Digital Cash: Another Dangerous New Idea in Monetary Policy

Source: Mises Institute

“While modern monetary theory has provided some distraction for public and commentators alike, the war on cash goes on… eliminate cash and there will be no limit to how low the Federal Reserve can go…[the] scheme, briefly, is as follows: digital cash should be provided in designated accounts at supervised depository institutions, which in turn would hold part or all of these funds in reserve accounts at the central bank. These digital cash accounts would earn interest and this interest rate would become the central bank’s main policy tool: in normal times, it would be positive, but in times of crisis the central bank would be able to cut the rate below zero…There is a lot to criticize in this proposal…A token-based system of digital cash (think bitcoin) is portrayed as prone to fraud, but we are lead to believe that no such problems exist when it comes to their favored form of digital cash…[A]ssurances that private individuals will not have to pay negative interest rates ring hollow; for once everybody is in the system, what is to stop the benevolent central bank from changing the rules on who is and who isn’t exempt from the negative rates? And once the fee on transfers between digital and physical cash is in place, why not make physical cash prohibitively expensive? Ultimately, the public is forced to use the financial system, negative interest rates are imposed as thought necessary by the central bank, and the ability to convert money into physical form is severely curtailed, if not completely abolished…The problem is that money is not a financial asset and physical cash is not…sterile. Rather, holding cash serves an important function:…holding money is an investment in certainty. Since we can never know with complete certainty when and what we want to buy or at what prices we will be able to sell our goods and services, we always have some money on hand. The more settled and certain conditions are, the less cash reserves a person will think it necessary to keep. But in a financial crisis, uncertainty spikes again and he will, therefore, increase his cash reserves to guard against this increased uncertainty until conditions quiet down again…Rather than securing the monetary system, the digital system…would further empower central bankers at the expense of consumers.”

 

‘The Riskiest Credit Market Ever, Central Banks Control Over Markets Is Coming To An End’

Source: Pimco/Zero Hedge

“The world’s largest bond manager is getting extremely worried about two things that it knows a lot about; i) the overall market and ii) the bond market in particular. Speaking to Bloomberg TV, Scott Mather, chief investment officer of U.S. core strategies at Pimco, joined a bevy of other money managers and warned, in no uncertain terms, that the credit market is heading for a crash the likes of which have never before been seen. ‘We have probably the riskiest credit market that we have ever had’ in terms of size, duration, quality and lack of liquidity, Mather said, adding that the current situation compares risk to mid-2000s, just before the global financial crisis. ‘We see it in the build up in corporate leverage, the decline in credit quality, and declining underwriting standards – all this late-cycle credit behavior we began to see in 2005 and 2006.’….Mather said that Pimco is ‘much more defensive’ and prefers asset backed securities….Mather’s conclusion: ‘People are starting to come to a more realistic outlook about the forward-looking growth prospects, as well as the power of central banks to pump up asset prices.’ Considering the S&P is about a few hundred percent higher than where it would be without central banks ‘pumping up prices’, the market is about to go through a lot of pain in the near future if the world’s largest bond manager is correct.”

 

Why the stock market is one or two bad economic reports away from a collapse

Source: Yahoo Finance

“The signs are starting to build that the global economy is cooling down more quickly than many balding pundits and aging stock price predictors would have investors to believe. Consequently, valuations on stocks are well overdue for a significant haircut…Think 10% nosedive, or more. In other words, a classic collapse….To many, the Federal Reserve is a friend and the U.S. jobs market is humming along – both serving as powerful reasons for stocks not to stay on the mat for too long. Going lost in this rose-colored glasses backdrop is mounting evidence that the trade war is taking its toll on companies around the world. In turn, economic data and leading areas of the market are worsening….’If markets are pinning their hopes on a U.S.-China trade deal next month or on the Fed successfully saving the day, then they could be in for a rude awakening,’ says Paul Ashworth at Capital Economics. Ashworth believes incoming economic data point to a ‘sharp’ slowdown….Many on Wall Street I have talked with these past few weeks continue to be optimistic on stocks this year…All of this dialogue suggests to me the market is one or two bad economic reports away from a sharp reversal as investment theses become derailed.”

 

The GOP’s Duty: Explain the Cost of ‘Free’

Source: Jindal/Wall Street Journal

“Progressives are changing the Democratic Party’s focus from building stronger safety nets for the disadvantaged to subsidizing everything for everybody…Democrats now promise free college, free health care and more – for everyone. Republicans can’t outspend Democrats, but they can make the case for freedom and against the idea that everything is ‘free’ without sounding like Scrooge…The American Dream is to get a good job and live better than one’s parents; becoming dependent on government is the American nightmare. Even Howard Schultz, the man who brought America $5 coffee, realizes promises like Medicare for All are unrealistic and too expensive. Yet Republicans have to do more than mock the Green New Deal’s bans on air travel, targeting of flatulent cows and subsidies for those unwilling to work if they want to persuade young voters of the case for limited government and personal freedom. In reality, ‘free’ means more government control at the expense of consumer autonomy….Progressive health, education and energy policies would result in government interference in larger parts of the economy…Consumers have a hundred choices of coffee but won’t be able to choose their health plans. Government paying for college would result in even more political interference with academic freedom….’Free’ means less efficiency, more expense and lower quality….Republicans have lost credibility on fiscal responsibility. Spending vastly increased on their watch. Even so, Medicare for All’s $32 trillion price tag makes even today’s appropriators look miserly. Republicans can’t outbid Santa Claus. Americans are willing to work hard and sacrifice for a better life but need to know how pro-growth policies benefit them…They will embrace effective market-based solutions that promote freedom if Republicans offer them, but voters will only wait so long.”

