“Tightening” Slugfest Erupts behind the Fed

July rate hike “in the bag” for Canada. Bank of England, ECB scramble.

It has been a veritable slugfest by central bank chiefs today and yesterday: Fed Chair Yellen, ECB President Draghi, Bank of England Governor Carney after his chief economist suddenly turned hawkish last week, and Bank of Canada Governor Poloz. And there are rate hikes in the air.

Bank of Canada’s Poloz didn’t want to “prejudge” the rate decision in July, he told CNBC yesterday, but “extraordinarily low interest rates” – the BoC had cut twice in 2015 in response to the oil bust – “have done their job.” And “certainly we need to be at least considering that whole situation now that the excess capacity is being used up steadily.”

Chief economist and strategist Stéfane Marion and senior fixed income economist Paul-André Pinsonnault, at Economics and Strategy, National Bank of Canada, saw it this way in their note: “July rate hike: It’s in the bag.”

Mr. Poloz went out of his way yesterday during an interview with CNBC to keep the July interest rate decision meeting “live” by downplaying last week’s feeble CPI report to instead emphasize his more bullish outlook for the Canadian economy.

With the Bank of Canada acknowledging that most of the transition is completed and reiterating its expectation of above-potential growth in the coming quarters, the current stance of monetary policy is no longer justified. The time has come to remove the 2015 rate cut insurance policy and return the overnight rate to 1%.

A rate hike by the Bank of Canada on July 12 appears to be a foregone conclusion (it would take a disastrous jobs report on July 7 to prevent such a move). We think that this will be followed by another rate hike in October.

Poloz also has his eyes on the Canadian housing bubble. In April, he warned that home prices are in “an unsustainable zone,” that the market “has divorced itself from any fundamentals that we can identify,” that there was “no fundamental story that we could tell to justify that kind of inflation rate in housing prices,” and that it was time to “remind folks that prices of houses can go down as well as up.” So one more reason, a huge reason, to tighten.

ECB President Draghi added fuel to the fire on Tuesday. Earlier this year, the ECB tapered its QE program from €80 billion a month in asset purchases to €60 billion. So Draghi’s assessment yesterday that “deflationary forces have been replaced by reflationary ones” spooked markets. Was he preparing the markets for cutting QE further and raise rates?

After the ECB saw the whirlwind that his statement had caused, senior officials came out today to calm the markets, concerned that investors had “misjudged” Draghi’s carefully nuanced speech and had responded too forcefully. Draghi must have thought that his message, telegraphed in vague ways before, should have been baked into the prices, but it wasn’t.

Bank of England’s Carney caused the pound to leap today when he said that continued growth in the UK would eventually lead the BoE to raise rates, or as he said, that “some removal of monetary stimulus is likely to become necessary.”

At its last meeting, the Committee voted 5-3 to keep rates at 0.25%. But a week ago, BoE’s dovish chief economist, Andy Haldane turned hawkish and said he’d seriously considered voting for an interest rate hike in that meeting, thus opposing Carney. A rate hike “would be prudent relatively soon,” he said. “Certainly, I think such a tightening is likely to be needed well ahead of current market expectations.” So at the August meeting?

Carney’s words today, suggesting that he might support a rate hike, were seen by the markets that the first rate hike has now moved closer.

Fed Chair Yellen said absolutely nothing to dispel the notion that the Fed is on a mission to remove accommodation by raising rates and unwinding QE. Speaking in London yesterday, she reiterated that the Fed would continue to raise interest rates “very gradually” and that the $4.5 trillion in securities on the Fed’s balance sheet as a result of QE would be unwound “gradually and predictably.” The Fed already announced the nuts and bolts of that plan, including how it will be phased in. Now it’s just a question of when it will start – my guess: in September.

So this is now the pattern: The Fed is well ahead of the other central banks, with four rate hikes under its belt and the QE-unwind planned in detail and ready to be kicked off as soon as September. And the other central banks are now beginning to fall in line.

The Bank of Canada never engaged in QE and its policy rate is currently 0.5%. It might hike rates twice this year, and the Fed once more. This would narrow the gap to about a quarter point. The BoE and particularly the ECB are still miles behind. The ECB is likely to lag the furthest for the longest, given the precarious nature of the sovereign debt crisis that QE has only papered over. But it looks like the tightening era has begun, though markets are far from having come to grips with it.

The Fed’s QE-Unwind may start in September. Read…  Rising Wages Scare the Fed: “We Need to Get on with This”

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  79 comments for ““Tightening” Slugfest Erupts behind the Fed

  1. George C says:

    “The borrowing and spending binge by Canadian households, businesses and governments (all levels) continues unabated. Growing the debt in the economy significantly faster than the economy itself grows seems to have developed into a way of life in Canada.”

    Canadian total (household, business, and all levels of government) debt numbers as of the end of March, 2017


  2. KSFO says:

    Draining liquidity actually has a sound, its a sound similar to air escaping from bubbles of all sizes.

  3. IdahoPotato says:

    Now that the Fed is determined to tighten, other central banks worry about more capital flight to the stronger dollar and higher Treasury yields.

    They’re stuck between a rock and a hard place.

  4. Lee says:

    Here in Oz a former member of the RBA is touting 8, yep 8, interest rate increases in the next two years.

    It isn’t going to happen.



  5. Wilbur58 says:

    Oh my god… .25% increases in interest! Like, oh my god!!!

