America’s Road Map to $40 Trillion National Debt by 2028


Planning on Your Behalf 

Watch out! At this very moment, professional economists of all stripes are making plans on your behalf. They are dreaming and scheming new and innovative ways to spend your money long before you have earned it.

Strange and strangely persistent beliefs… [PT]

While you are busy at the gristmill, grinding away for clients and customers, claims are being laid upon your life.  Your future earnings are being directed to boondoggles galore.  Yet these claims are in addition to everything Washington has already signed you up for.

At last count of the U.S. National Debt, every American citizen’s on the hook for nearly $70,000.  Add U.S. Unfunded Liabilities – which includes Social Security, Medicare Parts A, B, and D, federal debt held by the public, plus federal employee and veteran benefits – and each citizen owes almost $383,000.  And this sum is going to double in the years ahead faster than you can say lickety-split.

These professional economists, enamored by the genius of their graphs, see the recessions of tomorrow and know just how to prevent them.  Their master plan for reversing a recession before it strikes amounts to preemptive stimulus.  What’s more, in concert with Washington’s professional politicians, they are laboring day and night to roll out their bold plans before it is too late.

Fiscal space [don’t know how much there is, but there is clearly more]. Magic money [a bunch of light bulbs that went off in a bunch of politicians’ heads].  Unmet social needs [opportunities to spend]. A generous spending package [$1.7 trillion]. An excuse for fiscal action [fighting climate change]. Automatic programs [sending checks to households as soon as a recession starts].

As you can see, the pros are on the case…

‘Don’t Fret About Debt’

These – and many other – preemptive stimulus plans were outlined in a recent Reuters article. The article, if you happened to miss it, was titled: In planning for next U.S. recession, economists say, don’t fret about debt. What to make of it?

The wonderful sinkhole legacy (admittedly this doesn’t matter, since we are all fated to burn to a crisp in 12 years anyway… or 18 months if you prefer. It depends on which eminent scientific authority one believes, Ms. AOC or Prince Charles). [PT]

Here at the Economic Prism we relish bumper sticker wisdom like we relish political campaign slogans.  A colorful mix of mindless absurdity appears when something is distilled down to several words or less.  Plus, when the expression rhymes… it is just the cat’s meow.

Without question, ‘don’t fret about debt’ is a fine – and poetic – example of everything that is wrong with everything. As far as we can tell, no one has fretted about the debt for at least a generation or two. In fact, the 21st  century has been one big fat debt binge.

The reality is the growth of federal debt has been out of control for decades.  The solution that is always repeated for reeling this back is that, somehow, the economy will grow its way out of it. This has yet to …read more

Future Object of Speculation? Precious Metals Supply and Demand



The price of gold dropped $16, but the price of silver was all but unchanged. Whereas last week we said:

“…the consumer goods stockpile stored in Treasury bonds (to extend our half sarcastic, half tongue-in-cheek analogy) increased this week.”

The 10-year note takes another peek at the wide spaces below its 50-day moving average. [PT]

Last week, it was the opposite. Consumer goods spilled out of the storage tank of Treasury bonds. The interest rate on the 10-year note ended the week at a level not seen since September 20. Those pesky apples and orange and gasoline and rent may have poured into crude oil. Or bitcoin.

Not to beat a dead horse, but we hope we have made it clear that assets are not stores of consumer goods, or purchasing power.

We also hope to make it clear that a price move higher does not compensate for a prior drop. Or in this case, a price drop of the bond (i.e., rising interest rate) does not compensate for previous price increases (i.e., falling interest rate). It just imposes capital losses on new investors, not necessarily the ones who made the capital gains.

The principal virtue of the unadulterated gold standard is not static prices. That’s neither possible nor desirable. The virtue is stable interest rates, and hence stable asset prices. And hence little opportunity to speculate outside of agricultural commodities which are subject to the weather.

We are far from that today. It is highly likely that in the restless churn of our markets, one price or another will jump higher. Perhaps that will be the price of gold?

Fundamental Developments

Read on for a look at the only true picture of the supply and demand fundamentals. But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio fell this week.

Gold-silver ratio, bid and offer

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Gold basis, co-basis and the USD priced in milligrams of gold

Uncanny how the scarcity (i.e., the co-basis) rose with the price of the dollar in gold (i.e., the inverse of the price of gold, in dollars). This usually indicates  repositioning by speculators.