 

Economic growth up 3.1%, slightly better than Wall Street expected

Source: CNBC

“The U.S. economy grew by 3.1% to start the year, slightly better than expected and providing some relief at a time when recession fears are accelerating, the Commerce Department reported Thursday. First-quarter gross domestic product beat the 3% Dow Jones estimate but was lower than the initial 3.2% projection from the Bureau of Economic Analysis…Corporate profits also weakened, falling 2.8% across all companies and 0.5% in the S&P 500…Inflation indicators also were weaker than expected, with core personal consumption expenditures up just 1.6%. Exports rose 4.8% amid the increasingly bitter trade war between the U.S. and China…In the bigger picture, growth easily surpassed what most economists had been expecting at the start of the year…Corporate profits fell during the quarter,..Personal consumption expenditures rose 1.3% in the quarter, compared with a rise of 2.5% in the previous quarter but well above the 0.5% in Q1 of 2018…Second-quarter growth is expected to decline significantly. CNBC’s Rapid Update economist survey sees GDP up 1.8%, while the Atlanta Fed’s projection is for just 1.3%.”

“Unmistakeable Whiff Of Recession”: The Time To Prepare Is Now

Source: Source: Zero Hedge

“Although talk of a recession subsided early this year, it’s back in full force thanks to the trade war with China. ‘Call it scare-mongering if you like, but many of the data releases last week had the unmistakable whiff of a recession,’ said chief U.S. economist Paul Ashworth of Capital Economics. According to Market Watch, none of us should expect great economic news during this holiday-abbreviated week. The trade deficit is likely to widen (and not in the United States’ favor), consumer confidence could decline (and it should for all intents and purposes), and household spending was probably tepid in April. This all signifying one thing: an economic recession. The U.S. economy has taken a turn for the worse and it doesn’t look as if things will get much better anytime soon as global problems persist. A mountain of evidence in the past two weeks shows that key segments of the economy have slackened. Retail sales fell last month, business investment nearly dried up and manufacturers are growing at the slowest pace in nine years….This trade war has the ability to fling the U.S. into recession, and if that happens before the election in 2020, Donald Trump’s chances of reelection will drop dramatically.”

 

Only Central Bankers Could Dream Up ‘Negative Interest Rates’

Source: Tamny/Real Clear Markets

“Central bankers are an odd bunch. They’re convinced that ‘low interest rates’ at banks will power economic activity, but low interest rates paid on deposits signal low-risk lending. Think about it. If banks were truly seeking higher return loans they would be paying more for deposits….What’s expected to not succeed, and what’s dismissed right up to when it flowers, is rarely – if ever- hatched by low-interest lending. Entrepreneurs, by their very name, believe in a concept that most think has no chance of success. Hence the surprise when they prosper. Still, it’s a reminder that a venture with the potential for surprising upside would never rate a low-interest loan….All of this requires lots of thought as European central banks work to stimulate economic growth through ‘negative rates.’ According to a Wall Street Journal report from last Tuesday, the thinking inside central banks is that if they charge actual banks for parking cash with them, those institutions will instead lend their reserves at a market rate of interest, thus allegedly stimulating the economy. And if they charge individual customers to park their cash, maybe those customers will instead spend the money….True growth is driven by surprise developments that spring from investment in what’s the picture definition of uncertain. In short, negative rates and entrepreneurial endeavor have nothing to do with one another.”

 

Europe More Divided

Source: Wall Street Journal

“Anyone looking for a clear message from the European Union’s parliamentary elections has a better divining rod than we do. The anti-EU right did well, but so did the greens on the left. While nationalists gained votes, pro-EU parties will still hold two-thirds of the seats in Brussels. Perhaps it makes more sense to look at the meaning for nation states….The ruling Conservative Party fell to 9%, as voters punished it for bumbling over Brexit. The competitors to succeed Prime Minister Theresa May, who announced her June departure last week, differ on the kind of Brexit they’ll seek….While the European Parliament still has a pro-EU majority, it’s as fragmented and ideologically incoherent as ever. The traditional center-right and center-left parties saw declines from 2014 but remain the two biggest parties. The bloc’s 28 members, save Britain, support basic EU arrangements like the free movement of people and goods. But the deeper political integration envisioned by German Chancellor Angela Merkel and Mr. Macron requires a much broader consensus.”

 

How Stable Money Leads To Prosperity

Source: Stossel/Reason

“What makes money trustworthy? ‘It has to be fixed in value,’ says Steve Forbes in his new documentary, ‘In Money We Trust?’ Forbes notes that money has to be reliable, like a clock. We have ‘sixty minutes in an hour; sixty seconds in a minute. Imagine if that floated each day; that would make life chaotic.’ Stossel presents an abbreviated version of the documentary, which notes that throughout history, people needed a way to assign a fixed value to money. They tried all sorts of things, including backing money with crops, silver, and salt. ‘Salt’ is where our word ‘SALary’ comes from. Eventually, most people settled on gold, which was used up through the mid-1900s to back currency. The stability it brought to markets helped enable massive economic growth….Today, the Federal Reserve controls the supply of dollars. People use them because they trust that others will value them, and because the government says it stands behind them. But dollars are not backed by gold, or anything else. That worries people like Steve Forbes. A dollar buys 80 percent less than it did when Nixon took the country off gold in 1971. That’s largely because the Federal Reserve intentionally creates 2 percent inflation every year – they set it at 2 percent rather zero because it provides a buffer against deflation, which they fear will cause recessions.”

 

 

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