US jobless claims fall; Denmark struggles with peg; Germany gets deflation; China milk industry doubts; NZ swaps and fx fall sharply; NZ$1 = 72.5 USc, TWI = 76.1

David Stockman's latest missive - well worth a read on this subject:

"Zero interest rates are not even remotely harmless. They amount to a colossal economic battering ram because they transform capital markets into gambling casinos.

So doing, they cause risk and long-term capital to be mispriced, meaning an accumulating level of malinvestment and excess production capacity; and this is a worldwide condition because all central banks are engaging in the same game of financial repression.

As is now evident in the case of oil, iron ore, copper, consumer electronics and much more, massive excess capacity ultimately results in the collapse of boom time prices. Soon there is in motion a withering cycle of deflationary adjustment, profit collapse and a plunge in new capital spending.

So our monetary central planners are trapped in a dangerous feedback loop. Having fueled the boom with cheap money, they now justify the prolongation of ZIRP on the grounds that they must use the same tool to ward off the deflation they caused in the first place."

http://davidstockmanscontracorner.com/the-wreck-of-the-monetary-hesperu…

Here it is in a nutshell:



Economists and pollies tell us we need to save more and not spend so much by going into debt...yet "deflation" is bad because it will likely to slow peoples' spending....  And they see no problem with those claims.

So now the clueless have moved from "we need to put up interest rates because [hyper-]inflation is coming"  to "we must not drop rates because it, well doesnt matter"? or makes things worse?   So no matter the problem the cure is always the same, rates must remain too high!!! yes great logic.....really.

Thanks Steven,

agree on the resouce issue. Of course things are getting scarce - northern hemisphere fishing boats in the Antarctic, ultra deep oil wells and so on prove the point. 

However, the fact is that general price inflation has been in decline coincident with falling interest rates for thirty years. There are are numerous reasons for prices to decline - global wage arbitrage, the end of the boomer cohorts entry to the market place, production efficiencies, technological improvements etc. My point is that low interest rates and increases in the supply of money appear to be failing to generate inflation because of these much more powerful forces driving prices lower. Further, the ZIRP is, in fact, having an effect contrary to the one desired. Case in point the US shale drillers. High risk outfits being able to access bonds in the 5 or 6% range. Add in a bloated share market willing to throw money to anything with the chance of a return greater than 1% and you have a recipe for higher production and, ultimately a giant misallocation of capital. And that is what happened.

Low interest rates encourage saving - if you are nearing retirement you should probably have a big percentage of your savings in low risk bonds and bank deposits. In fact many legislations require super funds and insurance companies to do just that. If you were planning on funding your retirement from interest on, say, $500K, you now need 1 mil. so hence the need to increase savings. Got it?

I think falling prices are great news but the big picture is that the (central) banks are out to protect the banks and the collosal debts that are on their books. Right or wrong that overides everything they think, do and say.

Steven, regarding the ZIRP and it's power to inflate - sorry if you've already read the David stockman essay I linked to but I think this is well worth reading so have posted up some further paragraphs. 

the ZIRP market is completely dishonest and therefore deeply subsidized. And every Econ 101 student knows that when you deeply subsidize something, you get more and more of it. In essence, by clinging obstinately and mindlessly to ZIRP the Fed is just systematically juicing the gamblers, and thereby inflating ever greater mispricing of financial assets and ever more dangerous and explosive financial bubbles.

In fact, after 73 months of ZIRP how can rational adults obsess over whether the first smidgeon of a rate increase should occur in June or September and whether the economy can tolerate a rise in the funds rate from 12 bps today to 25 bps sometime down the road?

The difference is utterly irrelevant noise to the main street economy; it can’t possibly impact the economic calculus of a single household or business.

Having pinned the money market rate at the zero bound for so long and with such an unending stream of ever-changing and fatuous excuses, the occupants of the Eccles Building do not even know that they are engaging in a word splitting exercise that is no more meaningful than counting angels on the head of a pin. Indeed, if they weren’t mesmerized by their own ritual incantation they would not presume for a moment that a fractional variance of the money market rate away from ZIRP would have any impact on main street borrowing, spending, investing and growth.

So why does the Fed persist in this farcical minuet around ZIRP? For two reasons that are not at all hard to discern.

In the first instance, the Fed is caught in a time warp and fails to comprehend that the game of bicycling interest rates to heat and cool the macro-economy is over and done. The credit channel of monetary transmission has fallen victim to “peak debt”. The main street economy no longer gets a temporary pick-me-up from cheap interest rates because balance sheets have been tapped out.

The only actual increases in household debt since the financial crisis has been for student loans, which are guaranteed by Uncle Sam’s balance sheet, and auto loans which are collateralized by over-valued vehicles. Stated differently, home equity was tapped out last time; wage and salary incomes have been fully leveraged for years and households have nothing else left to hock.

So households now only spend what they earn, meaning that the Fed’s interest rate manipulations—-which had potency 40 years ago—-have no impact at all today. Keynesian monetary policy through the crude tool of money market rate pegging was always a one-time parlor trick.

""The only place that the inflation is showing up is in asset prices - shares and bonds and realestate - good luck with that when it's not supported by corresponding increases in the real economy."  I agree with you here, which confuses me as nothing else you have said I can relate to.  All the above are greatly over-valued so"



The only issue will be for those relying on the stored equity.  eg to secure loans or create a capital gain.   For those who quietly delverage as time goes by, and sudden drop in asset prices won't be a problem, their paper ratios might fluctuate by the value itself won't actually change on real assets.