In this case, the Monetary Metals Gold Fundamental Price, after falling the first half of the week, firmed up by $24 to $1,464.

Now let’s look at silver.

Silver basis, co-basis and the USD priced in grams of silver

In silver, the same thing happened to the co-basis, although the price didn’t move.

And like in gold, the Monetary Metals Silver Fundamental Price rose, …read more

US Money Supply Growth – Bouncing From a 12-Year Low


True Money Supply Growth Rebounds in September

In August 2019 year-on-year growth of the broad true US money supply (TMS-2) fell to a fresh 12-year low of 1.87%. The 12-month moving average of the growth rate hit a new low for the move as well. The main driver of the slowdown in money supply growth over the past year was the Fed’s decision to decrease its holdings of MBS and treasuries purchased in previous “QE” operations. This was partly offset by bank credit growth in recent months, which has moved to 6.6% y/y after being stuck below 4% y/y throughout 2018.

US broad true money supply TMS-2, year-on-year growth w. 12-month moving average. After establishing a new 12-year low at  1.87% in August, TMS-2 growth has rebounded to 3.09% in September. In 2000, the low in y/y growth coincided almost precisely with the peak in the S&P 500 index. The next major low was established in 2006, about one year before the stock market peak. It is worth noting that in both cases, money supply growth actually soared during the subsequent bear markets and recessions. This illustrates the fact that slowing and/or accelerating money supply growth exerts its effects with a considerable lag.

One factor in the jump in TMS-2 growth in September was the US Treasury’s General Account at the Fed. The Treasury is evidently rebuilding its deposits at the Fed since the most recent “debt ceiling” was removed.

Normally one would expect this to be neutral in terms of TMS-2 growth, as demand deposits of buyers of treasury debt should decrease commensurately.  However, after bottoming at minus 1.0% y/y in March, system-wide demand deposit growth has actually accelerated to 6.6% y/y in September.

The US Treasury’s general account at the Fed: after reaching a low of ~$125 billion in mid August, it has grown to ~$330 billion by the end of September.

Rebuilding the Treasury’s cash hoard will usually lead to a temporary liquidity drought. As we have previously discussed, the cash build-up beginning in August was quite likely one of the factors contributing to the recent repo market inconvenience.

Nevertheless, as the recent pace of demand deposit growth indicates, the effect is mitigated by accelerating bank credit growth and the fact that the Fed is expanding its balance sheet again.

As of September, growth in demand deposits and total bank lending has accelerated to 6% y/y and 6.6% y/y, respectively.

As an aside to this, the Fed’s balance sheet is actually expanding since July. In other words, the recent announcement of upcoming “reserve management/please don’t call it QE” activities seems to have been in reference to a process that has been underway for some time already. 🙂

Don’t call it “QE” – the Fed’s balance sheet flip-flops from shrinking to expanding.

Mind the Lag

As mentioned above, the effects of decelerating and/or accelerating money supply growth on the economy and financial markets tend to arrive with …read more

A Gain of 1,080% Annualized – One of the Strongest Seasonal Rallies is Starting Right Now

Bitcoin – An Exceptional Asset

When I first heard about Bitcoin (BTC) in May 2011, it was trading at 8 US dollars. Today, more than eight years later, BTC trades at around 8,000 dollars. A thousandfold increase! An investment of 1,000 dollars at the time would have resulted in a gain of more than a million  –  a dream result.

Bitcoin went from 10,000 BTC for a pizza to around 100 BTC for a Lambo in what appeared to be an unseemly hurry… [PT]

However, even an exceptional asset such as Bitcoin has its ups and downs – inter alia in terms of its seasonal patterns. And an exceptional seasonal trend lies directly ahead.

The Precise Annual Seasonal Pattern of Bitcoin

Let us take a close look at the seasonal pattern of Bitcoin.

The chart below shows the typical price pattern of Bitcoin in the course of a calendar year. The horizontal axis denotes the time of the year, the vertical axis the level of the seasonal index.

Bitcoin, annual seasonal pattern calculated over 9 years.  A strong seasonal rally begins on October 11

As the chart shows, there is typically an autumn rally in Bitcoin, similar to the one in the stock market. It begins on October 11 and ends on January 05 of the next year.