    What ridiculous theatre it all is.

    • raxadian says:

      Yeah it sounds ridiculous doesn’t it? But then the market is run by bots, some bubbles are gonna pop and nothing can stop it, just delay it at most.

    • Wolf Richter says:

      .25% x 4 = 1%. That already happened in the US. And more coming. Plus QE unwind. I know, it’s like watching paint dry, but it’s happening…. And not just in the US.

      • Wilbur58 says:

        Why aren’t savings accounts reflecting any of the increases we’ve seen thus far?

        • Wolf Richter says:

          I’ve seen some increases. They’re slow in the coming, as always. American Express Bank for example offers 1.05% on savings accounts. Goldman Sachs Bank offers 1.20% for online savings accounts. Bankrate shows a number of banks offering over 1% on savings. Credit Unions can probably do better. It’s out there, it’s slowly coming.

        • Lee says:

          Here in Oz:

          “The cuts come as new figures from financial comparison site Mozo show all of the big four banks have cut interest for online savings accounts by more than the 0.5 percentage point reduction in official interest rates over the past year.”

          So the banks here have increased rates on interest only loans, cut rates on variable rate mortgages by less than the RBA cuts, and cut rates on savings by more than the RBA cuts.

          All straight to their bottom line.



        • Lance Manly says:

          You are probably better off looking at the 2 year treasury rate https://ycharts.com/indicators/2_year_treasury_rate

        • Kent says:

          “I’ve seen some increases. They’re slow in the coming, as always.”

          I’m a little troubled by this conceptually. If a bank is willing to pay more for deposits in any form, then it must have a greater demand for money. Which should mean borrowers are demanding more loans and are also willing to pay higher interest rates.

          However, with QE, banks are theoretically sitting on trillions in excess reserves, which is free money to the banks. But, the Fed pays interest on the excess reserves, so reducing them, using them to settle loan issuances, reduces that income source.

          So, if I’m a bank, and trying to determine how to minimize my costs of funds, then my choice is using excess reserves and forgoing that income, or buying deposits with an interest rate that attracts them. Following that, it would seem that the interest rate paid by the Fed on my excess reserves would set the ceiling of the interest rate I’m willing pay savers. Otherwise, it would always be cheaper to use my excess reserves.

          Just looked it up and that rate is 1.25%. So I wouldn’t expect banks to pay any more than that.

          Anybody follow that reasoning? Anybody know if that is right or wrong?

        • RangerOne says:

          My captial one 360 money market just moved it’s rate from 1.00% to 1.10% effective yesterday.

          Would be nice to see a day where my savings went to 2%.

          Their 5 year CD is down at 2.1% though from a peak of 2.3%.

        • Bobber says:

          I believe the brokered CDs offered by investment banks such as TD Ameritrade trade at the current short-term interest rate. For example, you should be able to find a brokered 5 year CD that pays 2.5%. The same CD’s issued directly by banks are way behind the Fed and pay less than current rates, around 2%.

        • Wilbur58 says:

          Thanks all for the responses. I guess it’s time to check in with my bank for 1%.

        • RD Blakeslee says:

          Lee Bank offers 2.5% interest on a checking account up to 15K and 1.75 % on a linked savings account up to an additional 15K.

          One has to jump through some hoops (such as dozen purchases using the checking account per billing cycle), but the requirements fit normal personal spending practices and aren’t onerous, IMO.

        • Spanky Bernanke says:

          Yes, IR are coming up, but why in God’s good name would you trust your discretionary with a TBTF bank? Especially, when you can speculate in crypto and make a few HUNDRED percent?
          I find it all laughable–eight years later and suddenly rate increases and even selling that crap back into the market…they have ALL gone plain stupid. This pop will no doubt go into the history books termed “The Stupid Bubble”. Central bankers couldn’t have made more stupid decisions over the past 9 years.

      • d says:

        Wolf you can also look at it the other way that’s 400% increase in interest rates in a 18 month’s.

        Expressed as a %, its rather a lot.

        And long overdue.

        IMHO the Qe unwind will bite harder than 3% (App) interest rate by end 2019. As it will reduce the volume of cheap money available, so tighten some very sloppy bending criteria in the first tier lenders.

        Of course people with “contacts” can always borrow from china. They are still giving the stuff to foreign borrowers in beijing

    • nick kelly says:

      It’s .25 % on ten times as much debt. Or the equal of a 2.5 % bump back in the good ole days.
      Come up to speed.

      • SPOCK says:

        Nice analogy nick!

        I like it.

        .25% on 250k (in 2017) is the same as 2.5% on 25k (say in 2009?)

        The problem is, 250k is a whole lotta debt that you can’t pay off on a salary of 30k.

        For CANADIANS, some are starting to understand this “new math” and are wondering what the hell did they get themselves into.

    • SimplyPut7 says:

      Many people bought $1 million to $3 million dollar homes, some as much as $4 million and $5 million, based on the equity in the home they were selling to move into the new home. They then borrowed against the home using a home equity line of credit (HELOC) to buy condos, houses in new subdivisions in hopes to flip the property and make a profit. The market just stopped mid April 2017, very few sells above $1 million, even more rare are homes selling above $2 million.

      If rates start to go up, on a variable mortgage that’s an extra $2,500 – $12,500 per rate hike on the mortgage and the HELOC which has the condos, houses and other unnecessary items bought against the value of the home.

