Foreign investors buy nearly 100 billion in euro zone debt

LONDON, July 21 (Reuters) - Euro zone debt saw nearly 100 billion euros ($116 billion) of buying from outside the bloc in May, Citi said citing European Central Bank data, the latest sign that euro assets are benefitting from a shift away from U.S. markets.

The 97 billion euros of net inflows into euro zone debt with maturities longer than one year was the largest on a monthly basis since at least 2014, Citi said, pointing to portfolio flow data from the ECB.

Read the rest here.

The Federal Reserve Now Owns 15 Percent of the U.S. Treasury Market

According to the U.S. Treasury, as of February 29, 2020, there was $16.9 trillion in marketable U.S. Treasury securities outstanding. Of that amount, at the end of February, the Federal Reserve held $2.47 trillion or 14.6 percent – making it, by far, the largest single holder of U.S. Treasuries anywhere in the world.

By this past Friday, the Fed’s ownership of the Treasury market had increased to $3.12 trillion. It had grown by an unprecedented $650 billion in one month’s time. And on March 23, the Fed announced that it would buy unlimited amounts of both Treasury securities and agency mortgage-backed securities “to support smooth market functioning.”

But exactly how can a so-called “free market” function smoothly if the country’s own central bank is cornering the market. Salomon Brothers paid a $290 million fine and came close to getting slapped with criminal charges by the U.S. Department of Justice in 1992 for manipulating prices in the Treasury market. And make no mistake about it, the Fed’s massive purchases are having a demonstrative impact on driving up prices in the Treasury market while driving down yields – meaning the income that determines if senior citizens in America can buy real groceries or have to live on one pot of soup for the week.

At the end of 2007, before the Wall Street crash in 2008, a senior citizen could invest $10,000 in a 10-year Treasury note and get $400 a year in income, or 4 percent. Today, that same $10,000 generates just 0.67 percent or $67. Seniors who were living on their Treasury income have experienced an 83 percent drop in income while food costs and pharmaceutical costs have soared.

If the Fed keeps up this pace of Treasury buying, it will own the entire Treasury market in about 22 months. If you look at the New York Fed’s list of the Treasury securities that are being submitted to it for sale by Wall Street’s trading houses versus the amounts the New York Fed is buying, you will see that Wall Street is puking up Treasuries in something akin to projectile vomiting.

This is clearly another one of those unanticipated consequences of a corporate-controlled Senate that passed the massive tax cut for corporations and the one percent in December 2017 and created a $1 trillion+ deficit as far out as the eye can see with no plan for who was going to buy all of the gargantuan amounts of Treasury debt that had to be issued as a result.

Because yields on Treasury securities have collapsed by 83 percent since the financial crash, investors, including risk-adverse senior citizens, have been driven into the stock market in order to capture the higher dividends paid on stocks. That’s also been great for the richest top 10 percent of Americans who own the vast majority of the stock market.

Read the rest here.

Why Switzerland is wreaking havoc in the global currency markets

This is how a currency peg ends. This is how a currency peg ends. Yes, with a bang, actually.

The Swiss National Bank (SNB) shocked markets on Thursday by announcing that it would no longer hold the value of the Swiss franc down at 1.2 per euro, although it would lower interest rates from -0.25 to -0.75 percent. Mayhem ensued. The Swiss franc immediately shot up as much as 39 percent against the euro, before settling at "only" up 17 percent on the day. This is basically the biggest single-day move for a rich country's currency, as economist David Zervos points out, in the last 40 years. And it's sent Switzerland's stock market down 10 percent, as its suddenly more expensive currency will cripple its exporters by making their goods more expensive abroad.

Now let's back up a minute. Why was Switzerland pushing its currency down, and why has it stopped now? Well, in four words, it's the euro crisis. Back in 2011, you see, what looked like the imminent end of the euro made people want to move their money to the safety of Swiss banks. It wasn't about the secrecy, though. It was the fact that Swiss banks use Swiss francs, and those wouldn't get devalued like, say, Italian euros would if the common currency broke apart. The problem, though, was that this flood of incoming money pushed Switzerland's currency up too much, over 40 percent in just a year. The Swiss franc got so expensive that Swiss exporters, who sell 56 percent of their goods to the EU, were becoming uncompetitive, and Swiss prices were starting to fall.

And then the SNB remembered that a central bank can always push its currency down just by printing more of it. So that's what it did. Even better, it told everybody that this was what it was doing. It said it would buy as many euros with newly-printed Swiss francs as it took to keep the Swiss franc from being worth more than 1.2 per euro. That meant that, for awhile, the SNB didn't actually have to do anything, since nobody wants to bet against somebody with infinite money.