Optimal Seasonal Timing in Bitcoin

The average price gain achieved between October 11 and January 05 amounted to 78.83 percent. This is equivalent to an extremely large annualized gain of 1,080.82 percent.

Bitcoin Rallied in 7 out of 9 Cases

What happened in individual years? The following bar chart shows the return generated by Bitcoin between October 11 and January 05 in every year since 2010.  Blue bars show years in which positive returns were achieved, red bars show years that generated negative returns.


Bitcoin, return in percent between October 11 and January 05 in individual years since 2010.  Gains of up to 600% have been seen.

Blue bars obviously predominate. In this strong seasonal phase of just 86 days price gains of more than 200% were achieved on three occasions. One one these occasions – between October 11 2013 and January 05 2014 – a gain of legendary proportions was recorded. Bitcoin advanced by 624.30%!

Please note: nevertheless, I personally refrain from buying Bitcoin. I also do not consider Bitcoin to be money as defined by monetary theory,  as it is neither a commodity nor circulation credit. I rather regard Bitcoin as a kind of lottery ticket in a pyramid scheme. You are of course welcome to hold a different opinion, but I felt I should take this opportunity to inform readers of my stance.

BTC weekly since 2014 – also for the record: our view of Bitcoin is somewhat more benign than Dimitri’s – in fact, we do believe it has all the characteristics of money, even though it is not a generally accepted medium of exchange at the current juncture (as we have previously discussed, we consider …read more

Fed Chair Powell’s Inescapable Contradiction

Under the Influence


“This feels very sustainable.” 

– Federal Reserve Chairman Jerome Powell, October 8, 2019

Understandable confusion… [PT]

Conflict and contradiction.  These were two of the main themes reverberating around the world of centralized monetary planning this week.

On Tuesday, for instance, a novel and contradictory central banker parlance – “reserve management purposes” – was birthed into existence by Fed Chair Jay Powell.  We will have more on this later on. But first, to best appreciate the contradiction, we must present the conflict.

Free of government intervention, the economy and financial markets would get along within a low standard deviation. Extremes would appear from time to time.  But they would be quickly reconciled and balance would be restored within the normal distribution of the mean.

Free of government intervention, an agreeable stability would be maintained.  This can still be observed in remote areas; places free from the heavy hands of Washington, Beijing, and Brussels. For example, in remote areas, every village has an idiot. So, too, every idiot has a village.

Free of government intervention, near perfect harmony is preserved.  This is how the world should work.

Of course, how the world should work, and how the world actually works are dramatically different.  And how the world actually works, circa 2019, is under the extreme influence of central planners. Programs, policies, and procedures warp the bell curve, sending it askew.

Throw unrelenting central bank fake money credit creation into the mix, and things become lopsided to the extreme.  What’s more, the natural reconciliation process becomes overwhelmed with greater and greater issuance of credit.  The heat and pressure build until the whole thing melts down.

The End is Nigh

Over the last two decades we have conducted our own empirical research of the influence of central bank fake money credit creation. Our methodology is simple.  We observe the world about us – both good and bad.  When something cockeyed crosses our sights we zoom in for a closer look.

With our ears to the ground and our eyes scanning the horizon we ask two basic questions. Where is the money coming from?  Where is it going?  By following the money, some – but not all – aspects come into focus…

Million dollar shacks.  Unicorn money consuming vision companies valued at $47 billion. The S&P 500 at nearly 3,000.  Face tattoos.  Ghost cities.  Shale oil drillers that hemorrhage capital.  Junk bonds with negative yields.  Sovereign debt with negative yields.  Century bonds yielding 1.2 percent. Trillion dollar deficits.

Donald Trump.  Bernie Sanders.  Elizabeth Warren.  Nancy Pelosi.  Adam Schiff.  Hunter Biden.  Lockheed Martin.  The China Miracle.  AOC’s Just Society.  Boris Johnson.  Justin Bieber.  Micro-aggressions.  Soy lattes. And much, much more…

These are all fabrications and distortions of the mass money debasement of central bankers. Maybe some of these fabrications would still exist in a world with more honest monetary policy. But they would be less exaggerated and less destructive.