      Many people who bought these homes were middle class people. They don’t have the money to pay an additional 4%-10% of their income on housing expenses every time rates go up 0.25%.

      • Bobber says:

        Why not, if it’s heads you win, if it’s tails you declare bankruptcy and start the game again in five years. The banking industry is to greedy to stay away from credit risks. They’ll be lending to you again in five years whole heartedly, and the Fed government may even guarantee your loans.

        • SimplyPut7 says:

          Bankruptcy is 7 years in Canada and most mortgages are recourse loans. I’m not sure how these flippers/ speculators/ leveraged home owners would feel about losing everything.

          Canada is not like Florida, they would throw you out of your house and take all of your assets if you default on your loan. You won’t even qualify for a cell phone plan if you are bankrupt. The only credit the person will have access to for the next 7 years are prepaid credit cards.

          Also it’s only 2 cities (Vancouver and Toronto), and their surrounding areas that would be seriously affected by interest rate hikes, many other housing markets in Canada have corrected years ago, the rate hike won’t hurt them as much

        • nick kelly says:

          I’ve been a realtor in BC for a number of years and saw numerous people lose their houses in the 80’s crash. Some of them were people I knew well. I’ve never heard of a bank pursuing recourse after a foreclosure.

          There is at least one explanation for this: the persons most likely to lose their houses would have put less than 25 % down and would have had to pay a mortgage insurance fee to CMHC (now just CHC)
          So the bank didn’t take the hit.
          I also know very well a former girl friend who declared bankruptcy and got a mortgage less than 5 years later.

        • SimplyPut7 says:

          I live in Ontario in a house that was foreclosed on in the mid 2000s, the mortgage on the foreclosed house was greater than the sold price of the home. The people the bank foreclosed on fled, and the bank continued to look for the people for years after the sale of the house to collect the difference.

          Some of the things I have seen bank/private lender employees do, probably would not happen in a stable or declining housing market. Rising housing values and easy credit probably helped your former girl friend be a good candidate for a new mortgage.

      • Alistair McLaughlin says:

        Exactly. This bubble has pulled all sorts of people into the RE market, including those of limited means and limited market savvy who really have no business playing the property invest… I mean – speculation game. And the ones most recently succumbing to the siren call of apparently endless profits in real estate – who got in right at the top – will be the first ones crushed. The weakest are always the last ones in and the first ones trampled when the herd stampedes for the exit. I’m not looking forward to it. Expect plenty of crying and gnashing of teeth as they blame the “stupid government” or the “stupid Bank of Canada” or whomever for their own short-sighted greed. OK, I am sort of looking forward to it.

        • Roger says:

          Artificially low interest rates cause mal-investment and irrational exuberance. The home prices will find equilibrium with the “How much can you afford to pay per month?”

          I love it when you go to buy a car and they won’t tell you the price but will adjust the loan terms to match what you can “afford to pay”…3 year loan terms become 5 year terms then 7 etc. When interest rates are high they make the house price lower, otherwise nobody can buy and you cannot have that.

          The FED has to know they are popping the bubble, unfortunately the ultra low interest rates have crushed retired seniors. Kind of hard to live on the interest when it is so low you end up using the principal or worse fund managers go into ultra risky investment schemes searching for yield.

          Junk rated mortgages repackaged as AAA securities and sold into an unsuspecting market anyone? Is that deja vu I hear at the front door?

      • RD Blakeslee says:

        IMO, Anyone who leverages to that extent without appreciating the downside risk will go bankrupt, sooner or later.

    • MC says:

      You can still buy some junior bonds from a technically dead Austrian or Italian bank yielding all of a pricely 5.5% if you are really so starved for yield.

      Joking aside when not even years of literally free money (see TLTRO) and the most ferocious yield repression the world has yet seen could save a growing list of European banks from a tragic and expensive (for the taxpayer) demise, perhaps it’s time to pause and reflect.

  6. R2D2 says:

    Probably bankers and their buddies have unloaded as much assets as they could to suckers, and no matter how much more easing they do, they can’t find that many suckers anymore.

    So, they start the next phase; pop the bubbles so that the likes of Warren Buffet can buy assets back at pennies to the dollar.

    • Hiho says:

      That is exactly what I was thinking, insiders have already dumped their shit to some random suckers, so now they have told their pet central bankers that it is time to restart the game

    • Alistair McLaughlin says:

      Never ascribe to a conspiracy theory that which can be explained by basic desperation, incompetence and inertia. I doubt there was ever a concerted effort to inflate bubbles only to pop them for fun and profit. Rather, these are merely the unintended consequences – however cataclysmic – of policy makers, politicians and central bankers who believed in their own omnipotence and swallowed their own BS for far too long.

      There was no shortcut back from the brink of the 2008-09 GFC. But they believed they could lead us to the promised land anyway, and pulled out all the stops in trying to do so. Much like the desperate, disoriented man lost in the forest, who sets out on foot only to walk in a giant circle. He ends up even more exhausted, hungrier, colder, and exactly where he started. We are now very close to being back where we started a decade ago, only with higher debt levels and even more hidden risks than before.

      • Smingles says:

        “Never ascribe to a conspiracy theory that which can be explained by basic desperation, incompetence and inertia.”

        Great post. I yawn and tune out when people start talking grand conspiracies from the evil bankers.