Read the rest here.

Further evidence of severe global deflationary pressure.

Russian Central Bank Hikes Interest Rate to 17% as Ruble Collapses

Russia just raised interest rates to 17% from 10.5%.

According to a statement from Russia's central bank, Russia has taken its key interest rate to 17% from 10.5% in a stunning decision made after the collapse of the ruble on Monday.

The Bank of Russia's statement said the decision was driven by the need to limit significant devaluation in the ruble and inflation risks.

The announcement was made at 1 a.m. local time in Moscow.

Last Thursday, Russia hiked rates to 10.5% from 8% in an effort to combat inflation, which rose 9.1% year-on-year in November.

This surprise announcement from Russia comes after the ruble got absolutely crushed on Monday, losing more than 10% of its value against the US dollar, as the  ruble fell to below 64 against the dollar on Monday; earlier this year, one dollar bought about 35 rubles.

Read the rest here.

Russia Reels as Oil Plunges and Sanctions Bite

The Russian rouble has suffered its steepest one-day drop since the default crisis in 1998 as capital flight accelerates, raising the risk of emergency exchange controls and tightening the noose on Russian companies and bodies with more than $680bn (£432bn) of external debt.

The currency has been in freefall since Saudi Arabia and the Gulf states vetoed calls by weaker Opec members for a cut in crude oil output, a move viewed by the Kremlin as a strategic attack on Russia.

A fresh plunge in Brent prices to a five-year low of $67.50 a barrel on Monday caused the dam to break, triggering a 9pc slide in the rouble in a matter of hours.

Analysts said it took huge intervention by the Russian central bank to stop the rout and stablize the rouble at 52.07 to the dollar. “They must have spent billions,” said Tim Ash, at Standard Bank.

It is extremely rare for a major country to collapse in this fashion, and the trauma is likely to have political consequences. "This has become disorderly. There are no real buyers of the rouble. We know that voices close to president Vladimir Putin want capital controls, and we cannot rule this out," said Lars Christensen, at Danske Bank.

Read the rest here.

The sun is setting on dollar supremacy, and with it, American power

A serious alternative to the dollar is still a long way off, but the latest shenanigans on Capitol Hill have given the search for them renewed momentum

All great empires – from the Greek, to the Roman, the Spanish and the British - have at their heart a dominant means of exchange which is very much part of their political and social hegemony. Once upon a time, it was Roman coinage which was the world's pre-eminent currency. In more recent times it was the British pound. Today, it's the US dollar to which international investors flock as a safe haven for their money. Highly liquid and apparently reliable – until recently at least – nothing else comes even remotely close to the greenback's dominant position in the international monetary system.

That this position – what Giscard d'Estaing referred to as America's "exorbitant privilege" – could so casually be put at risk by politicians on Capitol Hill is an extraordinary spectacle that may be indicative of a great power already seriously on the wane. 

Read the rest here.

Don't underestimate Germany's new anti-euro party

(Reuters) - The political establishment has dismissed Germany's new anti-euro party as a fear-mongering populist aberration that could implode even before a looming federal election.

But the first congress of the "Alternative for Germany" (AfD) showed that the movement, launched only a few months ago by a group of renegade academics, journalists and businessmen, is striking a chord with voters and may prove an influential force come September.

Over 1,500 AfD supporters from across Germany packed into the Intercontinental Hotel in central Berlin on Sunday to elect the party leadership and formally approve a policy program that has one objective above all: an end to the euro and return of the deutsche mark.

Read the rest here.

Bitcoin is ludicrous, but it says something important about money

There was a great piece in the satirical news source The Onion a few years ago in which it “reported” that Fed chairman Ben Bernanke experienced a moment of existential panic during a congressional hearing as he paused, shook his head, and said, “It’s just an illusion . . . Just look at it: meaningless pieces of paper with numbers printed on them. Worthless.”

Sayeth the Onion headline: “U.S. Economy Grinds to Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion.”

Which brings us to bitcoin. It is a digital currency, which a certain variety of techno-utopian futurist crowd views as a form of money unencumbered by the shackles of privacy-reducing international anti-money laundering laws and inflation-tolerant central banks. Its value has been extraordinarily volatile over the last several weeks, rising from $20 a couple of months back, to over $250, to around $60 on Friday, with a couple of trading halts in between.

Bitcoin really is a tiny market in the scheme of things, and its recent gyrations mean that the dollar, euro and yen have nothing to fear from the competition. If a currency can lose 75 percent of its buying power in two days, it may not be the best store of value. But it also an important window into the strange and uncomfortable mystery of “What is money,” which is a harder question to answer than one might think.

Read the rest here.