Repent, ye sinners. [PT]

Here, in the main, are the findings of our research…

Central bank fake money credit creation has distorted capital markets, and by extension the entire economy and culture, so …read more

Zugzwang – Precious Metals Supply and Demand


Respectable and Not so Respectable Assets

The price of gold went up 8 bucks, and the price of silver went up a penny last week. These were not among the capital assets that could be liquidated for greater quantities of consumer goods last week. Nor were equities.

A respectable, mother-in-law-proof speculation: the 10-year US treasury note. [PT]

However, the consumer goods stockpile stored in treasury bonds (to extend our half sarcastic, half tongue-in-cheek analogy) increased this week. As the yield on the 10-year note fell from 1.675% to 1.515% — almost 10% of the yield was sucked out of this bond — the price rose. It went from $130.39 to 131.91 (near futures contract).

Speculators this week forked over about 1.2% more capital for that same piece of paper, than they did last week. In a rational world, this would be a joke. People would be laughing, that in the deepest, most liquid bond market in the word, the price is so unstable!

If there were any merit to the idea of central planning (there isn’t), if the Fed had any legitimate mandate to fix a price (it hasn’t), it would be the price of treasuries. Of all the things that should be subject to unleashed speculation (no things should, though certain commodities are subject to production risk), the last thing in the financial universe that ought to suffer this malady is the asset deemed to be risk-free (it isn’t), and the basis of the monetary system!

Keynes smirked that not one in a million people could see the problem. That’s because they’re all wagering around the table, rolling the dice and yelling “come on, baby needs a new pair of shoes!”

J.M. Keynes in full smirk mode. Murray Rothbard had this to say about Keynes: “To sum up Keynes: arrogant, sadistic, power besotted bully, deliberate and systemic liar, intellectually irresponsible, an opponent of principle, in favor of short term hedonism and nihilistic opponent of bourgeois morality in all of its areas, a hater of thrift and savings, somebody who wanted to liquidate the creditor class, exterminate the creditor class, an imperialist, an anti-Semite, and a fascist. Outside of that I guess he was a great guy.”  It’s probably fair to say that Rothbard wasn’t the biggest fan of Keynes. Neither are we. In the past we have at times pondered how many decades of progress Western civilization has lost by dint of adopting the garbled economics and execrable statism propagated by Keynes, but if there had been no Keynes, someone else would undoubtedly have provided the political-bureaucratic classes with a “scientific” fig leaf justifying their depredations. [PT]

Not so many people bet “DO NOT PASS” (i.e. gold) last week. Who would be so antisocial, when the shooter has hot dice? OK, so the stock market didn’t go up. But bonds are a respectable speculation, that your mother-in-law would not worry what would the neighbors think.

Bitcoin is not a respectable bet (though it’s improving) and it increased the amount of groceries by …read more

Elizabeth Warren’s Plans to MAGA

21st Century Hooverville

There are places in Los Angeles where, although the sun always shines, they haven’t seen a ray of light in over 100-years.  There’s a half square mile of urban decay centered on the Union Rescue Mission at 545 South San Pedro Street, where depravity, chaos, addiction, insanity and archaic diseases multiply and ricochet about like metastatic cancer.

One of LA’s modern-day Hoovervilles in San Pedro Street…  In 2015 it was reported that Union Rescue Mission CEO Reverend Andy Bales had caught three different bacterial infections from merely walking around in the area. One of the infections rendered him unable to ever walk again (doctors eventually had to amputate his foot, which had fallen prey to flesh-eating bacteria). In short, this is not exactly the most hygienic and healthy environment. [PT]

Photo credit: Mike Blake / REUTERS

Here, at Skid Row, some 10,000 zombies live within massive homeless encampments among spoils of garbage, feces, rats, and rot.  With little reprieve, they roll around on a filthy ground cover composed of fragmented concrete, glass, stone, and gravel. Diseases that flourished in the Middle Ages, like typhus and flesh eating bacteria, infect these street dwellers – and those who try and help them – with remarkable efficiency.

Take Reverend Andy Bales, CEO of the Union Rescue Mission.  He’s a man with a big heart and a personal commitment to action.  His late father and grandfather lived homeless in a tent for many years.

Awhile back, while passing out water bottles to those he serves, Rev. Bales contracted three different deadly bacteria – E. coli, strep, and staph.  Sadly, this cocktail of toxic microorganisms relentlessly attacked his body, consuming his flesh. For Rev. Bales, his encounter brought him to an important choice: Your leg or your life?