        The Fed is not some nefarious institution; they’re just incompetent. They’re professional economists trying to manage a chaotic system with non-chaotic models. They have failed in the past, they are failing in the present, and they will fail in the future.

        It’s as simple as that.

        • R2D2 says:

          And simply go to sleep when simple minded people simply ignore all the facts regarding how the so called Fed was forced upon the American people. Greed and incompetence do have some effect, but the 600 gorilla is how all the money printing benefits only a handful of people. Wake me up when you are done with your ranting.

        • Hiho says:

          So insiders do not exist, neither corruption nor vested interests.

          Yeah you had better go to sleep. Dude.

      • RD Blakeslee says:

        Exactly right, except “us” and “we” have to be qualified: Some of us never bought the monetary and fiscal shenannigans of 2008-9 in the first place and followed our own drummers steady on.

      • Steve says:

        Ah risk! To be mitigated, to be transferred BUT NEVER to be eliminated.

        Only the hubris of bankers actually believe they can defy mathematics and eliminate risk through fancy machinations of finance and accounting.

        Just can’t fix stupid.

  7. Jim Graham says:

    “”suddenly turned hawkish last week””

    Eagles and larger hawks eat the “hawkish” ones.

  8. Maximus Minimus says:

    Heard a joke recently: “What is the difference between metastatic cancer, and the Great Canadian housing bubble”?

    Metastatic cancer spreads from the periphery to vital organs, the Canadian housing bubble the other way round.

  9. ML says:

    Next month a savings account that I had have with my bank expires. The bank has been oaying me a fixed 2.15% net of tax for the last 4 years. The bank wanted my money when I opened the account. Now it does’t. It can get the money cheaper from the wholesale money markets. I am being offered 0.5%

    I and millions of others have resisted the encouragement to spend savings to help prop up the economy. Instead the economy has had to rely on people that don’t mind getting into debt.

    Perhaps if the authorities did’t wake up to smell the coffee the economy wouldn’t be run on stimulants. Which is the long run can only end up inflicting self-harm.

  10. nick kelly says:

    Well ya know what I’m going to confess here- if I were Yellen ( in her position that is ) I don’t know what I’d do.
    For every argument for tightening, you can make one for caution.

    It also seems that almost perversely, every time it looks like the Fed might get a chance to do some ‘normalizing’ , an external factor intervenes. The China stock market crash (mid 2015)

    I have no doubt that China asked the Fed to hold off, which given the Chimerica relationship. was heeded.

    Or Greece, or Italy or Spain…threatening… something.

    The latest? The sudden unexpected crash in oil, a possible harbinger of deflation.

    One of the differences between inflation and deflation (which the Fed knows all too well): inflation takes a while, deflation strikes like a rattlesnake.
    It took 2 years to drive the stock of White Sewing Machine Company, a reputable real manufacturer (not a paper Trust) to 48 dollars a share. It took a week in 1929 to take it to a dollar.

    Once people run from the theater to that tiny EXIT window called ‘CASH’ we will find out how small that window is.
    That is what the Fed must avoid.

    So if you had Yellen’s job- do ya feel lucky?

    • Alistair McLaughlin says:

      Fear of deflation has never been warranted. In fact, fear of deflation is largely what got us into this mess.

      Deflation is the logical and necessary end of very bubble. It’s the chemo that purges the cancer. That the chemo itself can kill the patient is a risk that must be taken.

      • nick kelly says:

        I will agree with you to this extent: It was fear of recession that got us here. Recessions are part of the normal cycle, but Greenspan decided to end them. I can still remember the announcement that he had tamed the economic cycle and thinking ‘oh oh’
        Ridiculous cuts for the dot,com crash and Y2K etc.

        It is recessions that are the natural healthy way to cure bubbles.

        Deflation is another matter. Or to chime in with your analogy, better to stop smoking and lose weight and avoid cancer and chemo.

      • RD Blakeslee says:

        Not only that, but those who saved and were rewarded with an increase in its valuation should no longer be pariahs.

        But we can’t win, if the opinion of the sheep affects us:

        We were “lucky”.

        We didn’t “Deserve” it.

        This or that “disadvantaged” group should have been sustained (somehow) instead.

    • Smingles says:

      Agreed with everything you said.

      There’s a lot of internal debate about whether the LAST rate hike was even appropriate, let alone whether they can afford to raise rates again this year.

      Kashkari is the Fed heel, and although you don’t hear it, he himself has said that many more Fed governors agree with him but don’t want to upset the Yellen narrative– yet.

      If inflation remains subdued, I suspect you’ll see that crowd publicly grow, and I wouldn’t bet on any more rate hikes this year.

  11. Flying Monkey says:

    The ECB will drag its feet with the Euro rising in light of US tightening. It wants a cheap Euro. It is puzzling why the Euro gains in light of US tightening; It should be doing the opposite if the ECB is really doing nothing.

    • Smingles says:

      Nothing moves in a straight line; if you believe the dollar should be strengthening, this price action is actually a perfect setup to buy dollars / sell euros. Very rarely is the obvious narrative (Fed raising rates, dollar should strengthen) the obvious trade until after the weak hands are shaken out.

      I’ve been patiently waiting to go long USD vs. EUR, as I believe the dollar will end up closer to $1.05 than $1.20 by the end of the year, but I’m looking at $1.15/1.16 as a better entry.