Global Money Printing and the Limits of Currency Manipulation

There’s plenty of money in the world. That’s the good news.

The not so good news: The flood of dollars, euros, yen and pounds pumped into the global economy by major central banks in recent years has yet to pay off in the form of job creation, investment and stronger economic growth.

It has kept banks afloat, let corporations build large cash reserves and restructure debt and, arguably, staved off a worldwide depression. But the ultimate aim — strong and self-sustaining growth in the world’s core industrial economies — remains out of reach, and analysts are wondering whether central banks are at the limits of what they can do to help.

Read the rest here.

Finnish Foreign Minister Warns Of Euro Breakup

Finland is preparing for the break-up of the eurozone, the country’s foreign minister warned today.

The Nordic state is battening down the hatches for a full-blown currency crisis as tensions in the eurozone mount and has said it will not tolerate further bail-out creep or fiscal union by stealth.

“We have to face openly the possibility of a euro-break up,” said Erkki Tuomioja, the country’s veteran foreign minister and a member of the Social Democratic Party, one of six that make up the country’s coalition government.

Read the rest here.

A Short History of The Fate of Paper Money

 “Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778 )

From this excellent article.
HT: Murphy

Dollar's status as reserve currency is in danger

The US dollar is getting perilously close to losing its status as the world’s reserve currency. Should it cross the line, the 2008 financial crisis could look like a summer storm.

Yes, worries about insolvency in Europe dominate the headlines. Last week, Standard & Poor’s cut Spain’s bond rating to BBB+ — a clear sign that Europe’s financial crisis is far from over.

But America’s escalating debt problem is far more likely to precipitate a truly global crisis, because the dollar has for decades played such a central role in the world economy.

How bad is the US problem? Former Treasury official Lawrence Goodman recently pointed out that investors are shunning US bonds and notes; the lack of other buyers forced the Federal Reserve to buy “a stunning . . . 61 percent of the total net issuance of US government debt” last year. Like many others, he warns that ballooning debt puts the US economy at risk for a sharp correction.

But the even larger risk is the potential loss of the dollar’s “reserve currency” status — a key support of the world economy for the last four decades.

It started with the 1973 Saudi commitment to accept only US dollars as payment for oil, followed by OPEC’s 1975 agreement to trade only in dollars. Trading of other commodities came to be priced in dollars, reinforcing the dollar’s “reserve” status.

As a result, central banks worldwide have held onto large reserves of dollars to facilitate trade. That, in turn, has enabled the US to print much larger amounts of its currency, with seemingly little inflationary consequences. It’s also made it easier for Americans to import more than they export, to consume more than they produce, and to spend more than they earn.

But all that is changing rapidly.

Read the rest here.

Iceland eyes Canadian Dollar for its currency

Iceland’s newfound love for the loonie is sparking a wave of controversy, from Reykjavik to Ottawa.

For 150 years, the rest of the world has shown scant interest in the Canadian dollar – the poor cousin to the coveted U.S. greenback.

But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.

Read the rest here.

What to do with our money?

The Times has a discussion up on what do with our currency.  Most people seem to think some updating is in order (I agree).  For the record here are a few of my suggestions.

• Drop the penny.  They cost more than they are worth to mint.
• Leave Jefferson on the nickel.
• Put Harry Truman on the dime.
• Put Teddy Roosevelt on the quarter.
• Put Ike on the half dollar. (Kennedy did not do anything worth being on our money.)
• Stop printing dollar bills and start minting $1.00 coins with George Washington of course.
• No more $2.00 bills
• Leave Lincoln on the $5.00 bill.
• Put FDR on the $10.00.
• Put Ronald Reagan on the $20.00.
• Put Martin Luther King on the $50.00. (My nod to political correctness.)
• Move Alexander Hamilton to the $100.00 bill.
• And if they ever go back to printing $1000.00 bills my vote goes to Jack Benny.

I don't support a rigid gold standard for reasons I have explained many times.  Though I do think everyone should own some gold as a hedge against out of control money printing.  If people really want to go back to some sort of "hard money" system I would suggest a silver standard.  There is simply not enough gold in the world for it to serve as an effective global currency for 7+ billion people.

Canada begins phasing out the penny

The Canadians are doing what the U.S. has not been able to accomplish: Eliminating the money-losing penny.

The Canadian government has announced that it will stop distributing the Canadian penny beginning in the fall, with the gradual goal of removing it from circulation.

The move, unveiled as part of the Canadian government’s overall budget proposal, comes down to cold, hard cash. That is, the cash that can be saved by removing the penny from circulation.