Most days he now gets around in his wheelchair… propelling it up and down the street wearing bike gloves. Occasionally, he wears a prosthetic.  Still, with a warm heart and special wisdom, Rev. Bales continues on his rescue mission. Earlier this year, and after much field research, he offered the following insight:

“This place is like a Petri dish for disease.”

Reverend Andy Bales today, minus his right foot. [PT]

Photo credit: Danny Liao

We suppose District 14 council member José Huizar, the city official representing Skid Row, would agree. However, since a throng of FBI agents raided his office late last year, he has been fairly distracted. Go figure!

Gold old District 14 council member José Huizar (D), reportedly the “richest politician in downtown LA”, currently under investigation for corruption (along with other City Hall dwellers), harassment and assorted other allegations is no stranger to controversy – back in 2010 he was already hard-pressed to “explain the disappearance of $1.5 million from the Eastside pollution control fund”. Considering the degree of pollution in and around skid row, it definitely seems the fund didn’t keep it under control much. [PT]

Photo via Los Angeles Downtown News

Giant Shams

Skid Row, however, is merely …read more

Repo Quake – A Primer

Chaos in Overnight Funding Markets

Most of our readers are probably aware that there were recently quite large spikes in repo rates. The events were inter alia chronicled at Zerohedge here and here. The issue is fairly complex, as there are many different drivers at play, but we will try to provide a brief explanation.

There have been two spikes in the overnight general collateral rate – one at the end of 2018, which was a first warning shot, and the one of last week, which was the biggest such spike on record, exceeding even that seen in the 2008 crisis.

The funding stresses in overnight repo markets were the culmination of a problem that has been simmering in the background for quite some time. It was partly the result of new banking regulations implemented after the GFC (Basel III), the change in money market regulations, the decrease in excess reserves due to QT (as well as for other reasons), a government that is spending like a drunken sailor, and last but not least, assorted yield curve inversions.

In essence, the problem is that there is a surplus of treasury collateral looking for short-term funding, and not enough liquidity. But how did this situation come about?

Relieving a Collateral Shortage

Readers may recall that we have previously discussed the Treasury’s general account at the Fed. When money market fund regulations changed in 2016, one of the problems was that demand for treasury bills was set to soar, as MM funds repatriated money previously invested in commercial paper (mainly issued by European banks) in the euro-dollar market for the yield pick-up.

In other words, the problem at the time was the opposite of that prevailing currently – there was not enough treasury collateral, particularly of the short term variety.  The Treasury inter alia over-issued t-bills as a counter-measure. In fact, the situation played into the hands of the Treasury, which wanted to shore up its cash position anyway so as to increase its flexibility during the recurring debt ceiling circus in Washington (when whichever party is not running the administration pretends to care about government debt).

It evidently did so again in early 2018, in response to corporate repatriation flows after the tax reform (US companies repatriated euro-dollars which they had previously lent to non-financial corporations in Europe and as a result, demand for t-bills increased once again).

US Treasury, general account at the Fed. There were large increases in the Treasury’s cash hoard in 2016 and 2018, which were aligned with the change in MM fund regulations and the repatriation of corporate funds after the tax reform. This was probably not a coincidence.

However, this was not the only thing that happened. In 2015, one year before MM fund regulations changed, banks needed to downsize their balance sheets to comply with the Basel III supplementary leverage ratio (SLR). The Fed supported their effort to shed deposits (and concomitantly, excess reserves) by uncapping the previously capped reverse repo facility …read more

The System Scrapes By – Precious Metals Supply and Demand


An Accident in Waiting

The price of gold dropped $20, and silver 43 cents. For reference, $20 was once worth just about an ounce of gold. Dollar was a unit of measure, a weight of gold equal to 1/20.67 ounce of fine gold.

A gold certificate from the time when the dollar still represented a fixed weight of gold [PT]

Today, it is an irredeemable currency, defined not as a unit of weight but as a unit of central bank liability which is backed by government debt, which is payable in this unit. The price of this unit is constantly changing, and mostly dropping. It is currently 1/1497 ounce.

It has dropped from 0.048 to .00067, which is a loss of over 98.6%. Gold, not consumer prices, should be used to measure changes in economic value over long periods of time. The cost of producing everything is vastly lower today than it was a century ago. Even with the added useless ingredients.