  12. glen charles says:

    how about x8 .25% rises within a 2 year time frame?
    the next two years,
    this type of propoganda will rapidly alter consumer spending patterns,
    doesn’t mean the saving will automatically go toward paying down existing debt either,
    this entire period has been described by some of the brighest about as a unprecedented experiment,
    going the other way must be the same,

    • Wolf Richter says:

      The Fed has imposed an unprecedented period of “Financial Repression” on the US. After the rate hikes, we’re still under that regime, but somewhat less so. I’m not sure we’ll ever fully emerge from it. But it looks like it is trying to back off its financial repression.

  13. SimplyPut7 says:

    I don’t know if Poloz is serious about raising rates. Him all of a sudden becoming hawkish is similar to when Yellen stated for years she was getting ready to raise rates and then all of a sudden did 3 rate hikes.

    While I’m glad the US was able to do raise rates without any markets tanking. In Canada, we have many properties were purchased with variable rate mortgages. If we really do have 2 rate hikes in a period of 6 months, that would slow the housing markets in Toronto and Vancouver quickly. As well as expose some of the fraud in the housing market that may not be easily buried with a settlement like Home Capital Group.

    The rate hikes could also have unintended consequences similar to the foreign buyers tax and the BC home ownership and equity partnership. Home prices for expensive homes dropped while lower priced homes increased, causing property taxes for lower income homeowners to increase and higher income homeowners to decrease.

    I doubt many people in Canada believe him or else they would stop buying houses and wait for the rate hikes to slow down before buying and moving into a more expensive house.

  14. Meme Imfurst says:

    Markets, banks, companies, by God everything, I mean everything is now run by unseasoned ‘experts’ who have little understanding of pain or very short memories. Either they are financially insulated from it or are part of ‘the things are different now’ crowd that really do believe they can control destiny or exempt from it. If you didn’t participate in this new ‘money wealth game’ you were made to feel stupid, a looser.

    Fate can be very crewel for foolish confidence and wreck less behavior. Time will tell……

    • RD Blakeslee says:

      “If you didn’t participate in this new ‘money wealth game’ you were made to feel stupid, a looser.”

      One of the advantages of living in your own little fiefdom outside which their aren’t any other inhabitants within a mile: Their opinions are lost in the wind …

    • Lee says:

      “I mean everything is now run by unseasoned ‘experts’ who have little understanding of pain or very short memories. ”

      You mean like iron ore futures jumping by 20% in a short period of time from its 2017 lows going up 10 of the last 11 trading sessions based on ‘hope’ that China will do something and the recent jawboning by the Premier at the same time stocks at Chinese ports are sitting around record levels of 140 millions tonnes with shipments out of Australia increasing and hitting records?

      Or oil having a good run despite global floating storage being the highest since 2010 and record inventories in the USA?

      Who cares about fundamentals when there is hype and hopeium.

  15. kam says:

    The Fed and the BoC have done their job. They have transferred income and wealth from the bottom 90% to the top 10%. Financial assets have exploded in value. Reckless spending on stupid stock market companies have peaked. And the economy has stagnated.

    If you take “Government” growth out of GDP, the economy has gone backwards.

    Now that the patient is dead, the morphine drip is being shut off.

  16. walter map says:

    The ‘tightening slugfest’ has started — and markets don’t know what’s about to hit ’em

    “It looks like the tightening era has begun, though markets are far from having come to grips with it,” says financial blogger Wolf Richter for our call of the day.


    Our host is a star. But everybody already knew that.

    • jb says:

      booyah Wolf ! The large scale financial media outlets are recognizing excellent journalism . Congrats .

  17. mean chicken says:

    “And there are rate hikes in the air.”

    Skate to where the puck will be.

  18. Nicko2 says:

    Here in Egypt, my local bank is giving 14% interest on one savings account. Recent change in the investment law allows unlimited repatriation of funds and another tax holiday on capital gains tax. Sure, there’s 30% consumer inflation, but FDI is flowing in. Can’t really lose with that.

  19. illumined says:

    If they all go through with these rate hikes that will just ensure these asset bubbles blow up in the next couple of years. Not a bad thing in the long run but the short and medium term pain will be severe. Right here in this article we might finally be seeing the beginning of the end of these serial asset bubbles.

  20. TheDreamer says:

    I have maintained for about a year now that the next crisis is likely to be a Global Dollar Liquidity Crisis starting abroad. (aka Everyone borrowed dollars they promptly lit on fire, and now no one gots any money and everyone wants their loans back – so they can pay the Ponzi)

    A large amount dollar denominated loans were used to funnel into IMO non-productive investment. Instead of building real improvements (roads that go somewhere, hydro systems, restoring environmental damage like fish hatcheries, offshore wind farms, well built housing), monies were used to fuel emerging or developed market consumption (inherently unproductive long term though nice for a short-term GDP boost) or speculation in financial assets (ultimately the least valuable of things in real terms) or prestige projects (we built a fancy thing, but we could have given our entire population water and sewers. But we have a skyscraper no one lives in!). Corruption cannot be ignored (look at the BRICS for a start).

    You look at China, but also places like Brazil, Argentina (100 year $$ bonds!) Mexico, and many, many more, and much money has been wasted for Paper results or totally wasteful investment (ghost cities and roads to nowhere, poorly implemented prestige projects). I have been and traveled to a few of these places, and communicate with friends on the ground via the internet, the money was not spent prudently to improve real quality of life and infrastructure. At best it built a Facade. Now the Fed has defected from the Global Prisoners Dilemma Central Banks and shortsighted participants have been playing.

