exact opposite effect on bond yields (rates) that it was supposed to have, which makes sense when you realize that investors have just been following the actions of the Central Banks rather than market fundamentals. But –when QE ends– then investors return to the safety of bonds which pushes yields back down again. This has been particularly noticeable since the end of QE3. Yields on benchmark 10-year Treasuries have plunged from roughly 2.70% in October when the program ended to 1.83% today. In other words, it is cheaper to borrow money today than it was when the Fed was purchasing $85 in bonds every month.  This is not the way QE was supposed to work.

But here’s the deal:  The way QE is supposed to work and the way it actually works, is the difference between public relations and reality.  Bernanke and Co. know the difference. You can trust me on this.  Monetary policy is not a random, shot-in-the-dark experiment with uncertain outcomes. The reason that inequality has grown to levels not seen since the Gilded Age, is because the Fed knows who is supposed to gain from its programs, and implements its polices accordingly.  Nothing is left to chance.

So what’s Draghi’s game? Is he merely flooding the markets with liquidity to push stocks higher and further enrich the investor class or is there something else going on here?

How about the banks? Could EZQE (Eurozone QE) actually be a stealth bailout of the banks?

Check out this blurb from macronomy.blogspot.com:

“Société Générale in their European Banks note from the 9th of January:

“€600bn of lost corporate lending….The European corporate loan book has shrunk by €600bn since 2009, the point at which corporate credit volumes began to retreat. Around €450bn of this shrinkage has taken place in the last three years – the period of austere governments and regulators. Almost all of this correction is down to three banking systems: Spain (€400bn lost from peak), Italy (€100bn lost) and Greece (€30bn lost).

The total euro area banking system has shed €7tn in assets since 2008. The first chunk of assets fell away in 2008-09 (typically non-lending assets – subprime, etc.). The second chunk of assets has been falling away since 2011.

At the total balance sheet level, it is actually Germany that has seen the lion’s share of the balance sheet decline. This is largely linked to the non-lending assets that fell away in 2008-09.

(Credit–Quality Street,  Macronomics)

EU banks have lost “€7tn in assets since 2008″?

Wow. It looks to me like the entire system is still in trouble six years after Lehman Brothers crashed. Could that explain what’s going on? Could that explain why Draghi has pushed so hard for QE; to bailout the banks?

Indeed. And while most experts agree that QE will do almost nothing to stimulate growth or reduce soaring unemployment, they also agree that it will push bank stocks higher, intensify their gambling operations, and help them to conceal their lack of capital.  The EU banking system is seriously undercapitalized and needs to be restructured so the debts can be written down.

QE helped to avoid that painful remedy in the US.  Draghi hopes it will work in Europe as well.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

 

Even Central Bankers Now Admit QE Doesn’t Work

Even As European Central Bank Is Set to Unleash a Massive Round of Quantitative Easing, Central Bank Heads Admit QE Doesn’t Work

By Washington’s Blog
January 22, 2015
Washington’s Blog, January 21, 2015

 

quantitative easing 1The former head of the Bank of England – Mervyn King – said today that more QE will not help the economy:

We have had the biggest monetary stimulus that the world must have ever seen, and we still have not solved the problem of weak demand. The idea that monetary stimulus after six years … is the answer doesn’t seem (right) to me.

Also today, William White – the brilliant economist who called the 2008 crisis well ahead of time, who is head of the OECD’s Review Committee and former chief economist for BIS (the central banks’ central bank)  slammed QE:

QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market.

***

Even after the stress tests the banks are still in ‘hunkering down mode’. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up.

***

Mr White said QE is a disguised form of competitive devaluation. “The Japanese are now doing it as well but nobody can complain because the US started it,” he said.

“There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.

“The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries – especially in Asia and Latin America – have borrowed $6 trillion in US dollars, often through offshore centres. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up.”

***

He deplores the rush to QE as an “unthinking fashion”. Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing “correlation with causality”. The Anglo-Saxon pioneers have yet to pay the price. “It ain’t over until the fat lady sings. There are serious side-effects building up and we don’t know what will happen when they try to reverse what they have done.”

The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. “They have created so much debt that they may have turned a good deflation into a bad deflation after all.”

The former long-term head of the Federal Reserve (Alan Greenspan) says that QE has failed to help the economy.

The original inventor of QE agrees.

Numerous academic studies confirm this. And see this.

Indeed, many high-level economists – including Federal Reserve economists and the main architect of Japan’s QE program – now say that QE may cause deflation and harms the economy in the long run.

Economists also note that QE helps the rich … but hurts the little guy. QE is one of the main causes of inequality (and see this and this). And economists now admit that runaway inequality cripples the economy. So QE indirectly hurts the economy by fueling runaway inequality.

A high-level Federal Reserve official says QE is “the greatest backdoor Wall Street bailout of all time”. And the “Godfather” of Japan’s monetary policy admits that it “is a Ponzi game”.