So using consumer prices to measure the dollar—which are themselves measured in dollars—is rather like using a falling chunk of wood to measure the velocity of a falling brick. The brick may be falling faster than the wood, but one should use sea level as the objective reference for altitude. And gold for economic value.

Anyways, stress in the repo market is not showing up as fear of counterparty risk. If it were, we would expect to see backwardation rear its head in the gold market. Nada. Does that mean that there aren’t systemic problems, built up over a decade of zero interest rates and other new perverse incentives, piled on top of all the perverse incentives that existed prior to—and caused—the 2008 crisis? Oh, there are problems aplenty.

It is just that market participants don’t fear them imminently. This may be because they expect the Fed and other central banks to jump on top of each incipient crisis, quashing it before it can blow up a major financial intermediary.

Of course, central bank intervention can no more prevent bank insolvency than jamming pennies in the fuse-box can prevent circuit overloading. It does two things. One, it postpones the problem. Two, it ensures the problem will be larger or even systemic. Instead of burning out a fuse, the penny approach causes the house to burn down.

Market participants do not look so far into the future. As Chuck Prince, then CEO of Citigroup said on July 10, 2007, just over a year before the crisis went thermonuclear:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Today, everyone believes the Fed will be faster to react and will act more decisively than it did back then. All taboos have been shattered, it has no reason to hesitate as it did before 2008. It is possible that there will be no more crises until the dollar and the monetary system collapse. Or, if …read more

The Inexorable Final Collapse


Groping in the Dark

This week central planners pursued their primary mission with steadfast conviction. They planned. They prodded. They prearranged tomorrow to save us from ourselves. Some also grubbed a little graft for their trouble. Other central planners took to debasing the dollar to price fix the federal funds rate within a narrow band of tolerance.  What in the world do they think they are doing?

Central planning committee in the analysis and forecasting phase… [PT]

We know from our own everyday experience that people make choices. What’s more, these choices do not occur in isolation.  There are a myriad of influences and constraints factoring into the countless choices people make as they go about their day.

One person drives their car to work.  Another takes the train.  While a third walks.  These choices may be individual preferences.  But they’re also subject to other factors – like proximity to work or the train station, the price of gas, the cost of parking, and much, much more. Perhaps central planners can account for some of these influences and constraints.  But not all of them.  Not even half of them.

People also behave in seemingly unexpected and erratic ways. They make irrational decisions. They run on emotion and ego over logic and sound judgment.  Some choose vanity over humility.  Others will cut off the nose to spite the face. How is a bureaucrat in Washington or Sacramento supposed to account for all of these unknown and illogical contingencies?

The Plan: implementation phase [PT]

When it comes to credit markets, the planners are especially effective at making an awful mess.  Namely, when they stretch out the currency, and supply the big banks with cheap and plentiful credit, they reward undue risk.  They paper over mistakes.  They also compel financial markets and the overall economy to an ever more perilous state.

Hence, when the credit market breaks, and the planners’ plans fail to compute, collapse and destruction are the consequences.  We will have more on this in just a moment – including an update on the latest Fed fabrication.  But first, for purposes of improvement and edification, we offer the following cautionary tale of collapse and destruction…

Death of Tubby

The Tacoma Narrows Bridge was a suspension bridge that connected Tacoma and the Kitsap Peninsula, spanning the Tacoma Narrows strait of Washington’s Puget Sound.  When it opened to traffic on July 1, 1940, the bridge included the third longest suspension span in the world.  Regrettably, the bridge was doomed long before the first vehicle ever traversed across it.

The original Tacoma Bridge in its all too brief heyday. It stayed forever young… as did Tubby, may he rest in peace. [PT]

The original bridge design – a conventional proposal – was scrapped in favor of something cheaper and innovative.  Several years earlier two hotshot engineers, Leon Moisseiff and Frederick Lienhard, published what was thought to be the most important theoretical advancement in bridge engineering for at least a decade.

According to their novel theory of elastic distribution, the stiffness …read more

Curious Events in Risk-Free Collateral-Land – Precious Metals Supply and Demand

Liquidity Shortage

Last week the price of gold rose $28, and silver $0.53. But the prices of the metals was not the big news last week. The price of repo — a repurchase agreement, to sell and repurchase a treasuries — skyrocketed. Banks were thirsty for liquidity, and only cash can quench it.