    We are already seeing how a small Hong Kong Margin Call can cause massive losses instantaneously. While the US economy has many issues, (unaffordable housing, untenable student debt crushing a generation preventing family formation, structural issues, crushing of savers/pensions, too much easy money for cokehead bankers, poor demographic outlook due to no babies, lack of long-term infrastructure like high speed rails), the US remains the 1 eyed man in the land of a Blind World. Worst case we can plant victory gardens and bring back the Civilian Conservation Corps (which we should do today!).

    I think we’re seeing a very real fracturing of the global order in some sort of combination run-up to a big burst originating outside the US borders but will inevitably impact the overly-financialized US economy. This will cause a massive margin call, and everyone will scramble for dollars (no one wants to be paid in monopoly funny money – and I sure won’t accept payment in Euros and Yuan (I still believe the EU will just disappear one day soon, or become a bunch of bureaucrats wondering why no one listens to them anymore) but I will consider taking Bitcoin if you don’t have anything else).

    This necessary debt cleansing will likely result in much needed and massive deflation. Passive Stock Indexes take a big hit due to too much foreign printed money needs to sell to cover their debts or maintain their currency (SNB stock purchases or money laundering or China’s rapidly declining dollar reserves for example). Collateral Fraud remains an Elephant in a China Shop.

    After deflation, The next phase will likely be hyperinflationary when all these various countries try to print their way out of it. This will cause a further increase in USD value and scarcity on a global macro level. Cryptos represent an interesting facet to this – we already hear that places like Venezuela are abandoning their currency on the ground in favor of crypto and dollars). In the US the average and above average consumer is already broke, so deflation will actually be popular. There is little goodwill towards housing speculators to be bailed out these days.

    Not certain, but how it looks to me for the past year or so, and I only think that more each day. Your commentary Wolf seems to make me think I’m at least moving in the right direction given the sudden Central Banker tune change. Not sure they even know that’s what’s happening.

    • Kent says:

      “In the US the average and above average consumer is already broke, so deflation will actually be popular.”

      Assuming the deflation is not in jobs and wages. Then maybe not so popular.

      • TheDreamer says:


        I spent about a year of my Economics and Philosophy thesis looking into Deflation (it was a fascinatingly unstudied phenomenon outside of abstract models built on lies not rooted in historical example, and the history contradicts what they claim) before I pivoted my thesis to the failings of the Keynesian hijacked Neoclassical model false assumptions (perfect knowledge, utility maximization, that consumers always purchase at the lowest possible price, etc) and Post-Modernist nonsense like we should throw out all of history because it’s evil and scary and cruel kind of thinking we see dominating the social sciences in academia (and then said screw it and became an engineer because I wanted to do something useful, only to return to the Academy to do my Ph.D. in Super Science..).

        We are simply told about Deflation that “It’s Bad” and then they scare you with words like layoffs or pay cuts to make us behave.

        In any case, I believe that the US economy is likely at a point of “minimal employment” as it stands, and that wage deflation is likely a fallacy, as the prices of goods can drop quickly with inventory liquidation, but wage decreases are very difficult. Elimination of paper-pushers and bureaucrats are the most key thing to do this process well. I suspect given the lackluster “recovery” there really aren’t that many people who can be laid off in the US without business activity simply failing. Perhaps I’ll become a management consultant, and fire all the managers they tend to be the least useful. That would be fun, I’m available for consulting.

        Basically, I concluded after a year of research, wages and base employment tend to be sticky and highly inelastic (need to keep the lights on and the water flowing and food coming in, and there is no such thing as unskilled labor and garbage men don’t like paycuts), but discretionary spending is highly elastic (eating out vs. eating in).

        Creative destruction (aka Deflation) wipes away the deadwood and allows green shoots and allows new and affordable market entry by former competitors priced out (think a local small business competing with a conglomerate chain). If a fire sale happens, inventory gets cleared rapidly, exciting the population and that will stimulate real growth in a locale (vs paper growth or low money velocity corporate financial mining). Example, I suspect one would go out much more often if a burger was $5, vs. the current $13 vs. making my own for $4.

        I would be happy all too happy to debate the idea further but would likely need a chalk board and several hours of your time to really make my case.

        My comments tend to be too verbose as it is here, likely because too much to say after not speaking for a year. Who knows, inspired by thinkers and analysts like Wolf Richter, Camile Paglia, and Jordan Peterson, I think there may be a market for such ideas, and I have considered finding a blog or starting my own and I will cover the topic.

        The short is – don’t let Deflation be a bogeyman- you likely have never really experienced it unless you were alive as an adult in 1930’s. All you’ve ever likely experienced is inflation, stealth hyperinflation, or extreme in your face inflation. They scare us with saying it’s bad, but really deflation makes laborers more wealthy (vs capital extractors). I say – let’s try deflation and see what that’s like! It might be nicer than you think!

        • Roger says:

          It seems to me that the QE heroin has largely missed main street and went to wall st. Perhaps this time around the issues will be main st. getting the bailout.

