Echoes of 1937 in the Current Economic Cycle
It is not too early to ask how the present US business cycle expansion, already more than five years old, will end.
The history of the last great US monetary experiment in “quantitative easing” (QE) from 1934-7 suggests that the end could be violent. Autumn 1937 featured one of the largest New York stock market crashes ever accompanied by the descent of the US economy into the notorious Roosevelt Recession. Should we take comfort from the fact that Friedman and Schwartz, in their epic monetary history, claim to have discovered the policy error by the Federal Reserve which was responsible for the 1937 denouement. And that today’s Fed officials are adamant about having learned their lesson? The short answer is no.
According to the now mainstream narrative, the strong economic recovery of 1935-6 could have continued for much longer if it had not been for the successive hikes in reserve requirements through late 1936 and early 1937, together with the sterilization of gold inflows from the start of that year. This meant the end of rapid growth in high-powered money supply. The trigger for these monetary policy changes was concerns within the Federal Reserve and White House about the intense speculative climate which had developed in equity and commodity markets during 1936, coupled with apparent upward pressure on goods prices. Friedman and Schwartz imply that these concerns were misplaced. And indeed, as regards the rise in goods prices, this was a benign recovery from a deep cyclical low-point in 1933 rather than something symptomatic of monetary inflation. It was, however, quite a different story for asset prices.
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Read more: mises.org
According to the now mainstream narrative, the strong economic recovery of 1935-6 could have continued for much longer if it had not been for the successive hikes in reserve requirements through late 1936 and early 1937, together with the sterilization of gold inflows from the start of that year. This meant the end of rapid growth in high-powered money supply. The trigger for these monetary policy changes was concerns within the Federal Reserve and White House about the intense speculative climate which had developed in equity and commodity markets during 1936, coupled with apparent upward pressure on goods prices. Friedman and Schwartz imply that these concerns were misplaced. And indeed, as regards the rise in goods prices, this was a benign recovery from a deep cyclical low-point in 1933 rather than something symptomatic of monetary inflation. It was, however, quite a different story for asset prices.
.................
Read more: mises.org
On Tuesday, May 20, 2014, the world entered Kondratieff Winter, the final phase of the Business Cycle, with a credit market reversal and a partial equity market reversal, as investor’s greed turned somewhat to fear, specifically fear that the world central banks’ monetary policies, no longer sustain investment gains and global economic growth, and have made money good investments bad.
ResponderEliminarGlobal debt deflation commenced, as currency traders strongly sold the Australian Dollar, FXA, as is seen in the FX Sponsor chart report AUD/JPY Price Breaks Down Below Key Support, which turned Major World Currencies, DBV, parabolically lower with the result that Gulf States, MES, Australia, EWA, KROO, New Zealand, ENZL, Thailand, THD, Brazil, EWZ, BRF, and Chile, ECH, traded lower.
With the Australian Dollar, FXA, now following the Euro, FXE, lower, investors are derisking out of debt trade investments, and delveraging out of currency carry trade investments in Global Industrial Producers, FXR, Metal Manufacturers, XME, such as CMC, WOR, GHM, SCHN, GSM, STLD, RS, HAYN, CVR, MLI, CSTM, CRS, Steel Producers, SLX, Aerospace and Defense, PPA, Global Energy Producers, IPW, and Timber Producers and Paper Manufacturers, WOOD.
The sell of Australia’s Bank, WBK, and Germany’s Bank, DB, led Global Financials, IXG, lower.
The May 20, 2014, trade lower in Yield Bearing Investments such as Gulf Dividends, GULF, Australia Dividends, AUSE, Water Resources, PHO, European Small Cap Dividends, DFE, European Financials, EUFN, and Dividends Excluding Financials, DTN, from their high was an epic economic event: the investor, specifically the fixed income investor is going extinct.
The trade lower of Call Write Bonds, CWB, and the turn lower of Defensive Shares, DEF, such as International Energy, IPW, Global Agriculture, PAGG, Electric Utilities, XLU, PUI, from their rally highs, communicates the failure of credit and the termination of profitable equity investing. Of note, Zero Hedge reports Caterpillar Retail Sales Plunge By 13%, Most Since February 2010; Caterpillar, CAT, traded 3.5% lower on the day.
The see saw destruction of fiat investments commented Tuesday May 20, 2014. While World Stocks, VT, and Nation Investment, EFA, may trade higher, Global Financials, IXG, and Dividends Excluding Financials, DTN, as well as Credit Investments, AGG, are trading lower, as the bond vigilantes have control of the Benchmark Interest Rate, ^TNX, which traded lower to 2.51%, but remains above support at 2.49%.
The failure of credit, that is trust in the monetary authority of the world central banks, is beginning to cause the death of currencies, starting first with the Major World Currencies, DBV, such as the Euro, FXE, the Swiss Franc, FXF, the British Pound Sterling, FXB, and the Swedish Krona, FXS. And coups throughout the world, such as in Thailand, and the Ukraine, are starting to cause the dissolution of traditional democratic nation state governance.
The world has passed through an economic inflection point, as the investor’s trust in the monetary policies of the world central banks is beginning to fail.
Fear is beginning to replace greed; specifically the fear that the monetary policies of the world central banks have crossed the rubicon of sound monetary policy and is starting to make “money good” investments, such as the European Small Cap Dividends, DFE, the Eurozone Stocks, EZU, the European Financials, EUFN, and Nation Investment in Eurozone Nations, such as Portugal, PGAL, Italy, EWI, Greece, GREK, and Spain, EWP, that is the PIGS, bad.
The world has pivoted from the age of currencies and the age of credit ... and into the age of diktat and the age of debt servitude.
On going disinvestment of currency carry trades and debt trades will introduce the much feared economic deflation on a worldwide scale.
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