Last week’s “oops” moment in repo land as the overnight general collateral rate briefly soared to 10% (we will soon publish a detailed summary of the sequence of events that has led to this hicc-up). [PT]

Just another day in the fool’s paradise of centrally planning an irredeemable currency and its interest rate. Just another crisis, to be tamped down by the central planner. Keep Calm and Carry On.

This is a curious phenomenon, where the market is offering a risk-free trade to give up one’s dollars and get them back tomorrow plus a return. Yet no bank or other trader is taking the bait. The problem was not a shortage of trust, but of liquidity.

When trust in the system collapses, then gold will withdraw its bid on the dollar (which most people will wrongly perceive as the disappearance of offers to sell gold). This will be permanent gold backwardation.

So the question that should be on everyone’s mind is: did gold drop into  backwardation this week? Or silver? Read on to see graphs of the gold and silver co-basis (backwardation is strictly when the co-basis > 0).

Fundamental Developments

Let us look at the only true picture of the supply and demand fundamentals. But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio fell (the chart values are Arizona morning time, whereas we are discussing the weekly close).

Gold-silver ratio, bid and offer

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Gold basis, co-basis and the USD priced in milligrams of gold

Not even the near contract is in backwardation. And the gold basis continuous is not in backwardation either. They are both around -2%. Conversely, the basis is just a bit under 2%. Gold is so abundant, that one can buy the metal and simultaneously sell it forward, to earn an annualized return of around 2%.

Whatever the ramifications of the repo crisis, they do not yet include systemic trust concerns. We do not expect the repo problem, in itself, to lead to such concerns or to gold backwardation.

The Monetary Metals Gold Fundamental Price fell $6, to $1,492.

Now let’s look at silver.

Silver basis, co-basis and the USD priced in grams of silver

…read more

Fiat Money Cannibalization in America

An Odd Combination of Serenity and Panic

The United States, with untroubled ease, continued its approach toward catastrophe this week.  The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement.  Yet, on the surface, all still remained in the superlative.

S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]

Stocks smiled down on investors from their perch upon what Irving Fischer once called “a permanently high plateau.”  As of the market close on Thursday, the Dow Jones Industrial Average held above 27,000, the S&P 500 above 3,000, and the NASDAQ above 8,000.  401k accounts, to the delight of working stiffs of all ages, origins, and orientations, are swollen beyond expectations.

Below the surface, however, the overnight funding market was subject to much weeping and gnashing of teeth.  Sometime between Monday night and Tuesday morning the overnight repurchase agreement (repo) rate hit 10 percent. Short-term liquidity markets essentially broke.

After several technical glitches, the Fed executed its first repo operation in a decade – $53 billion – to keep the interbank funding market flowing.  Zero Hedge documented the chaos real time. 

This was followed up with additional repo operations on Wednesday and Thursday – at $75 billion a pop, and both oversubscribed.  Perhaps Fed repo operations will be a daily occurrence, at least until the Fed launches QE4.

US overnight repo rate – as Fed chair Jerome Powell remarked: “Funding pressures in money markets are elevated this week”. Evidently, nothing escapes his eagle eyes. [PT]

At the same time, the effective federal funds rate – the upper range limit of the federal funds rate – continues to push above the rate the Federal Reserve pays on excess reserves (IOER).  In other words, the Fed’s primary tool for price fixing credit markets is not behaving according to plan.  Greater Fed intervention will be needed to keep things in line.

The fate of Fed projections… this may explain why the Fed was apparently surprised by the recent developments in overnight funding markets. [PT]

Centrally Planned Credit Markets

No doubt, these are the sorts of pickles that central planners invariably find themselves in.  At the heart of the matter is lack of cooperation. The planners push credit markets one way and the credit markets react in unanticipated and unexpected ways.

Remember, in centrally planned economies, supply and demand are not allowed to naturally adjust and equilibrate.  This often results in supply shortages and strange phenomena like store shelves with potato peelers and no potatoes.  Centrally planned credit markets are no different.

Through its interest rate price control policies the Fed creates an environment for liquidity mismatches (i.e. supply and demand disparities). Then the Fed must intervene with even greater price controls to arbiter them. This in turn compounds the mistakes; layering and levering them up to the extreme.

Somehow the clever fellows, as they devise plans upon plans from cushy …read more