          I expect some sort of helicopter monetary injections from the FED via guaranteed minimum income etc which should ultimately backfire. We could rapidly see that deflationary effect reverse and turn into inflationary effects. Already it is visible in the stores, I notice almost weekly increases in the price of food in addition smaller package sizes for the same price.

          The question I think is what will the reaction be when nobody can afford to buy from their fellow businesses. It doesn’t hurt the biggest companies at first but there should be an acceleration in business failures, pressures to work more for less, gimmicks and outright fraud in consumer goods, products and services.

          The gangsters of the business world will survive as the honest competitors are pushed out and individuals will be swindled more and more. I am not sure if there is a metric for that where you could point to greater fraud in say home improvement companies or the like.

          From my experience I saw some where business owners would pay their employees cash and no taxes. You can’t compete when the playing field is not a level one. In any case I digress.

        • FelixFosdik says:

          Blog it, my friend! There’s room for new, knowledgeable voices on the markets that comes from informed, sensible, non-software based “analysis.” It sounds like you have an interesting interdisciplinary mix in your background and I’d like to hear more from your perspective.
          But all praise to Wolf: This blog has been a godsend in helping me understand how finance works (or “works”) in 2017, in a way that conforms to the real world rather than the kabuki view approved by Econ 101 textbook writers.

        • Patience says:

          You are spot on dreamer, always enjoy your comments and the time you take to break it down to the nay Sayers.

          They have hyperinflated asset bubbles and still so many think that’s great; just a guess but it may be due to them getting lots of money for doing nothing.

          America will have to have deflation otherwise the alternative is even more dangerous; Wall Street/fed/foreign$ will own everything in the future.

        • nick kelly says:

          Read much about the thirties? All about laborers becoming more wealthy?

          In the 30’s both California and British Columbia hired dollar a day ‘Specials’ …Government rent- a cops (so legally cops) to stand at the border and turn back the folks fleeing the dust bowl Midwest.
          One manning the BC border said it was the worst job of his life.

          Income for labor dropped drastically in the Depression.
          For starters most labor in the 30’s was still farm labor.
          Wheat lost so much value it was no longer worth storing even as feed and was often just dumped on to the ground.

          For every actual non-farm job as a laborer there would be dozens of applicants, if not hundreds. There was no work for labor, and no, they didn’t become more wealthy.
          Not they were the only ones.

          Canadian author Max Braitwaite worked as a teacher in rural Saskatchewan in the early 30’s. (His account: Why Shoot the Teacher was made into a movie)

          The superintendent met him in the winter at the railway station in a one horse trap. He was wearing flour sacks on his feet for mukluks. ‘Oh, and one thing. The district can house and feed you but you will have to take a note for most of your salary’
          When Max demurred, the super, who was also a farmer said he’d sent some cattle to market and got a bill back. They didn’t cover the cost of the freight. Or his labor.

        • TheDreamer says:

          @Nick Kelly

          The Dustbowl Drought started in the early 1930s, building to bigger issues in 1933-34, again in 1936, and then 1939-40. It was the result of Hubristic notion that Man was Master of the environment, instead of Steward. It was caused by the wholesale slaughter of the buffalo which were the greatest permaculture system the world had ever known. The Buffalo was part of a much larger system providing sustenance for millions prior to the great North American plagues that came with Columbus and wiping out 85-90% of the population (vs the 40% in the European Black Plague). This loss of the megafauna, combined with just abysmal agricultural practices, and a really bad attitude by a lot of people, caused the sky literally to become filled with Kansas.

          I would kindly suggest that you are perhaps conflating Deflation (what happened in 1929) and, with a manmade refugee crisis that came due to Environmental issues, building to a crescendo 5 years later after the crash of 1929 is not the best reading of history. The Great Depression, really is a sequence of events, not merely because of a stock crash. The stock crash had little to do with the actual human suffering in the end. It just became known as an Era, and people forget the nuance when they were not there, and history is not taught so much. That or they were children, and they things tend to blend all together.

          In terms of timeline, you had the crash of 1929, and things went along for most people as it was. They were poor and getting buy, however, coming out of that recovery suddenly you had the Dust Bowl. That was not Deflation, that was an Apocalypse.

          Only the Irish Potatoe Famine and what Stalin did to the Ukraine compare at least in recent history in terms of sheer environmental damage. Frankly, the Dust Bowl was so much worse given the loss of topsoil, displacement, and human suffering. Many were new immigrants who knew little of the land and how to manage it. The whole world suffers even now for it.

          A significant portion of my family survived on the great plains in those years, some refugees after the Trail of Tears and the aftermath of the Civil War, and I grew up partly in a farmhouse that helped get them through it. There is no way I can forget the stories. However, I posit they are two very distinct events, that happened in sequence, and thus making it all the worse.

          The Dust Bowl was not Deflation. It was Death.

          BTW, one of the primary ways that the dust bowl was stopped, was with the Civilian Conservation Corps, a program I am passionate about restoring. I highly recommend this PBS documentary on it. I figure a similar program today, at $100 a day (basically the equivalent of a $1 a day back then) combined with the ability to write off or forgive student loans (and count towards a potential military pension) would do more to right this country than anything else. Obviously no segregation, and a real focus on getting young people to work in teams, learn about one another and develop trades. I estimate the cost of $5 billion to raise a 250,000 tree army for one year. It would create in aggregate around 3-6 million jobs and provide countless positive social benefits, as well as real GDP growth. Same priority for Veterans first, to help them get back on their feet, and become the leaders for the next corps. It also provides a nice way for Soliders to reintegrate into Civilian world, I think.