The government said it expects it can save about $11 million Canadian dollars (about $11 million USD) a year by not supplying the penny, because the cost to produce a penny is more than the penny’s face value.

Read the rest here.

Why The Euro Was A Bad Idea

1) Take all your money, all your immediate relative’s money and all your extended family’s money.

2) Put it into a single bank account and issue everyone a checkbook. Also co-sign on all their current and future debts.

3) How long do you think it will take before someone starts taking advantage of the situation?

-Craig R from here.

Return to sovereign currencies wouldn't be as traumatic as assumed

For the record I don't agree with the headline.  But the article raises some interesting points.

The currency team at Bank of America Merrill Lynch have taken a stab at what "fair value" would be for the major legacy currencies in the euro in the event of a breakup. And they've come up with some quite surprising results (see bar graph below)



The conclusion is that Spain, Italy, Portugal and France are all overvalued against the US dollar as things stand, with Spain the most at around 20pc. That's not so surprising, you might say, and if anything probably understates the true position.

But look at the countries thought to be undervalued. Ireland, on the Merrill Lynch analysis, is the most undervalued even though it is undoubtedly completely bust, while Germany, which conventional wisdom would say was massively undervalued as a result of its membership of the euro, is actually only quite marginally undervalued – by around 5pc. If Germany left, says the team, then the euro fair value would fall only 2pc against the dollar. If Italy left, it would rise only 3pc.

These are not big swings. The trouble with this sort of analysis is that there is a world of a difference between academic modelling of fair value and where a currency actually trades. Any break-up or withdrawal from the eurozone would unlikely be orderly. There would be large shocks to all currencies involved, and no model can fully account for these. Currencies often show extreme deviation away from fair value.

Read the rest here.

Book Review: Currency Wars

We’re in the throes of Currency War III, and Ben Bernanke has won the first offensive by flooding China with inflation.

If this sounds like a geeky online game, recall how Chinese prices surged after the Federal Reserve unleashed its quantitative easing in 2009 and 2010, one of many moves James Rickards parses in his somber book, “Currency Wars.”

“It was the perfect currency-war weapon and the Fed knew it,” he says, describing how the Fed’s expanding money supply forced China to print more yuan to maintain its peg to the dollar. “China was now importing inflation from the United States through the exchange-rate peg after previously having exported its deflation to the United States.”

Enough was enough, as President Barack Obama has now summed up the U.S. view that the yuan remains undervalued.

Rickards, whose CV includes stints at Citibank Inc. and Long-Term Capital Management LP, has written one of the scariest books I’ve read this year. Though I was tempted at first to dismiss him as alarmist, his intelligent reasoning soon convinced me that we have more to fear than fear itself.

Part history, part primer and analysis, the text covers topics ranging from the “misuse of economics” to complexity theory. The pieces, although disparate, fit together snugly, as in one of those mystery jigsaw puzzles that come with clues in lieu of cover art. The picture that emerges is dark yet comprehensive and satisfying.

Read the rest here.

Europe Unraveling -- but Is That All?

The news from Europe is uniformly disturbing. The trouble that started in Greece has received only a band-aid, and now the Greeks themselves are not even certain that they wish to put it on. Meanwhile, Spain, Portugal, Italy and Ireland are teetering on the brink, as well. Even the incoherent "protesters" who wanted to shut down the London Stock Exchange managed only to shut down St. Paul's Cathedral instead. Can't anyone in Europe do anything right? (The word "ineptocracy" has been coined to describe the phenomenon, which is, in my own phrasing: "A system where those least capable of leading are elected by those least capable of producing. The former then bungle through as long as they can, by taking from those who are producing, until everyone may enjoy being as impoverished as those who are not producing.")

We may finally be witnessing the inevitable consequences of a global system built upon exclusively fiat currencies -- money that consists only of paper promises. When an economy's medium of exchange is transformed from gold into paper, a certain convenience is achieved, to be sure -- but the convenience comes at a huge hidden cost. As I explained in my previous series on money, paper money is based entirely on debt -- on promises to pay in the future. But pay with what? You guessed it -- more paper money, or more promises to pay. An endless and spiraling cycle of debt is the driver of a fiat money economy.

Read the rest here.
HT: Bill (aka The Godfather)

Good post. I doubt that we will see the complete collapse of fiat paper currency. But I do think that there is going to be a dramatic devaluation of most of the world's currencies as a necessary consequence of the staggering levels of debt, which can not be paid off without some combination of a draconian program of austerity coupled with sharp tax rises and or deliberate financial repression with currency debasement and inflation as its corner piece. Historically few nations, and no democratic ones that I am aware of, have had the intestinal fortitude for the kind of long term deep austerity that would be necessary. That leaves us with the printing press.