          The vast majority of the public parks and canals and things we enjoy today were built then with real labor, mules, and shovels. We can restore them, and we have trucks as well. Nothing fancy, no Congressionally mandated pork, just hard work and a thoughtful mind towards really improving this beautiful land.

          Documentary is available here: https://www.youtube.com/watch?v=qpv-KYioIFc

        • nick kelly says:

          I guess it was the word ‘dustbowl’ that set things off.

          ‘I would kindly suggest that you are perhaps conflating Deflation (what happened in 1929)’

          Deflation didn’t ‘happen’ in 1929. It was not an event. It began in 1929. It ground lower until 1934 with many thousands of banks going under, taking deposits with them.
          Then because prices couldn’t go much lower, the rate of deflation slowed until 1937 or so.
          The farmers weren’t just fleeing drought. which did not hit all agricultural states. They were fleeing the collapse of prices, with wheat becoming in such oversupply it was worthless.

          Before reading your second post I was trying to think what you could possibly have meant about deflation being not so bad, if by that you include the 1930’s, the Great Deflation. In this period spending money virtually disappeared for most people.
          Especially for laborers, but generally.

          Could someone actually think the 30’s was a great time to be a laborer?
          So I wondered if maybe you meant the occasional periods of deflation in England in the 17 and 18 hundreds.
          True, prices declined gently for years at a time and because there was no earth- moving machinery, or harvest machinery etc. etc., the real wage of labor rose. It still was barely enough to live on but it could be lived on. By our standards, of course, this would seem like a Depression.

          But in deflation debts grow larger. There was no consumer debt in that era, and for the vast majority of the population, no mortgage debt. The government debt usually associated with war was a trifle compared to today.

          This was why the deflation was gentle- there was no financial structure to collapse. The South Sea Bubble being the biggest exception but that punished the one percent, the only ones able to speculate.

          We are not in that era which no doubt will seem like a bucolic Eden when seen through rose- colored glasses, but was actually a very tough life.

          We can hopefully live with very low inflation, although this means the government debt is now real and can’t be inflated away. (Inflating away debt is not always ‘evil’. IF you get higher real economic growth, which hasn’t happened)

          But any sustained period of deflation, in which the vast universe of debt: consumer, mortgage, federal, state, municipal, corporate etc. grows LARGER in real terms, apart from the interest, means not gentle deflation but a 30’s deflationary collapse.
          This space is replete with folks criticizing foreign governments for borrowing in US$ and then when their currency crashes, their debt skyrockets.
          Exactly the same happens in deflation, even to debts in the local currency.

          Everyone’s expectation is that it will be manageable- the omnipotent FED will just reflate.

          But suppose Illinois DOES follow Detroit and Puerto Rico and declare some version of bankruptcy? All the debt of ALL states will be instantly downgraded.

          It takes a minute to blow up a balloon, it bursts more than five hundred times faster, too fast to be seen without slow mo photography. Just how fast can the FED persuade folks not to run for that tiny EXIT door called CASH?

          Unless a government of Luddites bans machines, the wages of labor will not rise in deflation.

          BTW: up until World War Two, World War One wasn’t called that. It was called the Great War. No one thought it could happen again.

        • nick kelly says:

          Oh great- create jobs by banning machinery. Why hire a backhoe when we can do it with shovels?
          Or why hire a railroad when we can do it with mules?

          I’ve been trying to be polite but are you people nuts?

  21. cdr says:

    All I see is a possibility that some pinheads are finally noticing the ice cream cone is hitting their foreheads and now they’re contemplating a fix. A few are going in the right direction, but just hitting the nose. All confuse the drips that manage to find their lips with a good effort, with the latter group as the one getting the attention from the ones that still hit only the forehead. Kashkari is off looking for the bathroom.

  22. jb says:

    The rate hike Kabuki dance begins . of course when BOE , BOC, maybe ECB suggests tightening; their respective currencies pop. When yellen and company announce an earlier more probable tightening scenario the dollar is flat, the yield curve tightens . What’s up with that ?
    – the central banks will have to tighten in tandem or one currency will loose its competitive advantage . Lets see what the BOJ will do . They were a carry currency for many years .

  23. Sporkfed says:

    A giant game of musical chairs. The Fed doesn’t want to inflate away the paper assets,
    which would bring relief to borrowers, and they don’t want to set off deflation which
    would wipe out the value of the loans on the books. Decisions, decisions.

  24. rainclouds says:

    Yup. Apparently the BOC isn’t independent. ..


    • jb says:

      good Canadian website . oh sorry about W. Ross increasing tariffs on your lumber . not sure if that was necessary seeing that your currency is still at a good discount to the Yankee buck. But aren’t most home mortgages in canada of the variable rate nature ? if so yikes .

      • nick kelly says:

        The US bed frame makers’ association has asked for an exemption.
        I guess they don’t want gnarly boards from piney wood pecker poles.

        And to be a trifle more serious ( although the above DID ask for an exemption), the much larger US home builders’ association also opposes the tariff.

  25. a.hall says:

    If Pigs Fly and Interest Rates ; what will happen to the Bond Markets, the $555 Trillion of Global Banking Derivatives and Savings Accounts? Will the Casino Banks Gamble with Saver`s Money?

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